“Financial Checkup” is an ongoing series that discusses financial planning options. In this issue, Investment Executive speaks with Shannon Briske, certified financial planner and senior financial advisor with Assante Wealth Management (Canada) Ltd. in Saskatoon; and Brad Brain, chartered life underwriter and registered financial planner (among other designations) with Manulife Securities Inc. in Fort St. John, B.C.



The Scenario: Jeanne, 55 and single, has unexpectedly inherited $200,000 from her mother. Jeanne would like to use this windfall to increase her income when she retires at age 65.

Jeanne owns a house in Regina, worth about $300,000, and has a five-year mortgage of $150,000 at 5% amortized over 25 years. She has RRSP assets of $150,000 and unused RRSP room of $75,000. She does not have a tax-free savings account or other financial assets.

Jeanne works as a receptionist in a doctor’s office, earning $40,000 a year. She needs all her after-tax income to pay her expenses, including her monthly mortgage payments of $900, leaving nothing for RRSP contributions.

She wants to know what she should do with the $200,000 to give herself the maximum retirement income to age 95, and whether she should purchase critical illness, long-term care or enhanced medical insurance. Jeanne is a non-smoker in good health and has no estate goals.



The Recommendations: Briske believes Jeanne can spend $35,000 a year after taxes in today’s dollars from ages 65 to 95 — which is more than the $32,300 she is currently taking home — and still have about $100,000 in today’s dollars left. If Jeanne spent only $30,000 a year in retirement, Briske adds, she’d have about $600,000 left.

Brain is less optimistic. He thinks Jeanne can spend only $32,600, and that will be possible only if she gets her assets to work immediately and there are no emergencies. If Jeanne puts aside $20,000 for emergencies, she will have to live on $30,000 a year in retirement.

The difference between these projections lies mainly in Brain’s inflation assumption of 3% vs Briske’s 2%. The differing assumptions mean the 5% average annual return after fees that both are assuming during the 30 years after Jeanne retires is only 2% in real terms for Brain vs 3% for Briske. (Brain is assuming an 8% return, or 5% in real terms, while Jeanne continues to work; Briske assumes 6%, or 4% real, but for only 10 years.)

Because Jeanne doesn’t have significant assets, Brain believes, she needs to get an 8% return in the next 10 years even though that will require about 75% equities exposure, which Jeanne may be uncomfortable with. Brain hopes, however, that Jeanne can be convinced that lower equities exposure increases the risk that she will run out of assets.

With the lower inflation assumption, Briske thinks Jeanne can go with 60% equities exposure during the next 10 years and then shift to a 50% equities/50% fixed-income mix in retirement.

The two advisors also take significantly divergent approaches in the use of RRSPs and the investments they recommend.

Brain recommends Jeanne put $75,000 into her RRSP immediately to cover the unused contribution room, saying that Jeanne needs to shelter as much of her assets from taxes as possible. Brain notes that the use of the RRSP deduction for the $75,000 can be spread over as many years as Jeanne wants and should depend each year on the level of her other income.

But Briske suggests no more RRSP contributions because he doesn’t think Jeanne will get enough of a tax advantage from the contributions, given her low tax bracket, and he is concerned that Jeanne may be subject to old-age security clawbacks in retirement, given the minimum withdrawals for registered retirement income funds. Briske recommends tax sheltering using corporate-class investments. He notes that Assante has recently lowered the minimum investment for its corporate-class managed pools to $250,000, a level at which Jeanne would qualify.

In addition, Briske recommends that Jeanne put $15,000 into a TFSA immediately and add $5,000 a year every January, which means that eventually all her non-registered money will be tax-sheltered.

Briske considers a TFSA ideal for someone in Jeanne’s situation because such an account allows her to manage her retirement income without triggering OAS clawbacks. A major reason for the introduction of TFSAs was to encourage saving by low-income individuals who wouldn’t get significant tax benefits from RRSP contributions — and who can use these funds for unexpected expenditures without having to pay taxes on the withdrawals.@page_break@Brain also recommends a TFSA, suggesting Jeanne put $15,000 in one now and transfer money from the non-registered account holding the inheritance into this TFSA as well as her RRSP as the contribution limits allow, until all the inheritance money is in one or the other.

In terms of investments, Briske recommends a focus on income-generating investments. Because interest rates are currently low, he would avoid bonds and guaranteed income certificates for now and suggests Jeanne invest in income trusts and real estate investment trusts, infrastructure hybrid equities and dividend-paying stocks, including preferred shares. As much of the fixed-income portion as possible would be in the RRSP.

Because Jeanne has no plans for major travel, Briske suggests, most of the investments should be Canadian investments to avoid currency risk. However, he doesn’t rule out increasing the portfolio’s foreign content, saying that there is good reason to start looking at U.S. equities as that economy recovers further.

In contrast, Brain suggests putting $140,000 of Jeanne’s RRSP money into a guaranteed minimum withdrawal benefit product with a 70% equities exposure, which would increase the likelihood that the GMWB benefits will be greater than the guaranteed 5%. He believes the GMWB is important because it will provide Jeanne with a guaranteed income stream, and also would probably recommend putting more money into GMWBs when Jeanne is retired. Brain notes that in the years when the RRIF minimum exceeds the GMWB’s minimum, the insurance company will pay the higher RRIF minimum without compromising future income guarantees.

Brain recommends that the rest of Jeanne’s RRSP assets and her non-registered monies be in growth equities — half Canadian and the other half split between U.S. and international. He believes geographical diversification has “stood the test of time” in terms of enhancing returns and reducing volatility.

Briske assumes that Jeanne will sell her house when in her 70s for lifestyle or health reasons. In his experience, many seniors prefer to live in a condo or rent an apartment at that age to eliminate the time and energy required for house maintenance. When this happens, Jeanne would withdraw an additional $1,000 a month in today’s dollars from her investment accounts to help pay the rent. As she will no longer be paying property taxes and probably not heating bills, she should be able to rent a place for the equivalent of $1,500-$1,800 a month in today’s dollars.

Brain does not see any need to discuss now whether the house will be sold. The house gives Jeanne a place to live for now, and the question of selling it can be discussed when she wishes or needs to change her lifestyle for health reasons.

Briske recommends a return-of-premium $100,000 CI insurance policy that would be fully paid up in 15 years and could be converted to an LTC policy when Jeanne is 75. (See story on page B6.) Briske says CI is an important part of Jeanne’s financial plan because there isn’t a second income to help her through a potential illness or disability. The $5,000 annual cost of the policy would come out of her non-registered account.

The question of whether Jeanne converts to LTC coverage should be discussed when the policy matures. If she doesn’t convert, Briske would suggest the $75,000 return of premiums be put into an emergency fund.

He doesn’t recommend enhanced medical insurance because Jeanne doesn’t have enough income to afford it.

Brain doesn’t think Jeanne has the money to buy any kind of insurance if her primary goal is to ensure that she has sustainable retirement income. Says Brain: “I’m not happy that she’s underinsured. But the reality is that she doesn’t have enough cash to do everything, so she has to prioritize out of necessity.”

Neither advisor would charge fees for developing and monitoring Jeanne’s financial plan as long as they were investing the assets. Whichever advisor Jeanne works with would receive a portion of the fees charged on the account and commissions on any insurance products purchased. IE