Below you will find a real life case study of a couple who is looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their identity. The Globe and Mail often seeks the advice of our VP, Wealth Advisor & Portfolio Manager, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.
Special to The Globe and Mail
Published June 24, 2023
Ezra and Evelyn are well-set financially, with a substantial portfolio, a big travel budget and a son they’d like to help financially now rather than after they’ve gone. How much can they give him without jeopardizing their retirement plans?
They’ve both retired from their full-time jobs and are doing some part-time contract work, Evelyn earning about $15,000 a year and Ezra $22,000. Evelyn is the age of 62 and Ezra is 70.
Evelyn has a defined benefit pension that pays her $27,468 per year, plus a bridge benefit of $4,788 a year that will end when she is 65. Ezra is receiving Canada Pension Plan and Old Age Security benefits, while Evelyn is planning to start the benefits at 65.
Short term, their goal is to transition to full retirement in about three years and “travel as much as we can,” Evelyn writes in an e-mail. They want to ensure they have enough money to cover their living expenses plus a travel fund for the next 15 years.
One of their main concerns, though, is to what extent they can afford to help their only child, who is 27, financially.
Although they rent rather than own a home, they have savings and investments. “How much can we give [our son] now and still fund our retirement and travel?” Evelyn asks.
We asked Matthew Ardrey, a portfolio manager and senior financial planner at TriDelta Financial in Toronto, to look at Ezra and Evelyn’s situation. Mr. Ardrey holds the certified financial planner (CFP), advanced registered financial planner (RFP) and chartered investment manager (CIM) designations.
What the expert says
Ezra and Evelyn are spending $100,800 a year including travel of $36,000 a year for the next 15 years, Mr. Ardrey says. This travel expense is expected to decline by one-third each decade after that.
Based on their investment holdings, they could earn an average rate of return of 4 per cent a year on their $2.5-million portfolio, the planner says. Inflation is forecast at 3 per cent a year. “To note, their housing costs rise at a much higher rate each year – 5 per cent a year based on their agreement with their landlord,” he adds. This affects $18,600 of the above noted annual expense total.
“Based on these assumptions, they can make their retirement goal with ease,” Mr. Ardrey says.
He stress-tested the forecast using a Monte Carlo simulation, which introduces randomness to a number of factors, including returns. “In this plan, we have run 500 iterations with the financial planning software to get the results,” the planner says. For a plan to be considered likely to succeed, it must have at least a 90 per cent success rate, meaning at least 450 trials out of 500 succeed. If it is below 70 per cent, then it is considered unlikely.
“With their scenario, they reached 100-per-cent probability of success.”
Where their real question lies is how much they can help their son now given these other assumptions and still have a successful retirement, the planner says.
“Being conservative investors, they feel they can achieve a 3-per-cent rate of return,” he says. He also ran a 4-per-cent rate of return, based on the projected return on their existing holdings, and a 5-per-cent rate of return “in case they decide to expand their investment asset classes beyond what they are currently using.”
Using the Monte Carlo simulation, they could give their son the following amounts as a gift now, depending on the rate of return they achieve on their investments: with a 3-per-cent rate of return, they could give him $250,000; with 4 per cent, $425,000; and with 5 per cent, $600,000, the planner says.
The investment portfolio and its returns will be the more important for Ezra and Evelyn than for many other Canadians because they have no real estate they can fall back on, he says. Given their desire to help out their son, purchasing real estate at this point would actually work against their goals.
“It would take income-producing assets and turn them into a non-income producing asset,” Mr. Ardrey says. “Some may argue that expenses would be lower if they bought, but given their reasonable rate of rent, this appears to be the better option for them.”
That said, not having real estate “is removing the safety net while walking the high wire of investing,” he says.
There is also the risk that the unit they are renting could changes hands and they could be forced to find a new home at today’s new and higher prevailing rents.
“This is a situation I expect to see more and more down the road,” Mr. Ardrey says. With housing becoming increasingly difficult to acquire, it will be more commonplace to see renters with big investment portfolios but no real estate assets.
The planner suggests Evelyn and Ezra make a couple of changes to the structure of their portfolio.
First, they have considerable interest-bearing assets in their non-registered investment accounts. This income type is the least tax efficient. “They should review their portfolio as a whole and determine how to best generate income to maximize their after-tax return.”
Second, though they state in the Financial Facelift application that their holdings are joint, their statements clearly show that all non-registered assets are in Ezra’s name only, the planner says.
British Columbia, where they live, has probate tax of 1.4 per cent. “With the current balance of the non‑registered accounts, this would amount to a probate tax of about $6,750 on Ezra’s death,” Mr. Ardrey says. This can be avoided by simply making the accounts joint, with Evelyn having the right of survivorship.
“Evelyn and Ezra are happily retired and are able to not only take care of themselves, but also help their son with his life,” the planner says. “To what degree they are able to do this will depend on how they manage their investments. With no real estate assets, this is more important for them than someone who has a house to fall back on.”
The people: Ezra, 70, Evelyn, 62, and their son, 27.
The problem: Can they afford to travel extensively and still help their son financially now rather than after they are gone? If so how much can they afford to give?
The plan: With their expected 3-per-cent rate of return, they can gift their son $250,000 now without impinging on their lifestyle. Consider rearranging their holdings to be more tax-efficient and possibly aiming for a higher rate of return if they’re comfortable doing so.
The payoff: A good measure of how much of their wealth is surplus to their retirement spending budget.
Monthly net income: $5,755 or as needed.
Assets: Cash in bank $12,500; GICs $238,000; stocks $241,000; investment grade corporate bonds $290,500; her TFSA $118,000; his TFSA $114,000; her RRSP $894,000; his RRSP $629,000. Total: $2.5-million.
Monthly outlays: Rent $1,550; home insurance $50; hydro $110; transportation (EV) $310; groceries $800; clothing $150; gifts, charity $450; travel $3,000; other discretionary $250; dining, drinks, entertainment $525; personal care $100; club membership $50; pets $200; sports, hobbies $150; subscriptions $55; other personal $100; health care $150; health, dental insurance $150; life insurance $20; phones, TV, internet $230; RRSPs $300; TFSAs $1,080. Total: $9,780. Shortfall comes from investment income.
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Some details may be changed to protect the privacy of the persons profiled.