Page 15 - Newcom

is a problem since parents need help emotionally, nancially and physically, even while their kids have their own kids.”
When calculating people’s needs, he stretches current income over longer periods, and looks at CPP and OAS trends. He notes that these pro- grams typically account for only 25% of clients’ incomes.
Key income sources
Many retirees prefer low-risk investments, such as GICs, but those only offer returns of 2% or less. So, advisors are educating clients about preferred
Women continue to outlive men. In 2011, there were 500 women for every 100 men over the age of 100. Source: Statistics Canada
shares, blue-chip dividend stocks, REITs, and mortgage investing to help boost returns before and during retirement.
Some say this switch is short-term, but even when interest rates rise, “it’s still going to be dif cult to make good real rates of returns, minus in ation, on GICs,” says Anna Knight, an advisor with International Capital Management
in Toronto.
“In the 1980s, when they offered returns of 14% or 15%, in ation was also very high. Over the long-term, even retired clients are better off in blue-chip dividend-paying stocks than 16
COUPLE 2
Sarah (63) and Shane (63) married in their 40s. They managed to scrape together enough to buy a house in
Edmonton the same year, and had their only child, Glynnis, the following year. She’s now 19 years old, attending com- munity college, and still living at home without paying rent.
Sarah is an award-winning docu- mentary lmmaker who earns $53,000 per year by taking work as a lm editor. Shane is a painter whose work is current- ly in demand: he sold 14 pieces in 2013 at an average price of $4,000, and that was his best year to date. In other years, he’s earned so little as to not have to le a return.
On average, the couple has put a
few thousand each into a joint RRSP each year since they married. Their total invested assets are $132,455.
Sarah and Shane may not live past age 90 since they eat poorly. Sarah’s par- ents are alive but unhealthy at ages 86 and 88, and Shane’s parents both died of cancer before age 60.
Income expectations
After age 65, Sarah can expect $13,600 per year from CPP and OAS, and Shane can expect $7,500 per year. In total, they want $50,000 per year when they retire, which leaves a de cit of about $29,000; based on what they’ve saved, they would be broke in about ve years. So, they need to work until age 75 and, during that time, Otar says that Shane needs
to save at least $28,000 from painting sales, while Sarah must continue to save at least a few thousand per year.
Optimal portfolio
The couple should hold 50% stocks and 50% bonds until they retire at age 75. They’ll have converted their RRSP
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
0%
to a RRIF or an annuity, depending on whether interest rates are still low. If rates are low, they should choose a RRIF and then revisit that decision at age 73. Then they should consider buying a life annuity if they’re overspending and if assets are dwindling. After they retire, they can switch to 40% stocks and 60% xed income.
Otar also suggests segregated funds, because he says the MER is justi ed by the funds’ withdrawal guarantees during potentially bad sequences of returns. Also, they can be transferred probate-free to Glynnis (see Chart 3 and Chart 4, this page).
Longevity risk
Otar says Sarah has a 14% chance of surviving beyond 95 and Shane has a 7% chance.
Chance of running out of money
High
THINKSTOCK
THINKSTOCK
$1,500,000 $1,250,000 $1,000,000
$750,000 $500,000 $250,000
$0
Chart 3
Chart 4
Probability of Depletion
40% 60% 80% 100%
Percent Equity in the Portfolio
Portfolio Value
Probability of Depletion at Age 95
Optimum Mix
www.advisor.ca
01 2015 AE 15
65
70 75
80
85
90
95
Lucky
Median
Unlucky
Age
20%