“Financial Checkup” is an ongoing series that discusses financial planning options. In this issue, Investment Executive speaks with Tom Cooney, a certified financial planner, registered financial planner and senior financial advisor with Assante Capital Management Ltd. in Toronto; and Michel LeBoeuf, a CFP and executive financial consultant with Investors Group Inc. in North Bay, Ont.



The Scenario: Henry, a 68-year-old resident of Brampton Ont., is a retiree who had worked with a major manufacturing firm that has gone bankrupt and is now being broken up. He has been receiving a pension of $60,000 a year, with full medical and dental benefits, and he is worried that his benefits may be cut with the breakup of his former employer.

In addition to Henry’s pension, he has $400,000 in non-registered assets, invested entirely in Canadian equities, down from about $500,000 before the markets tanked; and $100,000 in RRSP assets invested in fixed-income.

His wife, Susan, 60, retired as an executive assistant when Henry retired three years ago. She has no pension or benefits, but has RRSP assets of $300,000, invested in fixed-income.

The couple are in good health, have two independent children, a mortgage-free house worth $500,000 and qualify for full Canada Pension Plan benefits. They haven’t yet withdrawn money from their RRSPs, as they have been keeping their spending to about $70,000 a year.

They want to know: what the worst-case scenario would be; by how much should they assume Henry’s pension could be cut; and how much after-tax income, in today’s dollars, could they count on until Susan is 95 if that were to happen?

They also want to know if they should downsize their house, get critical illness and/or long-term health insurance or take out additional life insurance beyond the $200,000 that is part of Henry’s benefits.

Henry and Susan would like to leave their two children $100,000, or more, each in today’s dollars, if that is feasible.



The Recommendations: Both advisors say Henry and Susan should be OK, even if Henry’s pension is cut in half.

Assuming an average annual return of 5%, after fees and inflation of 3% a year, Cooney calculates that the couple would be able to withdraw $28,000 a year from their RRSPs until Susan is 95.

LeBoeuf, who also assumes 3% inflation but a 6% annual return, thinks the couple could withdraw $30,000 a year.

The couple don’t need this much. LeBoeuf calculates that they need to take out only $21,000 to retain their current lifestyle until Susan is 65 and starts collecting old-age security benefits; they would only need $17,000 thereafter.

LeBoeuf notes that if this amount is what the couple do end up withdrawing, they could have an estate of $618,000 in today’s dollars, plus their home, when Susan is 95.

Under Cooney’s projections, with his lower 5% return, the financial assets would be much lower — about $330,000.

The couple could leave an even bigger estate if they sell their home and buy a condominium. LeBoeuf ran projections on this in which he assumed they ended up with $250,000 in additional financial assets.

If Henry and Susan didn’t feel the need to preserve all that resulting capital, they could spend an additional $10,500 a year. If they wanted to preserve that capital, in today’s dollars, they could spend an additional $6,000 a year. And if they spent none of this money, they would have an additional $600,000 in assets, in today’s dollars, when Susan is 95.

Cooney thinks the couple would need to spend $300,000-$350,000 to get a condo that they would be happy with, leaving them with $150,00-$200,000 in additional investible assets.

If Henry and Susan want to spend $30,000 a year, keep the house and fulfil their estate goals, LeBoeuf recommends that they buy a joint “last to die” universal life policy for $250,000. This would cost about $7,000 a year for 10 years or, based on mortality assumptions, $3,000 a year for the rest of their lives.

LeBoeuf notes that this insurance could also be a good idea even if the pension isn’t cut. Additional funds can be put into a UL policy, and LeBoeuf recommends that Henry and Susan put $14,000 in the policy; these assets are tax-sheltered, both within the policy and when funds are withdrawn. (Funds can be withdrawn at any time from UL policies.)

@page_break@In addition, LeBoeuf recommends the couple get a policy that allows for all the funds to be withdrawn tax-free when the first spouse dies.

Cooney doesn’t think the couple need to buy more life insurance — at least, until they find out whether and by how much Henry’s pension will be cut. Cooney’s research suggests a joint last-to-die policy to age 100 for $400,000, with no cash redemption value, could be purchased for $5,000 a year.

LeBoeuf doesn’t think the couple need CI or LTC insurance, as they have enough assets should one or both become ill. However, he says, they should still look at LTC policies; if such a policy would give them comfort, they should buy one.

Cooney believes the couple should investigate both CI and LTC insurance, but, again, Cooney thinks that it’s early to decide that. He notes that his research suggests Henry is too old to qualify for CI. Susan could get a 10-year renewable CI policy for 22 conditions, with a return of premium on death, for $200 a month or a permanent CI policy, with the same features, for $535 a month.

A shared-coverage LTC policy for $300,000 that provides up to $1,500 a month in non-facility care and $3,000 in facility care would cost $565 a month for 15 years, or $440 a month for life, although premiums may rise after five years. If inflation protection of 2% a year and the “return of unused premium on death” option is included, it would cost $900 a month for 15 years, or $720 a month for life.

However, Cooney also notes that the couple may find that Henry’s medical benefits are eliminated in the reorganization of his former company. Should that happen, the couple could get a basic extended health and drug plan for about $145 a month or a more comprehensive plan that would include dental for $250 a month.

Both advisors note that it goes without saying that the couple should put $5,000 each into tax-free savings accounts, which provide shelter from taxes both within the TFSAs and when assets are withdrawn.

In addition, LeBoeuf recommends that Susan withdraw from her RRSP each year the maximum amount that will still leave her with no taxable income, while Henry, whose income is taxable, lets his RRSP grow.

What isn’t spent of Susan’s RRSP withdrawals can be reinvested.

Cooney’s preference is to leave RRSP assets sheltered for as long as possible, although he agrees that taking some of Susan’s RRSP money out earlier might not be a bad idea.

Cooney also recommends that Henry split some of his pension and, when applicable, RRSP withdrawals with Susan to keep their joint tax bill as low as possible.

Both advisors also suggest investing in corporate-class mutual funds, in which capital gains taxes are deferred and annual taxable distributions are minimized.

Cooney and LeBoeuf both suggest Henry and Susan have spousal testamentary trust provisions in their wills. This would lower taxes for the survivor, as testamentary trusts are taxed separately from an individual’s other income.

Both advisors note that testamentary trusts could also be set up for the couple’s children. Up-to-date powers of attorney, with alternatives, are needed.

Cooney also advises distributing items of sentimental value in the will itself. The couple could also provide a list that is referred to in the will, although it wouldn’t be legally enforceable. In addition, Cooney suggests looking into funeral planning and the possibility of prepaying for this.

Both advisors also strongly recommend that the amount required for three years of living expenses be put aside in cash or short-term cash equivalents until the situation with Henry’s pension is clarified. This would be about $60,000, or 8% of the couple’s total financial assets.

Cooney thinks that, given the uncertainty about Henry’s pension, the couple should look into guaranteed investments, such as annuities or segregated funds with guaranteed minimum withdrawal benefits, for a portion of the portfolio. Once it’s clear what Henry’s pension will be, the couple may be more comfortable having their income shortfall covered by such products.

Excluding these GMWBs and the money set aside for three years of living expenses, Cooney recommends an asset mix of 40% in fixed-income securities (35% Canadian and 5% global) and 60% in equities. The latter would comprise 16% in Canadian equities, 3% in Canadian small-cap stocks, 14% in U.S. equities, 2% in U.S. small-cap stocks, 13% in international equities, 2% in emerging markets and 10% in real estate stocks.

LeBoeuf recommends a 70% fixed-income/30% equities as-set mix at the moment, but he wouldn’t let the equities portion go higher than 40% at any time. As the couple ages, LeBoeuf would lower the equities portion to around 20%.

LeBoeuf does not recommend any specific foreign investments, although some Canadian equities or balanced funds he uses may have a small portion invested outside Canada. He sees no reason for this couple to take the currency risk involved.

Cooney agrees that there is currency risk, but points out that this can be minimized by using foreign equities funds that offer currency hedging.

On the fixed-income side, excluding the assets set aside for living expenses, LeBoeuf recommends bonds and a real property fund, with the latter accounting for about 7.5%-10% of the total portfolio.

At Investors Group, advisors are compensated through mutual fund trailers or commissions, so LeBoeuf does not charge for developing and monitoring financial plans.

Cooney charges $250 an hour. A financial plan usually costs $1,000-$2,500. Ongoing monitoring and changes to the plan generally cost $250-$750 a year.

Cooney also receives a portion of the asset-management fees for investments and commissions for the life insurance products. IE