Kathleen left the work force a year or so ago.DARYL DYCK/The Globe and Mail

Rekindled inflation and jittery stock markets have Kathleen – who left the work force a year or so ago – feeling a bit nervous about her financial future. She is age 66, with solid investments and a mortgage-free condo in pricey British Columbia.

“I thought I was in excellent shape when I retired, but with the events recently, including the inflation rate and drop in the stock market, I am no longer so sure,” Kathleen writes in an e-mail. She has yet decided what to do with about $150,000 in registered savings in her employer’s group plan. She has four years of laddered GICs worth $175,000 that she plans to collapse as they come due and take into income.

“The remainder of the RRSPs I plan to leave until I’m 71 when they have to be turned into a registered retirement income fund,” or RRIF, Kathleen writes.

Traveling is an important goal for Kathleen, and she hopes to budget at least $24,000 a year for it on top of her basic living expenses. She has lent her two children $100,000 each for a down payment on their first home. For now, they are paying her $600 a month combined, but she hopes one day to forgive the balance outstanding – provided she can afford to.

Her retirement spending goal is $66,000 a year after tax, including travel.

We asked Linson Chen, a financial planner and portfolio manager at RGF Integrated Wealth Management in Vancouver, to look at Kathleen’s situation. Mr. Chen holds the certified financial planner (CFP) and chartered investment manager (CIM) designs.

What the expert says

“Kathleen is depending heavily on her savings and investments to meet her spending needs, so success will be tied to her rate of return,” Mr. Chen says.

To supplement her government benefits, she is having to withdraw $50,000 a year, more or less, from her RRSP each year. Her children are repaying her a combined $600 a month and she makes $400 a month working part time.

“At a 6-per-cent growth rate, Kathleen has enough investment assets to generate an after-tax and after-inflation income of $66,500 a year,” the planner says.

In his forecast, Mr. Chen assumes a rate of return on investments of 6 per cent a year and an inflation rate of 3 per cent. He leaves out the $400 a month in part-time income “because we do not know how long she will continue doing this.” After five years, the forecast assumes she forgives the remaining balance on the loans to her children. “We calculated the income to last up to Kathleen’s age 95.”

Kathleen may or may not choose to forgive the outstanding loans to her children in five years, the planner says. “She may want to continue with the repayment for a bit longer to help with her cash flow needs.”

Keeping four years of cash flow needs in the laddered GIC “is a good strategy,” Mr. Chen says. “When you are retired and taking an income out of your portfolio, digging into an investment while it is declining in value will permanently reduce your principal.”

Kathleen will need to monitor her GIC allocation, replenishing it when the stock market recovers, he says. “This would mean rebalancing and selling some of her investments when they have appreciated in value to purchase more GICs,” the planner says.

Kathleen’s asset allocation is about 30 per-cent-fixed income (including the GICs) and 70-per-cent equities. Her holdings are mainly large-cap Canadian and US stocks with some mutual fund holdings, he says. “The portfolio skews toward an over-allocation to technology and growth-oriented securities.”

With fixed income yields looking more attractive, it may be an opportunity for her to lower the volatility of her portfolio and reduce the level of risk by shifting more to fixed income.

As well, Kathleen has a high single-security risk with Apple stock, which makes up a quarter of her portfolio, Mr. Chen says. “Apple has done exceptionally well and has been a strong performer with an annual return of 33 per cent over the past five years and 22 per cent over the past 10 years,” he says. “However, having a quarter of her portfolio in a single stock is too much concentration risk for a retiree. I suggest that she further diversify her holdings because the future performance of Apple could really make or break her long-term retirement security.”

As to Kathleen’s group RRSP with her previous employer, she can transfer the proceeds to her larger personal RRSP account (assuming it is not locked) and consolidate the two. “This may be preferable for her because it will make administration simpler,” Mr. Chen says.

Under BC rules, Kathleen has been deferring property tax on her home for the past five years and has a balance owed of $10,280. Although the interest rate charged is about to rise, “the BC property tax deferral program is still the most cost-effective option to get equity out of her house.”

One risk to the forecast is if Kathleen does not achieve a 6-per-cent return on her investments. “At a 5-per-cent growth rate on her assets, she will need to continue with the $600 a month loan repayment for the remainder of her life to achieve her desired income to age 95,” Mr. Chen says.

But Kathleen would still have her condo value to fall back on. “She does have significant home equity that we did not consider in our analysis,” the planner says. “The home equity is available as a financial backstop if necessary, using a home equity line of credit or a reverse mortgage.”

Because Kathleen is taking withdrawals from her RRSP, the planner recommends that she convert a small portion of her RRSP to a RRIF to take advantage of the federal pension income tax credit. The credit is worth up to $2,000 a year, which, at a federal tax rate of 15 per cent, would equate to $300 in federal tax savings. BC offers a provincial pension credit worth up to $1,000, for a tax saving of $51.

Client situation

The person: Kathleen, age 66.

The problems: Is she still in a good position to enjoy spending $66,000 a year after tax? Can she forgive the loan to her children?

The plan: Aim for a 6-per-cent return on investments for a real rate of return after 3-per-cent inflation. Convert part of her RRSP to a RRIF. Don’t be too hasty to forgive the loan to her children. Take steps to lower her investment risk by selling some Apple stock.

The payoffs: Financial security with the value of her home as a buffer.

Monthly net income: $5,540.

Assets: Cash in bank $17,000 (not included in portfolio); tax-free savings account $36,000; GIC ladder in RRSP $175,000; group RRSP at work $150,000; other RRSP assets $705,000; residences $1,050,000. Total: $2.1-million.

Monthly outlays: Condo fee $475; property tax (deferred); home insurance $75; electricity $45; maintenance $250; transportation $325; groceries $500; clothing $275; gifts, charities $375; vacations, travel $2,000; other discretionary $300; dining, drinks, entertainment $550; personal care $125; health care $75; communications $220. Total: $5,590.

Liabilities: None.

Want a free financial facelift? E-mail [email protected].

Some details may be changed to protect the privacy of the persons profiled.

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