Advisor analysis – Carol Plaisier

Widows are coping with all kinds of emotions, including grief, fear and worry about the unknown. I usually start by making it clear that, when it comes to their investments, they don’t have to do anything tomorrow.

Sheila’s immediate problem is that she doesn’t have a lot of spare cash on hand. In order to give her a little wiggle room, I’d suggest that she refinance her mortgage to reduce her payments to about $500 per month (instead of the $1,000 she currently pays). Depending on the lender, she may be able to reduce the payment without refinancing.

She should invest the additional $500 monthly that would once have gone to the mortgage into a TFSA. That will easily accumulate some additional capital that could be used to cover emergency expenses.

Although it’s not clear how Sheila is invested right now, I probably wouldn’t make any drastic changes. Instead, I’d try to move her gradually into a portfolio that offers her the opportunity for growth, without undue risk.

For instance, if she is almost entirely invested in GICs, I’d begin educating her about how inflation can erode the real value of her investments, eating away at her spending power.

I would run the numbers for her, but often I think the most effective way to get that concept across is to talk about real life situations. I’d ask her if she’s noticed that prices always seem to go up in the grocery store and at the gas station, and yet her GICs aren’t making any more interest.

When Sheila’s next GIC comes due, I might say, “Let’s take a small percentage of it and put it in a low-risk fund just to get a feel for that.”

Really, Sheila isn’t in terrible shape for retirement. Even if she never invests another dollar, her $500,000 in RRSPs should be worth about $675,000 by the time she retires at age 65, assuming a return of 4 percent. If she spends $50,000 a year—enough to sustain her current lifestyle—the money should last her until past age 96 assuming a 4 percent rate of return.

But Sheila isn’t going to get those kinds of earnings by investing in GICs. I would steer her toward a portfolio that is roughly divided into:

• 40 percent lower risk balanced funds such as Fidelity Monthly Income, FT Bissett Dividend Income and CI Signature Growth and Income
• 30 percent moderate risk equity funds such as Fidelity Northstar (for global equities) and NEI Ethical American Multi-Strategy (for American equity)
• 30 percent moderate risk Canadian dividend equity funds such as TD Dividend Growth & Dynamic Dividend Advantage or segregated funds

I’d structure it so that—once Sheila rolls her RRSPs over into an RRIF—monthly payments come out of the less volatile low-risk balanced funds. That way she won’t be faced with withdrawing from a seriously diminished fund when the market is down.

In the meantime, the moderate risk equity funds allow for the possibility of higher returns over time, but they’re likely to be more volatile. Every year I’d rebalance Sheila’s portfolio, so that whenever those equity funds exceed their 30 percent portfolio allocation, the additional earnings are shifted to the less volatile balanced funds. If the market is down, I simply wouldn’t shift any of the funds over.

The dividend and segregated funds provide additional income security because they yield returns that aren’t completely reliant on the stock market.

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This article was prepared solely by Carol Plaisier who is a registered representative of HollisWealth™ (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). Brokerage services provided by HollisWealth are provided through Scotia Capital Inc. Insurance products are provided by HollisWealth Insurance Agency Ltd. The views and opinions, including any recommendations expressed in this article, are those of Carol Plaisier alone and not those of HollisWealth. ™Trademark of The Bank of Nova Scotia, used under license.