The Portfolio Doctor

By David Cruise and Alison Griffiths
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The Patient: Michelle Arden, 68

Situation: Divorced. Two married sons.

Assets: House $275,000, no mortgage. Car paid for, will need a new one in a few years.

Pension Income: $1800 a month -- OAS, CPP and small company pension

Investments:

Self Directed RRSP: $240,000 (mutual funds and bonds)

Non-registered:

Mutual funds $261,000

Stocks $75,000

GICs: $40,500

Concern: Next year I have to apply for a RRIF. I have no idea what I'm supposed to do and cannot make any decisions! I would like to know if my savings are sufficient to allow myself a private room in a retirement home if this is necessary later on.

Doctor: Michael Chow, Stonehaven Financial

Michael Chow advises Michelle to take a deep breath. "She should be very proud of herself," he emphasizes. "She's in her late sixties, she's looked after herself and her money for 30 years. Her health is good now. She could easily live into her nineties and beyond. Her challenge is to look to the future."

In order to estimate value in the years to come, Chow theoretically allocated her overall portfolio 60 per cent to equities and 40 per cent to fixed income and bonds. This is a more conservative allocation than she has now. He estimated a net return of 6 per cent for the equities and 4 per cent for the fixed income and bonds. For expenses, Chow used Michelle's own budget of $29,000 annually but adjusted it for inflation.

"I wanted to err on the side of conservatism since I was trying to compute a 30- year projection for her situation," Chow explains. "I did enhance her current lifestyle needs by $30,000 in year two, to be used to purchase a new car and in the third year by $6,500 to replace the current roof on her house. These monies were removed from her GICs which have a current value of $40,500."

At age 70 Chow suggests Michelle select the minimum RRIF withdrawal of 5 per cent, then 5.26 per cent at age 71 and so on. Her adviser needs to begin re-structuring her portfolio so these withdrawals can be easily made without forcing a sale of bonds or equities in down markets.

For the purposes of the projection, Chow assumed that Michelle would move into assisted care at the age of 78. At that point he upped her annual living expenses to $57,000 to cover the added cost.

When Michelle does move into some sort of assisted care, she will likely sell her house. Chow conservatively added only 1 per cent annually to the value of the house and then assumed she sells it at age 78. He recommends that the proceeds from the house sale be put in GICs or in a high interest savings account.

"Without knowing the actual impact of future health care, I did not want to tie up any of these monies so they would be readily available for any health emergencies that may occur at that time or beyond," Chow explains.

Chow emphasizes that careful attention should be paid to the tax and fee ramifications of her non-registered investments now and in the future. Hopefully, all of Michelle's mutual funds, both in her registered and non-registered accounts carry no load fees. If not she should speak with her adviser and ask why. With the amount of money she has and her age, the adviser should be placing her in funds that have the flexibility of zero front and rear end loads.

Chow recommends that Michelle's adviser seek out tax class and dividend funds as well as other investments that will maintain the 5 per cent overall growth while minimizing tax.

"The net answer to her question is that, yes, she will be ok," Chow assures. "If her portfolios are managed properly she should be able to remain self sustaining and independent well into her eighties. In fact, if her investments are handled properly she should be able to maintain the $1 million level well into her late eighties."

However, Chow urges Michelle to start doing a little thinking and homework in order to remind independent. "She's done a fantastic job of looking after her affairs. I'd hate to see her spoil that with a lack of planning now.

For instance, she wants to stay in her house as long as possible. How long can she last there if she isn't able to drive? Are there taxis available where she is? What about other transportation? These are the questions she needs to ask herself if she doesn't want to get forced out of her home."

Among the issues Michelle should consider are proximity to hospital and other health care, suitability of her house if she ends up using a walker (stairs are murder), accessibility to shopping and friends in the event she is unable to drive.

If Michelle has concerns about any of those issues she might consider moving now to a more suitable location while her health is still good. Also, for the same reason, Michelle should start researching "assisted living" options.

"There's nothing worse than waiting to look for options until you're forced out of your home," Chow emphasizes. "People go into a panic and they make bad decisions."

Independence isn't just a matter of age and health. It has a great deal to do with planning and hard headed thinking. David's godmother Marguerite, who turned 90 last year, has been on her own since her husband died several years ago. Her number one concern is to live in her house as long as possible and because her means are limited she has thought things through carefully.

For instance, Marguerite's carpets are wearing out so she's chosen a very low pile replacement, anticipating she will eventually need to use a walker. She has made other small modifications to her house in the hopes of staying as long as possible, but even so she has carefully investigated assisted care and other options.

And one more thing, Michelle -- this is a good time to give some thought to updating your will and power of attorney. With continued good health and some planning, Michelle Arden should be able to live as independently as she has in the past for many years to come.