FINANCIAL FACELIFT: B.C. couple want to achieve a ‘working optional’ lifestyle


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.

Written by:
Special to The Globe and Mail
Published January 22, 2021

Benjamin has worked hard over the years building a successful – and valuable – professional practice. Now he’s wondering whether he should sell his half-interest in the business or simply lean back and collect dividends. He’s getting $135,000 pre-tax in dividend income. Benjamin and his artist wife Esther are 57 with two adult children.

Benjamin’s goal is to achieve a “working optional” lifestyle by the time he is 60. His plan is to work one day a week. He and Esther have a house in British Columbia valued at $950,000 with a mortgage of $580,000. Their retirement spending goal is $96,000 a year after tax.

Benjamin estimates the value of his practice at anywhere from $1.5-million to $4-million. “I don’t need to sell at this time,” Benjamin writes in an e-mail. As long as the business is profitable, “I could just hang on and collect dividends.” What he’s trying to figure out is how much he would have to sell his practice for to match or surpass his dividend income. “Could I do better by investing the proceeds elsewhere?” he asks.

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Esther and Benjamin’s situation.

What the expert says

“The key question for Benjamin and Esther is to determine how much they need to sell the practice for in order to break even with the future stream of dividends from Benjamin’s business,” Mr. Ardrey says. He assumes the dividends continue to be $135,000 a year, growing at the rate of inflation.

Benjamin feels that at a minimum he would be able to sell his half of the practice for $1.54-million, the planner says. “According to conversations with his accountant, he would be able to shelter almost the entire amount with his remaining capital gains exemption, only having to pay $41,000 through alternative minimum tax,” he says. “Thus for purposes of this comparison, we will assume that Benjamin receives a payment of $1.5-million after-tax in 2023.”

Benjamin and Esther estimate they are spending $7,840 a month, which includes their mortgage payments of $2,425 a month. Once the mortgage payments, the savings to Benjamin’s registered retirement savings plan and to Esther’s tax-free savings account are subtracted, this leaves spending of $4,515 a month.

“Benjamin confirmed that anything not being saved is being spent,” Mr. Ardrey says. “When I ran a budget analysis for them, this amounted to $3,500 per month unaccounted for,” he adds. “This is a significant difference because it almost doubles their post-mortgage expected lifestyle expenses.”

Because of this significant discrepancy, the first thing that Esther and Benjamin need to review is their budgeting, the planner says. “If they are going to retire with a specific amount of spending in mind, they should understand where those dollars are going now so they can plan for their future,” he says. “With that in mind, I have included the additional $3,500 a month in their spending budget” both now and after they retire.

Next, to determine a breakeven amount required from the sale of the practice versus the dividend income stream, the planner estimates a rate of return on the couple’s investment portfolio. “Benjamin feels that returns of 10 per cent are the minimum he would expect,” Mr. Ardrey says. That’s based on Benjamin’s experience as a self-directed investor over the past decade. “That assumes they are fully invested in equities in a portfolio focused on value and dividend income throughout the remainder of their lives,” the planner says.

“When I entered an asset mix of all equities, ignoring the 25 per cent Benjamin is holding in cash today, the historical rate of return that the program produced is 5.67 per cent,” the planner says. He assumes this will all be direct stock investment with no management fees. “I used 5.67 per cent in all the projections, feeling that the 10 per cent figure was too high,” Mr. Ardrey says, “especially because they would have to draw on this portfolio and would need to have some diversification away from equities in the future.”

In the first scenario, Benjamin retires but maintains the dividend income stream, never selling his interest in the practice. As additional cash becomes available from registered retirement income fund (RRIF) withdrawals, and then from paying off their mortgage, Esther and Benjamin use the surplus cash flow to maximize their TFSAs, where they have unused contribution room.

At their age 90, they have a net worth in future dollars of $7.3-million, of which $4.7-million is tied up in their home and Benjamin’s practice, Mr. Ardrey says.

In the second scenario, Benjamin sells his practice for $1.5-million and Esther and Benjamin maximize their TFSAs upon the sale. Benjamin asked whether he should pay off his mortgage. With rates as low as they are today, they are better off investing than paying down debt, the planner says. This second option leaves them with a net worth of $5.6-million at the age of 90.

“To reach an equal number at age 90, Benjamin would need to increase the selling price by $275,000 to $1,775,000, assuming the additional amount was taxed as a capital gain upon receipt,” Mr. Ardrey says.

“Out of interest, I ran a third scenario in which the rate of return was 4.67 per cent rather than 5.67 per cent,” the planner says. If that were to occur, Benjamin would have to sell his practice for more than double – $3.05-million – to reach the same outcome as the first scenario, he says. “So the rate of return and its consistency is very important.”

Maintaining a 100-per-cent equity portfolio throughout retirement is risky. Esther and Benjamin should diversify their portfolio to help smooth out the volatility, the planner says. This becomes increasingly important as they draw on the portfolio. “Withdrawing money in down markets crystalizes losses,” he says.

Benjamin and Esther can look at traditional diversifiers such as fixed-income securities, which often do not move in correlation with stocks and so can be drawn upon when stock prices are down. But what they would gain in liquidity they would give up in returns, he says. “The prospect of yields beyond 2 per cent to 3 per cent in this asset class would not be expected.”

To increase their diversification and, one hopes, improve returns, Esther and Benjamin could consider alternative investments such as private income funds, Mr. Ardrey says. Not only have these investments offered solid returns, they have virtually no correlation to stock markets, he adds. “So as markets go up or down, the returns on these investments remain consistent.” Mind you, private debt funds do have liquidity risk and may be subject to set redemption periods, the planner says.

Client situation

The people: Benjamin and Esther, both 57, and their children.

The problem: Should Benjamin sell his practice or hold on to it and continue collecting dividends from the business?

The plan: First, get a firm handle on spending. Benjamin should temper his rate of return expectations. Consider adding some private debt funds to their portfolio.

The payoff: A better understanding of how to make optimal financial choices as they arise.

Monthly net income (budgeted): $11,845

Assets: Cash in bank $8,000; non-registered stocks $100,000; his TFSA $9,000; her TFSA $7,000; his RRSP $120,000; her RRSP $155,000; residence $950,000; Benjamin’s business $1,500,000. Total: $2.8-million

Monthly outlays: Mortgage $2,425; condo fee $160; property tax $150; water, sewer, garbage $175; home insurance $90; electricity, heat $140; maintenance, garden $250; transportation $535; groceries $600; clothing $200; gifts, charity $175; vacation, travel $500; other discretionary $100; dining, drinks, entertainment $400; personal care $75; club membership $25; pets $50; sports, hobbies $250; subscriptions, other $150; health care $220; life insurance $195; phones, TV, internet $75; RRSP $500; TFSA $400. Total: $7,840. (Does not include unallocated surplus spending of $3,500.)

Liabilities: Home mortgage $580,000

Want a free financial facelift? E-mail

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

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor & Portfolio Manager
(416) 733-3292 x230

FINANCIAL FACELIFT: Can Ted retire at year end and spend $150,000 a year?


Below you will find a real life case study of an individual 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, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by:
Special to The Globe and Mail
Published November 20, 2020

A retirement activity for Ted, fishing.

Ted wants to retire from work as a self-employed consultant at year end when his current contract expires. He is 58 and single with no dependants.

Years of running a successful business have left Ted with more than $2-million in his corporate investment account. He also has a mortgage-free house in Toronto and a defined benefit pension from a previous employer that will pay him $24,000 a year, indexed to inflation, starting at the age of 65.

“If I retire now, how much could I safely draw per year from my investments and in what order?” Ted asks. “What would be the most tax-efficient way to draw down the corporate funds?” His investments comprise a mix of dividend-paying exchange-traded funds and index funds. “What return should I expect and what asset mix would you recommend?” he asks. “Do you see any gaps and what would be your suggestions to correct them?”

Longer term, Ted might exchange his house for a condo in Toronto and a villa someplace where the winters are warm. His retirement spending goal is $150,000 a year after tax, up from spending of about $70,000 now. The increase would cover travel and leisure expenses.

We asked Matthew Ardrey, vice-president and portfolio manager at TriDelta Financial in Toronto, to look at Ted’s situation.

What the expert says

Ted will be relying largely on his corporate investment portfolio for retirement income, Mr. Ardrey says. Ted has $55,000 in his tax-free savings account, $120,000 in his RRSP and $2.08-million in his corporation.

Because the bulk of his assets are in his corporation, Ted must consider the tax consequences of each withdrawal and take full advantage of available tools to minimize tax, the planner says. This includes using the capital dividend account, or CDA. With this, the non-taxable half of a capital gain from a stock sale is added to the CDA and can be distributed as a tax-free dividend to the shareholder.

“In terms of how we see the drawdown of Ted’s accounts, he will focus on using his corporate assets exclusively at a rate of $150,000 per year, plus any available CDA distribution,” Mr. Ardrey says. “As the assets are depleted, the amount of the CDA distribution declines from $43,700 in year one to $4,800 by the time Ted is 83 in 25 years’ time.”

Once Ted turns 65, he will have pension income of $24,000 a year plus Canada Pension Plan benefits of $8,254 a year. The CPP benefits are less than maximum because Ted has been drawing dividends rather than salary from his corporation. The planner assumes Ted’s Old Age Security benefits will be clawed back because his income is high. “This [extra income] will allow him to reduce the amount of his withdrawals from the corporation to $110,000 per year.”

Next Mr. Ardrey looks at Ted’s investment strategy – and finds it wanting. If Ted is to live off the income from his investments, he will have to find a way to keep stock price volatility low and “create a consistent stream of income for his future,” the planner says.

“Currently, Ted’s portfolio is 63 per cent in cash, and aside from one small stock position, the remainder is in a financial services ETF and an income fund,” Mr. Ardrey says. Ted’s cash position is so high because he sold three substantial holdings – a real estate investment trust (REIT), a Nasdaq index ETF and half his income fund – when the markets pulled back in September. This nervousness does not augur well for someone who wants to invest solely in stocks, the planner says.

Ted plans to invest 50 per cent of his corporate portfolio in dividend-paying stocks and 50 per cent in stocks that focus on capital appreciation, Mr. Ardrey says. As well, Ted would like to focus on investments with return of capital distributions (like some REITs and income funds) to minimize tax. (Income tax is deferred on return of capital distributions until the security is sold.) With this strategy, Ted expects to earn $10,000 to $12,000 a month in dividends, the planner says.

Historically, a well diversified, 100-per-cent stock portfolio with allocations to all geographic regions could earn a total return (dividend yield plus capital appreciation) of 6 per cent, net of investment costs, Mr. Ardrey says. If Ted gets $10,000 a month in dividends, this would be a yield of 5.77 per cent. Dividends of $12,000 a month would mean a 6.92-per-cent yield. “Though it’s not impossible to achieve,” such high yields will likely require more concentration in securities (such as REITs and income funds) and sectors (such as financial services and utilities) than would be prudent, the planner says.

Even if Ted can resist the urge to sell when markets are jittery, he will need more than just dividends to achieve his spending goal, Mr. Ardrey says. He will need to draw on his capital as well, selling his holdings over time. If he has to sell when “there is a prolonged market contraction, he risks permanent losses.”

Given the size of his portfolio and how dependent he will be on it for retirement income, Ted should consider hiring a professional portfolio manager or investment counselling firm, Mr. Ardrey says. Such firms are required by law to act in the best interests of their clients. They can also offer investments that do not trade on public markets, including private income or debt funds; for example, fund managers who offer mezzanine or bridge financing to corporations.

So can Ted retire at year end and achieve his spending goal? “Unfortunately, the answer is no,” Mr. Ardrey says. By the age of 82, Ted would run out of investment assets, but he’d still have his real estate. Selling his property at that point and investing the proceeds would carry him to age 90. This assumes Ted is able to achieve that 6-per-cent return.

Having to sell his real estate would leave Ted with little in the way of a financial cushion, the planner says, “something that I would not recommend.” There is a simple solution. Ted can keep his property cushion by cutting his target spending from $150,000 a year to $120,000, still well above the $70,000 he is spending now, Mr. Ardrey says.

Client situation

The people: Ted, age 58.

The problem: Can he retire at year end and spend $150,000 a year? How should he draw down his corporate investments?

The plan: Cut spending target to $120,000. Consider hiring a professional money manager to design his portfolio to lower risk and provide steady and potentially higher returns.

The payoff: A worry-free retirement.

Monthly net income (budgeted): $5,870

Assets: Bank $25,000; corporate cash $130,000; corporate investment portfolio $1.95-million; TFSA $55,000; RRSP $120,000; estimated present value of DB pension $444,670; residence $1.25-million. Total: $3.97-million

Monthly outlays (forecast): Property tax $600; home insurance $105; utilities $235; maintenance $335; transportation $390; groceries $415; clothing $85; gifts, charity $170; vacation, travel $1,665; dining, drinks, entertainment $1,165; health care $85; phone, TV, internet $120; TFSA $500. Total: $5,870

Liabilities: None

Want a free financial facelift? E-mail

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

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
(416) 733-3292 x230

FINANCIAL FACELIFT: How can this couple save for their son’s higher education and their own retirement?


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, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by:
Special to The Globe and Mail
Published September 25, 2020

Since coming to Canada from India in 2016, Sanjay and Maya have found well-paying jobs, bought a large condo in Toronto and had a child. He is age 35, she is 32.

Both are professionals, bringing in a combined $300,000-plus a year in salary. Sanjay earns another $15,000 a year in income from his business, which he hopes to expand.

“We have assets across Canada and in India, spanning equities, bonds and real estate,” Sanjay writes in an e-mail. While they are both well educated, “financially, we believe there’s so much more we can and should do,” he writes. “The last few years were so unpredictable in the stock market that most of the time we spent on the sidelines.”

Their questions: “What should be our portfolio structure to achieve our goals?” Sanjay asks. Their long-term goals include saving for their son’s higher education and for their own retirement. Their retirement spending target is $6,500 a month or $78,000 a year. “How much should we be saving on a monthly basis?” As well, “what products are we missing that are unique to Canada and which can give us some tax benefits?”

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Sanjay and Maya’s situation.

What the expert says

Now that they are settled, Sanjay and Maya would like to take stock of their lives and ensure they are on the right path for their financial future, Mr. Ardrey says.

“Sanjay’s goal is to work at his own business full-time once his income from it is sufficient, which he figures will take another two years.” In preparing his forecast, Mr. Ardrey assumes that for the next two years (2021-22) Sanjay will earn $15,000 a year from his business and in 2023 will start working there full-time, earning $150,000 a year.

After communicating with the couple and analyzing their income and expenditures, the planner discovered some holes in their budget. They appear to have a larger surplus than their numbers indicated, he said. Although some of the difference can be attributed to RRSP refunds, “Sanjay and Maya need to review their budget thoroughly,” Mr. Ardrey says.

The next step is for Sanjay and Maya to open a registered education savings plan for their son, who was born in 2018, to take advantage of the Canada Education Savings Grant, the planner says. The grant adds 20 per cent to the first $2,500 in contributions made to an RESP each year up to a maximum of $7,200. “To maximize the grant, they should look at contributing $5,000 for this year and next (to catch up with missed contributions) and then $2,500 a year afterwards,” he adds.

The savings will not be enough to cover the expected future cost of postsecondary education, estimated at $20,000 a year for a student living away from home, Mr. Ardrey says. Including investment returns, they would be able to cover off about 55 per cent of the expected costs. The remainder would have to come from the child’s work income, student loans or other family savings or current income.

In addition to their above-mentioned savings, Maya will be enrolled in a defined contribution pension plan by the end of the year, the planner says. Starting in 2021, she will contribute 6 per cent of her salary, matched by her employer. In addition, Maya makes the maximum contribution to her RRSP annually. Mr. Ardrey assumes that after he leaves his job to run his own business, Sanjay will maximize his RRSP contribution room each year as well.

Next, the planner looks at the couple’s investment portfolio, which has an asset mix of 95 per cent equities and 5 per cent fixed income, with most of the stock portion in U.S. and international markets. Aside from bank accounts, all of the non-registered investments remain in investment accounts in India, with the bulk in mutual funds, he says. The historical return for a portfolio with this asset mix is 5.6 per cent a year, with an average investment cost of 1.25 per cent, Mr. Ardrey says. When they retire, his analysis assumes their rate of return is reduced by one percentage point as they add more conservative investments to their asset mix.

Both Sanjay and Maya plan to retire at the age of 65. Based on their time in Canada, they would get 85 per cent and 93 per cent of Old Age Security benefits, respectively. If they continue to work at their current income levels, then they would get 87 per cent and 95 per cent of Canada Pension Plan benefits, respectively.

“Based on the above assumptions, Maya and Sanjay can meet their retirement goals with ease,” Mr. Ardrey says. At Maya’s age 90, they would have $3-million in investment assets, largely in RRSPs or other registered accounts, and $4-million in real estate value, he says. If they decided to spend that investment value, they could increase their spending by $4,500 a month, in addition to the $6,500 a month in planned spending.

“With that kind of financial cushion in place, Sanjay and Maya may want to look at retiring earlier than 65,” Mr. Ardrey says. He did a projection with a retirement age of 60 for Sanjay and age 57 for Maya. Even if they retired sooner they can still meet their goal, though the additional spending room would fall to $1,000 a month more than the $6,500-a-month target.

Despite this rosy picture, there are things that Sanjay and Maya can do to improve their financial picture, Mr. Ardrey says. First is to open tax-free savings accounts and contribute the maximum allowable. “Being able to save an additional $6,000 each and every year tax-free will greatly benefit them in retirement,” he says. Unlike RRSPs, withdrawals from TFSAs are not taxable.

As well, a considerable amount of their investments remain in Indian rupees, which adds foreign-exchange risk to their investment portfolio, the planner says. They should look to move those investments to Canada where they can form part of an overall investment strategy, he says.

Because Sanjay plans to run his own business, they might want to consider a less volatile asset mix, the planner says. Given low interest rates and turbulent stock markets, they could add some private income-producing investments such as a private debt fund or a global real estate fund, Mr. Ardrey says. “These funds would be designed to supplement their returns while reducing the volatility risk of the equities.”

Client situation

The people: Sanjay, 35, Maya, 32, and their son, 2.

The problem: How best to chart a path to a solid financial future.

The plan: Open an RESP for the child to take advantage of the government grant. Open TFSAs for both of them so their earnings can grow tax-free. Consider lowering risk in their investment portfolio.

The payoff: A brighter financial future than they may be anticipating.

Monthly net income (budgeted): $19,000

Assets: Bank accounts: $32,700; stocks $72,000; mutual funds $145,000; Indian mutual fund $27,900; his RRSP $37,000; her RRSP $49,000; his DC work pension $6,300; residence $1.25-million. Total: $1.6-million

Monthly outlays (forecast): Mortgage and property tax $4,200; condo fees $750; home insurance $70; electricity, heating $150; maintenance $240; transportation $400; groceries $800; child care $1,880; clothing $540; gifts, charity $200; vacation, travel $600; other discretionary $1,000; dining, drinks, entertainment $700; personal care $100; club memberships $150; sports, hobbies $150; subscriptions $40; other personal $100; prescriptions, supplements $100; health, life insurance $105; phones, TV, internet $215; his group RRSP $830; her RRSP $2,160. Total: $15,480. Surplus of $3,520 goes to unallocated spending and saving.

Liabilities: Mortgage $850,000

Want a free financial facelift? E-mail

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

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
(416) 733-3292 x230

FINANCIAL FACELIFT: Lucinda wonders how to organize investments after the coronavirus accelerated her decision to sell her house


Below you will find a real life case study of an individual 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, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by:
Special to The Globe and Mail
Published August 7, 2020

At the age of 60, Lucinda is going from being without contract work and collecting the Canada Emergency Response Benefit to wondering how to invest and manage about $1.5-million – the net proceeds from her house sale in downtown Toronto. The deal, for a total of $1.7-million, is set to close in September.

“The [COVID-19] pandemic accelerated my decision to sell my house in case of a significant drop in housing prices,” Lucinda writes in an e-mail, and because contract work in communications is now hard to come by.

“I fear I won’t be able to find work anymore, meaning I might need to cut into my savings, which I wanted to avoid. So now I need guidance on how to map out my retirement savings strategically,” she adds.

“My plan had been to take a few months off to attend to house repairs and then look for another contract in the spring,” Lucinda writes. “Then the pandemic hit and the contracting job market – combined with my experience level – led me to conclude it may take a very long time, if ever, for me to be employed again.”

She has no plans to buy another place and has rented an apartment for September. A key goal is to help her daughter, her only child, who has just graduated from university, to get established.

A self-directed investor who uses a mixture of mutual funds and exchange-traded funds, Lucinda wonders how best to structure her investments to last a lifetime. She also wants to leave as much as possible to her daughter. She wonders, too, when to begin collecting Canada Pension Plan benefits. Her target retirement spending goal is $45,000 a year after tax.

We asked Matthew Ardrey, a vice-president and portfolio manager at TriDelta Financial Partners in Toronto, to look at Lucinda’s situation.

What the expert says

“Like many Canadians these days, Lucinda’s working life has been cut short by COVID-19,” Mr. Ardrey says. “So taking stock of her financial picture today and where it is going in the future is a prudent exercise.”

Lucinda estimates she will net $1,474,000 from her house sale after she pays off her mortgage and covers closing costs, the planner says. Her existing portfolio is a mixture of ETFs and mutual funds with an asset mix of 48-per-cent stocks and 52-per-cent cash and fixed income. The stocks are slightly overweight to Canada, but are otherwise well diversified geographically, he says.

“The historical returns on her portfolio asset mix are 4.39 per cent, with investment costs of 0.79 per cent, leaving her with a net return of 3.6 per cent,” Mr. Ardrey says. If inflation is assumed to be 2 per cent, this leaves her with 1.6 per cent above inflation, he adds.

If Lucinda sticks to her modest spending target of $45,000 a year to the age of 90, she would leave an estate of about $2.4-million in 2050, the planner says. She could spend another $42,000 every year before exhausting her capital. “That being said, I would not recommend this level of spending unless it is nearer to the end of her life, because there is no real estate to fall back on as a cushion.”

Lucinda has expressed concern about the direction of the stock market and low returns on fixed-income securities, the planner says. “She certainly has justification for her concerns.” The five-year Canadian government bond yield is a scant 0.31 per cent. “Though bond [prices] have had a great 2020 so far, in part due to interest-rate cuts, the long-term future of this asset class is definitely in question,” Mr. Ardrey says.

First off, Lucinda may want to look to an actively managed bond fund portfolio with solid yields that she can continue to hold for the coupons (interest payments), Mr. Ardrey says. Actively managed funds tend to do better in difficult markets. She is holding bond ETFs, most of which passively track market indexes.

With her increased wealth, Lucinda should consider hiring an investment counselling firm, which is required by law to act in the best interests of its clients, he says. (For a list of such firms, see the Portfolio Management Association of Canada website at

These firms can “create a strategy for her that will provide solid, ongoing income from both traditional and alternative asset classes,” the planner says. He recommends an asset mix of 50-per-cent equities, 20-per-cent fixed income and 30-per-cent alternative income – a class that includes funds that invest in private debt and income-producing real estate. The addition of alternative income investments, which do not trade on public markets, has the potential to boost fixed-income returns while offsetting the volatility of stock markets.

“The next couple of years will continue to be volatile in stocks,” he says. “But if she can ignore the volatility and focus on the dividend payments, she can use that income to pay for her lifestyle (with government benefits) without drawing on her capital.”

Lucinda should invest her new capital gradually, especially when it comes to buying stocks, Mr. Ardrey says. “I would not want to see Lucinda invest a substantial amount of capital, only to have the markets fall 20 per cent the following month.”

As for when to start taking Canada Pension Plan benefits, the planner suggests Lucinda wait until she is 65. “If Lucinda took her CPP at age 60, she would get $7,848 a year. So by the time she turned 74, she would have collected a cumulative total of $109,872 ($7,848 multiplied by 14 years).”

If she waited until age 65, Her CPP would be $12,144 a year. In 9 years, she would have collected $109,296.

“So, if Lucinda lives beyond age 74 and a few months, she would be better off taking CPP at age 65 than 60,” the planner says. Getting the larger amount starting at 65 would overtake the advantage of getting the smaller amount earlier starting in her 74th year, he adds.

Client situation

The people: Lucinda, 60, and her daughter, 26.

The problem: How to invest the proceeds of her house sale to last a lifetime and leave an inheritance for her daughter. When to take CPP.

The plan: Start CPP at 65. Consider hiring a professional investment counselling firm. Enter the stock market gradually. Consider actively managed bond funds and alternative fixed-income investments to potentially boost returns and lower volatility.

The payoff: The comfort of knowing she may be able to spend a little more than she plans and still leave a substantial estate.

Monthly net income (budgeted): $3,750.

Assets: Bank accounts $52,000; mutual funds $48,400; TFSA $61,500; RRSP $374,600; net proceeds of house sale $1.5-million. Total: $2-million.

Monthly outlays (forecast): Rent $1,650; home insurance $15; electricity $50; transportation $150; groceries $400; clothing $50; vacation, travel $300; personal discretionary (dining, entertainment, clubs, personal care) $500; health care $230; phone, TV, internet $90; miscellaneous future discretionary spending $315. Total: $3,750.

Liabilities: None

Want a free financial facelift? E-mail

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

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
(416) 733-3292 x230

FINANCIAL FACELIFT: Should Wilfred and Wendy diversify their Canada-heavy stock portfolio as they inch closer to retirement?


Below you will find a real life case study of a couple who are 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, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by:
Special to The Globe and Mail
Published July 3, 2020

Now in their 50s, Wilfred and Wendy plan to hang up their hats soon, sell their Manitoba house and move to a warmer clime. Wilfred is 58, Wendy, 53. Wilfred retired from his government job a few years ago and is now collecting a pension and working part time. He plans to continue working until shortly before Wendy is 55, when she will be entitled to a full pension. Both have defined benefit pensions indexed 80 per cent to inflation for life that will pay a combined $82,956 a year.

“We want to travel more in our younger years, so we would likely need more income in the first few years of retirement,” Wilfred writes in an e-mail. Their retirement spending goal is $75,000 a year after tax plus $25,000 a year for travel. With no children to leave an inheritance to, “we want to use up all our invested funds,” he adds. “We are extremely active, healthy people who have good chances of living a long life.”

They’re considering moving to British Columbia for the “milder winter weather and greater recreational opportunities,” Wilfred writes, but would only do so if they could buy for about the same price as their existing house fetches.

The stock market drop this spring left them feeling their investments are not sufficiently diversified, Wilfred adds. “I would like to diversify our stock holdings away from Canada only.”

We asked Matthew Ardrey, a vice-president and portfolio manager at TriDelta Financial in Toronto, to look at Wilfred and Wendy’s situation.

What the expert says

Wilfred is planning to retire fully in the spring of 2021 and Wendy in January, 2022, Mr. Ardrey says. “With the goal in site, they would like to ensure that they are financially ready for the next stage in their life,” the planner says.

First off, the pair do not keep an accurate budget, Mr. Ardrey says. “As we went through this exercise, they revised their monthly spending upwards by $1,200.” The updated numbers are shown in the sidebar. “Before they retire, I would strongly recommend that they do a full and accurate budget, he adds, because a large discrepancy in their spending “could have a dramatic effect on their financial projections and their ability to meet their obligations in retirement.”

Wendy has three options for her pension, the planner says. She can take $3,874 a month with no integration of Canada Pension Plan and Old Age Security benefits. Or she can take $4,320 a month to the age of 60 and $3,688 a month thereafter with CPP integration. The third choice is $4,621 a month to the age of 60, $3,989 a month to 65 and $3,375 a month thereafter with integration of both CPP and OAS.

According to the pension administrator’s website, the purpose of integration is to provide a more uniform amount of income throughout retirement, rather than having less income initially (prior to CPP and/or OAS eligibility) and more income in the later years (when CPP and OAS commence). Integration provides an opportunity to increase the cash flow early in retirement which, for some, is preferred.

“I thought it would be interesting to compare her three options to find which would be the most lucrative over her lifetime,” Mr. Ardrey says. Option No. 1 is the clear winner, he says, giving the largest cumulative value of payments to the age of 90.

To illustrate, by 72 Wendy will accumulate $961,000 of pension with no integration, compared with $956,000 with integration of CPP and OAS.

In drawing up his plan, Mr. Ardrey assumes Wendy chooses the first option and that they both begin collecting government benefits at 65. He also assumes they buy a condo in B.C. in 2023 for about the same price as they get selling their current home. Because it is a long-distance move, he assumes transaction and moving costs total $100,000.

“Before we can discuss their retirement projection, I need to address their investment portfolio,” Mr. Ardrey says. Wilfred is right to think they need to diversify, the planner adds. They have a portfolio of nearly $800,000 invested almost all (97 per cent) in Canadian large-cap stocks. “Further concentrating their position, they have that 97 per cent spread over only 13 stocks, and of that, 62 per cent is in only five stocks,” Mr. Ardrey says. This exposes them to “significant company-specific risk,” he says.

As well, the Canadian stock market is not as diversified by industry as U.S. and international markets, so it can lag at times. “For example, in the recent market recovery, financials and energy have been lagging, which are two of the three major sectors on the TSX,” he says.

To illustrate, the planner compares the performance of the TSX and the S&P 500 indexes from Dec. 31 and from their February highs to the market close on June 24. The TSX is down 10.4 per cent from Dec. 31 and down 14.8 per cent from February. The S&P, in contrast, is down 5.6 per cent from year-end and down 9.9 per cent from February.

“Having a portfolio almost entirely allocated to stocks in retirement is a risk that Wilfred and Wendy cannot afford,” Mr. Ardrey says. He offers two alternatives. The first is a geographically diversified portfolio with 60-per-cent stocks or stock funds and 40-per-cent fixed income using low-cost exchange-traded funds. Such a portfolio has a historical rate of return of 4.4-per-cent net of investment costs.

Or they could hire an investment counsellor that offers carefully selected alternative income investments with a solid track record, Mr. Ardrey says. Adding these securities to their portfolio ideally would lower volatility and provide a higher return than might be available in traditional fixed-income securities such as bonds, the planner says.

Either way, they meet their retirement spending goal of $75,000 a year after tax, plus $25,000 a year for travel until Wilfred is 80.

Client situation

The people: Wilfred, 58, and Wendy, 53

The problem: How to ready themselves financially to retire in a couple of years.

The plan: Draw up an accurate budget, continue saving and take steps to diversify their investment portfolio to lower volatility and improve returns.

The payoff: Financial security with a comfortable cushion.

Monthly net income: $11,230

Assets: Bank accounts $51,000; his stocks $78,000; her stocks $135,800; his TFSA $86,500; her TFSA $78,000; his RRSP $232,217; her RRSP $186,767; estimated present value of his pension plan $464,000; estimated present value of her pension plan $677,417; residence $425,000. Total: $2.4-million

Monthly outlays: Property tax $270; home insurance $75; utilities $185; maintenance $200; garden $50; transportation $580; groceries $600; clothing $200; gifts, charity $200; travel $2,000; dining, drinks, entertainment $350; personal care $150; subscriptions $50; dentists $30; health and dental insurance $100; cellphones $130; cable $200; internet $130; RRSPs $1,025; TFSAs $1,000. Total: $7,525

Liabilities: None

Want a free financial facelift? E-mail

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

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
(416) 733-3292 x230

The coronavirus has created a tremendous financial opportunity for workers with a pension


Unique opportunities sometimes come in extreme times.

The one detailed below on commuting the value of your pension won’t be an option for many, but for those with the ability to take advantage, it could meaningfully improve their retirement finances for years to come.

This opportunity is based on three fundamental facts.

First, the current or commuted value of your pension is much higher when interest rates on 5 Year Canadian Bonds are low. The five-year bond is trading near historic lows, at 0.57 per cent at the time of writing.

Secondly, you can use the paid-out pension money to buy some very solid long-term Canadian investments with dividend yields of six per cent or more.

Finally, the effective marginal tax rate on Canadian dividends is very low. In Ontario, British Columbia and Alberta, you don’t pay any tax on such dividends at $40,000 of taxable income, and only 7.6 per cent at $70,000 of taxable income.

Let’s take a look at each of these facts.

Why low interest rates make your pension worth more today

Canadian money and Why low interest rates make your pension worth more today.This only relates to the one-time value of defined-benefit (DB) pension plans, since defined-contribution plans go up or down in value each month based on the investment value of your account.

Low interest rates can be great for DB plans because they are valued on a specific date — usually monthly. This value is essentially meant to compensate you for what the pension would need to set aside to cover your pension payouts.

Let’s say you needed to get $50,000 a year from a guaranteed investment certificate. If interest rates are 10 per cent, you would need $500,000 invested to generate the $50,000. If interest rates are one per cent, you need $5 million to generate the same amount. Today, the pension plan needs to set aside much more money to ensure it can meet the fixed needs of your lifetime pension.

The value of your pension is made up of several factors. Needing $5 million to generate $50,000 is a very generic example, but the difference could mean getting $250,000 or more on a full mid-level pension if you retire today compared to if you retire when rates are two percentage points higher.

Of particular interest is that pension plan managers do not want you to take the commuted value. They don’t want to lose assets at the best of times, but especially not at the most expensive times when interest rates are low. If they wanted you to take out the cash, they would provide more education to make your decision easier. In our experience, you often have to push hard to get answers to key questions that might help you make better informed decisions.

Keep in mind, too, that with some plans you can make the decision to take the cash instead of the pension right before you retire. With other plans, you have to make the decision to take the commuted value of a pension as early as age 50 or 55. This is an important question to ask your manager.

What to do with a cash payment

One of the keys to making such decisions is to understand that this isn’t play money. This is your retirement pension. You want to invest wisely and lean conservative. If a portfolio won’t do as well as your pension, then you should keep the pension.

We often analyze pensions for clients to determine the break-even point if someone was to live to be 90. This point will depend on whether a pension is fully indexed to inflation, and must account for any other health benefits that might be included.

Having said that, because of the low interest rates at this time, the rate of return required to do better than a pension payout is generally in the range of 2.75 per cent to four per cent today. If the pension funds are invested at, say, a three-per-cent annual return until age 90, and funds are drawn out exactly the same as they would be in a pension, the investments will be worth zero at age 90, the same as they would be for the pension if you pass away at 90 with no survivors.

Over the long term, three per cent is a pretty low hurdle to clear. It is much easier now. As an example, we put together three investments with a combined yield of more than seven per cent that could help you achieve this return.

George Weston Preferred Share – Series D: The current dividend yield on this fixed-rate or perpetual-preferred share is 6.2 per cent (at the time of writing). The share price is still down almost 15 per cent from March, but we believe that you will see some decent price recovery in addition to the dividend.

Canadian Imperial Bank of Commerce common shares: The current dividend yield is 7.5 per cent. No Big 5 Canadian bank has cut its dividend since the 1930s. It is possible they would, but very unlikely. The stock is still trading almost 30 per cent lower than it was in mid-February, but even if the stock price never goes up, and the dividend never rises, 7.5 per cent a year is a decent return. The good news is that both the stock price and dividend are very likely to meaningfully rise during your retirement years.

Bridging Income Fund: Bridging Income is a well-run firm that offers secured private lending and factoring. The fund has delivered consistent annual returns of eight per cent or more, with little correlation to stock markets. It has also provided positive returns for the past 70-plus months without a single negative month. We have worked with the fund since its inception seven years ago, and this has provided investment benefits to our clients.

The above three are clearly not meant to be an investment portfolio, but they represent a sample of what can be purchased today, often at higher yields than normal because of the decline in markets.

Tax and dividend considerations

Usually, the commuted value of a pension is paid out in two forms. The first would be funds that are tax sheltered and paid out into a registered retirement savings plan or similar account. You don’t pay tax on the transfer, but you will pay full income tax on the funds when they are ultimately withdrawn from the account.

The second form usually comes out as a taxable lump sum. There is a maximum transfer value for a pension, with anything above this amount considered taxable income. The general rule is that the larger your annual income as an employee, the higher percentage of your pension payout will likely be taxable. There are some strategies to lower the tax payment, but it is important to fully factor in the tax bill when determining what pension option makes sense.

In the three investments mentioned above, the George Weston and CIBC investments pay out eligible Canadian dividends, while the Bridging Income payout is considered interest income.

For a pension payout, we would hold Bridging Income in a tax-sheltered account. For the Canadian dividends, we are very comfortable holding them in a taxable investment account, because of the low tax rates on this income. Even for someone who has a total taxable income of $90,000, the tax rate on Canadian eligible dividends is just 12.2 per cent in Ontario and 7.6 per cent in B.C. and Alberta.

One of the negatives of a pension is that you don’t have control of the cash flow. It comes in every month, fully taxed, whether you need the cash or not. If you take the commuted value of your pension, you have much more control over cash flow and income, and this can be very valuable over time, as shown by the Canadian dividend income example.

The bottom line is that historically low interest rates along with higher-yielding investments can be a very rare opportunity that comes out of unfortunate circumstances. If your company or organization is strong and you are very risk averse, then keep your pension as is. If you don’t fall into that group, you should at least explore your options, especially now.

Reproduced from the National Post newspaper article 14th April 2020.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
(416) 733-3292 x 221