Financial Post Article: This 70-year-old with some risky investments wants to know where to put his money

The Financial Post asked me to review the finances of a 70-year-old retired man who is expected to inherit $200,000. 

He has been focusing on growing a modest, self-directed investment portfolio using a mix of somewhat risky stocks and funds.

What should he do now for the next chapter in his life?

How much does he need to retire, what should he do with his inheritance, should he buy or rent his next home, and how should he invest? Can he afford to move to another province, start traveling, pay off his mortgage, cancel his life insurance policy?

In the article you’ll learn the financial strategies and investment ideas that I recommend, so that he can live out the rest of his retirement with the lifestyle he wants.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

This 70-year-old with some risky investments wants to know where to put his money

Financial Planning Notes

Kyle’s income is his pension, OAS & CPP, and the minimum RRIF withdrawal totaling $58,000/year before tax and $51,000/year after tax. It is all taxable. He is not touching his TFSA.

Most of his income is taxed at 27% and 32% in Quebec, but he has moved into the 36% tax bracket which applies to income over $56,000. The minimum RRIF rises every year and he will have more investments from his inheritance, so his tax will rise quite a bit.

To maintain this income for life, he needs a bit over $200,000 in investments and he will have about $450,000 once he invests his inheritance.

Kyle is spending his $51,000/year after tax, but can save $2,200/year when he pays off his small mortgage and $2,400/year by canceling his life insurance policy.

He does not need his life insurance policy because he has nobody financially dependent on him, including his ex-girlfriend. No point in paying $200/month so an ex-girlfriend gets $100,000 when he dies! There is no benefit to keeping his policy and he has better uses for the $200/month premiums. These are high because of his age.

Kyle can afford to increase his income to about $71,000/year. That gives him about $12,000/year after tax in additional spending (after paying off his mortgage and cancelling his life insurance).

Kyle wants to start traveling again and to move to Alberta in a year or 2. Both will increase his expenses. He can afford to spend about $12,000/year total for the 2. It will be difficult to make both work. He will need to minimize what his new home costs him if he wants to travel.

His home is worth only about $200,000, so if he sells it and buys in Alberta, he will probably need to use all of his inheritance and a mortgage. His inheritance + proceeds of home sale will be less than $400,000, which does not buy much in Alberta. He can really only afford to pay about $1,650/month for rent: $1,000/month from the extra $12,000/year he can afford plus $650/month he spends now on utilities & property taxes.

Kyle asked whether he should buy or rent his next home in Alberta. The general rule of thumb is that buying is more effective if he will live there at least 10 years. He could minimize the effect on his life if he puts down a minimum down payment and takes out a mortgage, which can allow him to keep his non-registered investments to provide retirement cash flow.

Kyle’s $7,000 TFSA is invested in 3 stocks, which are all the most trendy stocks of the last 15 years. He has lost most of his money on 2 and one is the current trendy stock. If he wants to keep picking his own stocks, he needs a better method.

Most of his investments are in his RRSP with $180,000 in ETFs and $75,000 in a bank balanced fund. The bank balanced fund is not “investing for growth”. It sounds like his ETFs are mainly equities if he is investing for growth.

Kyle asked, “How should my money be invested to sustain me through retirement.” Since he needs his money to work for him and he still has a long-term life expectancy of about 20 years, it is most effective for him to continue to invest for growth with a high equity allocation. Kyle says he has been investing for “growth”, so he is comfortable with significant short-term fluctuations in his investments. The common belief that older people should invest more conservatively in balanced funds has provided a less reliable retirement over 20+ years in history than a portfolio of 100% equities. Bonds get killed if there is a period of high inflation, but stocks have adjusted over 25-year periods to any economic conditions of the last 200 years. Stocks are the most reliable long-term investment and also the highest return asset class. The best choice for him is either a broad index fund like the MSCI World or S&P500, or he could get advice from a growth-oriented financial advisor, if he can find one that will do a 100% equity portfolio with enough growth to get index-level returns or higher after fees. He would benefit from the financial planning advice, if he finds the right advisor, especially with tax planning, investing effectively, and advice on minimizing the cost of buying his new home.

If Kyle invests 100% in equities and gets index level returns after fees, he can afford to spend about $5,000/year more through his life. That can allow him more flexibility for his new home or for traveling.

Tax planning: Kyle will have a lot of TFSA room and possibly some RRSP room. He should maximize his TFSA from his inheritance and probably contribute up to $50,000 to RRSP. He can deduct about $7,000/year in RRSP deductions and carry forward the rest every year. He is 70 and can only contribute until age 71, but can then carry forward deductions to get larger tax refunds in future years. Effective tax planning for him would be to try to only be taxed at the lowest tax bracket and deducting enough RRSP to avoid the higher tax brackets. This is a taxable income of $51,000 in Quebec and $56,000 in Alberta.

Ed