Doris gets along quite well on her pension money.
With her work pension, CCP and OAS, she earns $2,251 a month. It's not quite enough to cover her annual expenses of about $33,500, which includes extensive travel for the 70-year-old retired civil servant.
But with about $8,600 in payments from a life income fund (LIF) and a RRIF (registered retirement income fund) every year, she even has money left over to contribute to her TFSA.
All told, Doris has more than $500,000 in assets, excluding her home, yet not all is well with her finances, in her opinion.
"I turn 71 next year, so I will be forced to withdraw more money from my RRIF, and I'm concerned about how much taxes I will pay on that money," says Doris, who is single with no children.
She has almost $200,000 in an RRSP and an RRIF, and she wants to withdraw the money as tax-efficiently as possible.
Furthermore, she admits she often has a hard time getting a clear picture of how her overall portfolio is performing relative to her needs and age. Particular sore spots are her RRSP, RRIF and LIF, which consist of almost $300,000 in mutual funds under management with a large insurance/financial firm. Doris says she has broached the subject with her adviser, but his answers rarely seem satisfying -- to the point she questions whether she's getting good advice for the $3,000 a year in fees she's paying.
"I'm so confused about all this. I'd like to know what's all going on with my stuff," says Doris, who has another $150,000 sitting in savings accounts.
"I'd like to be able to consolidate it all so it's more understandable."
Uri Kraut, senior wealth adviser with Assiniboine Credit Union, says before Doris can consolidate, she needs a broader strategy that addresses her income needs and her tax situation.
"Under the current withdrawal strategy, it would appear Doris is paying her bills, has no cash-flow shortages and is maxing out her TFSA," he says. "Additionally, the income she is taking out is entirely using up the lower tax bracket of about 27 per cent so there is little benefit to accelerate withdrawals at this point, unless there is a need or a concern about estate preservation."
The most glaring problem for Doris, however, is the overall structure of her portfolio. Aside from the money held in savings and GICs, which totals more than $175,000, her other investment portfolio is very high-risk for her age. She has about 83 per cent of her assets invested in equities with the remainder in fixed income.
"It appears savings accounts are corresponding reactions to the overweight toward equities, not a strategic recommendation made by Doris's primary adviser," Kraut says.
Even with her savings accounts, her asset-allocation mix is 43 per cent fixed income and 57 per cent equity, still likely too aggressive for someone of her age. Furthermore, the way her overall assets are set up seems to suggest she has saved her money independently of her adviser.
"If this is the case, she should consider finding another adviser."
Yet even if her adviser were aware of the amount of money in savings and GICs outside of the portfolio he has built for her, the asset mix he has set up is not tax-efficient for a retiree, especially one facing increasing mandatory annual RRIF withdrawals, all of which will be fully taxable.
Any earnings Doris makes on her RRIF and LIF investments -- including capital gains and dividends -- will be taxed as normal income when withdrawn.
"The gains are entirely taxable as a withdrawal at some point in the future, either at 35 per cent if she is alive or 46 per cent as an estate withdrawal," he says. "The preferable place to achieve growth would be first in her TFSA and then in her open account where capital gains can often be deferred until the asset is sold or through the use of special mutual funds."
The main take-home point here is the equities in her portfolio should be in a TFSA, where earnings are tax-sheltered, and in non-registered accounts where both dividends and capital gains are taxed much more favourably than interest earnings.
The way her investments are currently set up in her RRIF and LIF are not only inefficient from a tax perspective, they're very prone to market volatility -- stock-market downturns -- that could ultimately reduce her retirement income.
The bad news for Doris is that, at this stage, she is facing a tax increase on RRIF withdrawals in about two years, no matter what she does.
"RSP drawdown strategies can be very effective when started shortly after retirement," Kraut says. "Unfortunately, by the time you approach your 70s in situations like this there is little that can be done."
For this reason, it's very important that her money is properly allocated in the right investments. All of her RRSP, LIF and RRIF money should be in fixed-income investments. They won't provide much of a return, but she will be less likely to lose money. And because she will be taxed more heavily on future withdrawals, preserving capital is important.
Overall, most of her investible assets, including non-registered money, should be sitting in fixed-income investments because of her age. The typical rule of thumb for fixed income is its percentage of your portfolio should match your age. In Doris's case, her portfolio should contain about 70 per cent fixed income investments and cash, not 17 per cent or even 57 per cent. The remaining assets could be invested in equities for growth, but this money should be held in her TFSA and non-registered account.
Yet Doris has more than enough money to get her through retirement, so her need for growth from her investments is minimal, Kraut says.
That doesn't mean, however, Doris should have $150,000 sitting in savings. Most of the money could be invested in bonds, bond funds or GICs for a slightly higher return, underpinned by a strategy that will provide her with enough cash annually for emergencies and other spending.
Given all these issues with the asset allocation of her money, Doris is right to be concerned about whether she's getting the best bang for her buck from her adviser.
Her overall management cost for her registered assets is about $7,500 a year. This amount includes $4,500 in fund-management fees, which translates into a cost of about 1.5 per cent a year of her money in this portfolio. As compensation to her adviser, Doris pays about one per cent of her registered assets annually, which comes out to $3,000.
"That's not excessive, but again, what is the client receiving for this?" Kraut says.
"The fees may be high for her considering the apparent lack of planning that has been done on her total strategy and the clear issues that ought to be fixed."