Widows deal with all kinds of emotions, including sadness, fear and fear of the unknown. I usually start by explaining that when it comes to investing, they don’t have to do anything tomorrow.
Sheila’s immediate problem is that she doesn’t have much spare cash. To give her some breathing room, I suggest she refinance her mortgage to reduce her payments to about $500 a month (instead of the $1,000 she’s currently paying). Depending on the lender, they may be able to reduce your payment without refinancing.
She should invest the extra $500 a month that used to go towards her mortgage into a TFSA. Thanks to this, you will easily accumulate additional capital that can be used to cover emergency expenses.
While it’s unclear how Sheila is currently invested, I probably wouldn’t make any drastic changes. Instead, I would try to gradually move it into a portfolio that offers it room to grow without too much risk.
For example, if she is almost entirely invested in a GIC, I would start teaching her how inflation can reduce the real value of her investment, robbing her of purchasing power.
I would give her numbers, but I often find that the most effective way to convey this concept is to talk about real-life situations. I would ask her if she has noticed that prices at the grocery store and gas station are always going up, and yet her GICs are no longer in much demand.
When Sheila’s next GIC comes due, I can say, “Let’s take a small percentage of this and put it in a low-risk fund to see for ourselves.”
Really, Sheila isn’t in terrible shape for retirement. Even if she never invests a dollar, her $500,000 in an RRSP should be worth about $675,000 by the time she retires at age 65, assuming a 4 percent return. If she spends $50,000 a year – enough to maintain her current lifestyle – the money should last her until she is 96, assuming a 4 percent rate of return.
But Sheila won’t make those kinds of profits investing in GIC. I would direct her towards a portfolio that is roughly divided into:
- 40% 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 stocks) and NEI Ethical American Multi-Strategy (for US stocks)
- Canadian 30% moderate risk dividend stock funds such as TD Dividend Growth & Dynamic Dividend Advantage or segregated funds
I would structure it so that when Sheila converts her RRSP to an RRIF, the monthly payments would come from less volatile, low-risk, sustainable funds. This will prevent you from having to withdraw from a severely weakened fund in the event of a market decline.
Meanwhile, moderate-risk equity funds allow for higher returns over time, but are likely to be more volatile. Every year I rebalanced Sheila’s portfolio so that whenever equity funds exceeded the 30% allocation of the portfolio, additional gains were reallocated to less volatile balanced funds. If the market falls, I simply wouldn’t move any of the funds.
Dividends and segregated funds provide additional income security because they generate profits that are not entirely dependent on the stock market.
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This article was prepared exclusively 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 Canadian Investment Industry Regulatory Organization). 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 solely those of Carol Plaisier and not of HollisWealth. ™Trademark of The Bank of Nova Scotia, used under license.
