Lucinda wonders how to organize investments after coronavirus accelerates decision to sell her house

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Its current portfolio is a mix of ETFs and mutual funds with an asset mix of 48 percent stocks and 52 percent cash and fixed income.

Fred Lum / Le Globe and Mail

At the age of 60, Lucinda went from being without a contract to work and collecting the Canada Emergency Response Benefit to wondering how to invest and manage around $ 1.5 million – the net proceeds. selling his home in downtown Toronto. The deal, for a total of $ 1.7 million, is expected to close in September.

” The [COVID-19] The pandemic hastened my decision to sell my house in the event of a significant drop in house prices, ”Lucinda wrote in an email, and because outsourced communications work is now hard to find.

“I’m worried that I won’t be able to find a job, which means I might have to cut my savings, which I wanted to avoid. So now I need some advice on how to strategically map my retirement savings, ”she adds.

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“My plan was to take a few months off work to do house repairs, then look for another contract in the spring,” Lucinda writes. “Then the pandemic hit and the contraction of the job market – combined with my level of experience – led me to conclude that it may take a very long time, if ever, for me to find a job.

She has no plans to buy any other accommodation 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 settle.

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

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

What the expert says

“Like many Canadians these days, Lucinda’s professional life has been cut short by COVID-19,” says Mr. Ardrey. “Taking stock of its financial situation today and its future development is therefore a prudent exercise.”

Lucinda estimates that she will make $ 1,474,000 from the sale of her home after paying off her mortgage and covering closing costs, according to the planner. Its current portfolio is a mix of ETFs and mutual funds with an asset mix of 48 percent stocks and 52 percent cash and fixed income. Equities are slightly overweighted relative to Canada, but they are otherwise well diversified geographically, he says.

“The historical returns to the asset mix of his portfolio are 4.39%, with investment costs of 0.79%, leaving him with a net return of 3.6%,” says Mr. Ardrey. If inflation is assumed to be 2%, that leaves it 1.6% more than inflation, he adds.

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If Lucinda sticks to her modest spending goal of $ 45,000 a year until she is 90, she would leave an estate of about $ 2.4 million in 2050, according to the planner. She could spend an additional $ 42,000 each year before she runs out of capital. “That being said, I wouldn’t recommend this level of spending unless it’s nearer the end of its life, because there isn’t any 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, the planner says. “She certainly has a justification for her concerns.” The yield on five-year Canadian government bonds is just 0.31%. “Although the link [prices] have had a great 2020 so far, in part due to the interest rate cuts, the long-term future of this asset class is definitely in question, ”says Mr. Ardrey.

First, Lucinda may want to look to an actively managed bond fund portfolio with solid returns that she can continue to hold for coupons (interest payments), says Ardrey. Actively managed funds tend to do better in difficult markets. It owns bond ETFs, most of which passively track market indices.

As her wealth increases, Lucinda should consider hiring an investment advisory firm, which is legally bound to act in the best interests of her clients, he says. (For a list of these companies, see the Canadian Association of Portfolio Managers website at https://pmac.org/.)

These companies can “create a strategy for her that will provide her with a solid and continuous income from traditional and alternative asset classes,” says the planner. It recommends an asset mix of 50% stocks, 20% fixed income, and 30% alternative income – a category that includes funds that invest in private debt and productive real estate. of income. The addition of alternative income investments, which do not trade on public markets, has the potential to boost fixed income returns while offsetting stock market volatility.

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

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Lucinda should invest her new capital gradually, especially when it comes to buying stocks, says Ardrey. “I wouldn’t want Lucinda to invest a substantial amount of capital, but for the markets to go down 20% the next month.”

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

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

“So if Lucinda lives past 74 years and a few months, she better take CPP at 65 than at 60,” the planner says. Getting the highest amount from age 65 would outweigh the benefit of getting the smaller amount earlier from his 74th year, he adds.

Client Situation

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

The problem: How to invest the proceeds from the sale of your house to last a lifetime and leave a legacy for your daughter. When to take CPP.

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The plan: Start CPP at age 65. Consider hiring a professional investment counseling firm. Gradually enter the stock market. Consider actively managed bond funds and alternative fixed income investments to potentially increase returns and reduce volatility.

Le gain: The comfort of knowing that she may be able to spend a little more than she plans on while still leaving 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 from the sale of a house of $ 1.5 million. Total: $ 2 million.

Monthly expenses (forecast): Rent $ 1,650; home insurance $ 15; electricity $ 50; transportation $ 150; groceries $ 400; clothing $ 50; vacation, travel $ 300; discretionary staff (catering, entertainment, clubs, personal care) $ 500; health care $ 230; telephone, television, Internet $ 90; miscellaneous discretionary future expenses $ 315. Total: $ 3,750.

Liabilities: No.

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