Early 90s, sold the home, now what? How to invest $600,000 to cover retirement home expenses
Reader case study
“Thanks for all of your interesting reading materials Mark. I have a few questions for you if you don’t mind…
My mother is in her very early 90s, is in good health and is in the process of selling her condo. We believe it should net about $600,000 after the sale. She will be moving into a retirement home. Those retirement home costs will be about $5,000 per month (and are likely to only go up over time). What is the best way to invest the $600,000? I mean, what is the best way to provide a modest income to pay for retirement home expenses of $5,000 per month? (Right now, only 50-60% or so of that $5,000 is covered via a workplace pension, Canada Pension Plan (CPP) and Old Age Security (OAS) income). That means we have a $2,000 per month shortfall. This $600,000 will have to do. Should we buy her an income fund? Should we consider an all-in-one fund that includes both bonds and equities? Other? Thoughts?”
Very interesting case study – and I suspect a similar case study might apply to many Boomer parents these days.
So, thanks to some help from Owen Winkelmolen (Fee-For-Service Financial Planner, FPSC Level 1 and founder of PlanEasy.ca) and annuity expert Alexandra Macqueen, CFP® from PensionAcuity.com we’ve provided two viable options for how to invest $600,000 to help cover the retirement home expenses.
The transition, assumptions and income gaps
Transitioning into a new living environment will likely be stressful enough, so we want to ensure finances aren’t adding to that stress for any aging parent.
We’re going to project our assumptions over 15-years (say to age 105) but really, we’re planning for some very short and medium-term income goals, so we want to ensure we can provide a safe and steady stream of income.
For spending we’re going to assume $5,000 per month, or $60,000 per year, in retirement home expenses and to be safe we’ll add an additional $6,000 per year for miscellaneous expenses. For income, we’re going to assume CPP, OAS and pensions provide $3,000 per month, or $36,000 per year in pre-tax income.
That means we need to create an additional $30,000+ of income each year to close the gap.
We’re going to assume regular 2% inflation for CPP/OAS/pension but we’ll assume 5% inflation on retirement home expenses.
To close this $30,000+ income gap, we’re going to look at two different options. The first is an ETF portfolio plus a 5-year GIC ladder. The second is a smaller ETF portfolio plus an annuity. Let’s dive in!
Option 1: ETF portfolio plus 5-year GIC ladder
With this option, we’re going to take the $600,000 proceeds from the sale of the condo and create an investment portfolio. Because we have a shorter time frame (~15 years) we’re going to use a conservative 30/70 allocation between stocks and fixed-income.
To create a steady stream of income over the short-term we’re going to set aside $150,000 for a 5-year GIC ladder in a non-registered account. This will be part of the fixed-income portion of the portfolio. This ladder will provide $30,000+ in stable, guaranteed income each year.
Each year we’ll move some fixed-income investments into a new 5-year GIC to replenish the ladder. With current 5-year GIC rates around 3.0% to 3.5% this will provide some protection against inflation.
The remaining $450,000 will be split between bond and stock ETFs. We believe rather than using an all-in-one fund that Mark wrote about here, or even an income fund, using a simple 3-4 ETF portfolio will let us easily shift money around and replenish the GIC ladder each year.
We’re going to maximize the available TFSA room at $57,500 and the rest will go into a non-registered account. The equity portion of the portfolio will provide growth for the medium-term and the bond portion will be used to replenish the GIC ladder. Each year a portion of the non-registered portfolio can be shifted into the TFSA as new contribution room becomes available.
This coming year that TFSA contribution room is $6,000 – take advantage of that!
Over time the majority of investments will end up in the TFSA so this will help minimize any tax on the estate. In the meantime, the interest income from the GICs will be fully taxable to the extent the GICs are not held within the TFSA.
This option provides enough income to last until age 105, even with expenses rising at 5% per year, but no longer than that.
The big benefit with this option is that over the short-term the overall net-worth remains much higher than with our second option. So, depending on health, longevity, risk tolerance, inflation, and estate goals, this could be a very good option. As an added benefit, it provides a lot of flexibility if more (or less) income is needed.
Option 2: ETF portfolio plus an annuity
With this option, we’re going to explore using an annuity to generate some of the income gap.
Thanks to fee-for-service financial planner Alexandra Macqueen, CFP®, we believe there is a great case to be made here for using part of the $600,000 condo proceeds for an annuity.
Alexandra:
“When retiring at a young age, annuities are much less attractive. At age 90 the argument for annuities is much more favorable. In this case, a 90-year-old woman could expect to receive a monthly income of approximately $920 per month per $100,000 premium, which is an annual yield in excess of 11% ($920 per month x 12 months = $11,040 per year). Because the annuity is being purchased with non-registered funds, there is no tax payable on the monthly income, meaning income-tested benefits, such as GIS, would not be affected by the annuity income. In this case, yearly non-indexed income of approximately $33,000 per year could be provided with $300,000 in premiums, leaving $300,000 – or half of the proceeds of the sale of the condo – available to provide liquidity, meet any future shortfalls, or provide estate value.”
“Although annuities provide income only on the condition of the irreversible handover of the assets, they also provide safe and guaranteed income with the benefits of a higher yield (than a GIC) and longevity insurance. When estate value is less of a concern, the source of funds is non-registered, and the purchaser is at an advanced age, an annuity can be a very attractive option. In addition, if mom purchases two annuities, the income could be fully covered by the Assuris guarantee.”
Using this option, with an annuity covering the income gap, the remaining $300,000 proceeds from the condo sale can also be invested to cover any increased living expenses in the future or create an estate. Because the annuity provides a safe and guaranteed stream of income, we can probably use a slightly more aggressive 60/40 allocation between stocks and fixed-income for the rest of the portfolio.
Again, we’ll take advantage of the available TFSA room at $57,500 for tax-free growth and the rest will go into a non-registered account. Each year a portion of the non-registered portfolio can be shifted into the TFSA as new contribution room becomes available; maximizing the benefits the account delivers.
The focus on the annuity first, then the ETF portfolio, provides enough income to last past the age of 105, even with expenses rising at 5% per year. The downside of this option is that in the early years the overall net-worth is much lower. The annuity option only hits break even after 10-years.
Summary
These of course are just two options of many that could be offered to this aging Boomer parent. We believe however, these are likely the best options of the bunch to meet the income needs associated with rising retirement home expenses, while investing in a stress-free manner; that also offers great financial flexibility from the proceeds of the home sale to benefit the aging parent and/or the estate.
A big thanks to Owen and Alexandra who offered their time and insights for this case study. I hope to have them back on the site in 2019 to share more of their expertise. You can contact Owen or Alexandra via the links below.
Owen Winkelmolen, Fee-For-Service Financial Planner, FPSC Level 1 and founder of PlanEasy.ca.
Alexandra Macqueen, CFP® and annuity expert PensionAcuity.com, co-author of Pensionize Your Next Egg.
Disclosure: My Own Advisor, and the financial experts above, have provided this information for illustrative purposes. This is not direct investing advice nor should it be taken as such. Assumptions above are for case study purposes only. If you have specific needs, please consider consulting a fee-only financial planner to discuss any major financial decisions.
Thoughts on the case study? Comments on the options?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Adding my comments late, but I don’t like any of the options mentioned. Will she have help with managing her funds and are those individuals responsible? I doubt she would want to worry about taking care of it herself. If she has responsible help or even going with a paid advisor (which I don’t like) and assuming she only needs $24k per year from her investments and allowing for a 1% or 2% increase per year, than I like the idea of putting $150k into GIC’s and draw down what she needs for the next 7 or so years. The balance I’d suggest investing in Quality Dividend Growth stocks (definitely max out TFSA). One could easily find 5 to 10 extremely secure DG stocks which would provided a 4% to 5% yield on $450k generating at least $18k to $20k of income. The income could be reinvested and should she require a portion of it later, could easily be set up to be deposit what she needs into her chequing account. The income would also grow which she would not get with bonds, ETF’s or annuities. The other advantage of investing the portion she does not need to cover expenses in DG stocks is that it will benefit her beneficiaries, which I assume she would also like to consider.
Good to hear from you cannew. Are you in the South yet?
With any aging parent and given the details in my post, to be honest, it’s hard to determine what is best with so many factors to consider.
In this case study, the bias was the kids didn’t want to take care of mom’s bank account so it was hands off all the way. I can appreciate managing a dividend growth stock portfolio is not always hands off but it can be depending upon the companies chosen. There are really only 30-40 CDN dividend stocks worth owning long-term.
You are absolutely right – the income could be reinvested and should she require a portion of it later (or for the kids via inheritance). Really, there are lots of options but I did like the ones presented by the advisors – simple for the aging parent to deal with. I would even go as far as $200 annuity or so + $K in GICs + $K for a balanced ETF like VBAL or VGRO.
Happy Holidays.
Ok , it seems that some commentators are not considering that in you older years you may not be capable/comfortable/willing to self manage a portfolio of individual stocks. Have you dealt with many people over 80? I don’t know a single one who manages their own funds.. our minds abilities decline from 60 onwards.
Agree Phil. That is a big reason why I will strongly consider options such an annuity, particularly when an inheritance is no consideration here.
Bang on. This is why it’s on the table for us (no dependents) as we get older. Guaranteed income and no decision making. Income security and transferred investment risk. It’s smart really in some key situations but some investors don’t see that – only a “greedy advisor” or something like that.
Work pension, cpp, oas, annuity, and some of your own money, especially if it’s the money handler that dies first. What could be more reassuring, easy to deal with when you’re 75-80+ for your remaining years, when heirs aren’t a priority?
Exactly. No heirs. So:
1. Small workplace pension for me. Small one for my wife – might exhaust early (before age 70).
2. CPP x2
3. OAS x2
4. Annuitize some non-reg. assets for an annuity say $200K (after RRSPs are spent in 50s and 60s).
5. GICs with rest of non-reg. assets say $100K.
That’s about as rock-solid for income and inflation protection as it gets.
Thanks Mark for that share. There are some growth assets in your future retirement portfolio plans as well?
Dale
I own some stocks that pay lower to modest dividends (JNJ is one) and I own a few hundred shares of VYM. I don’t own anything that does not pay a dividend or a distribution. I figure if I’m going to invest, I want to get paid 🙂
The approach over the last 10 years of thinking this way has increased our dividend income inside our non-reg + TFSAs (x2) to just over $17K per year. That excludes our RRSP assets. I figure we can hit $30K per year inside non-reg. and TFSAs (x2) within 10 years if we keep the plan intact.
https://www.myownadvisor.ca/dividends/
I plan to buy more VTI or VYM in the coming years.
I can appreciate my income/dividend growth oriented approach is not for some folks but I simply don’t like the long-term hope of capital gains with our slowing economy and major demographic shifts now underway.
Thanks Mark, you may have seen my Twitter post from this morning, on dividends vs market through market corrections. Truly incredible. I tagged you on that. For the potential of better risk adjusted returns I love the divining rod of a meaningful dividend growth history.
Looks like you guys are sitting pretty with a wonderful asset mix.
Happy holidays if we don’t chat. Hope you don’t mind me being too active on this post, ha. I thought it was a great blog post and a wonderful learning opportunity.
I saw that 🙂
I have some plans to work with Alexandra in 2019 on annuities. I know they are unloved by some but it will be interesting to learn more; especially the tax benefits of using non-reg. money to invest in them and when that might apply/benefit retirees.
Well, I wouldn’t say sitting pretty right now. We have a mortgage. 🙂
…But we have been working hard on maxing out TFSAs (priority #1 every year) and then maxing out RRSPs (priority #2) as we kill debt. I need more U.S. content inside my RRSP, so working on that over time.
Anyhow, I figure maxing out those registered accounts eventually and becoming debt-free will be ideal for us in the coming decade for an early retirement. We should be able to work as we please and that goal is part-time work.
Thanks for being a big fan Dale. Again, I’ll work on your email and questions for an interview in early 2019.
Chat again soon,
Mark
Nailed it Phil. I think a LOT of people look at it from the point of where they currently are, their own situation and the current (or relatively recent past) market conditions rather than an overall picture. IOW, a lot of bias creeps in, myself included.
Correct Phil. Not everyone has a sharp mind at age 80 or 90 or beyond. Using an annuity or other products, you are transferring that risk away from you to someone else (the life insurance company). I’m glad you see the big picture.
I deal with my parents (in late-60s and early-70s) but I see what is going on with my great aunt – almost mid-90s with dementia. Her late husband was smart to buy an annuity for him (assumed joint-survivorship) but I don’t know for sure. What I see now is, she can afford to live where she can thanks to some smart decisions made years ago.
I believe some investors think they’ll live and be wise forever 😉
That’s assuming they’re wise already. LOL
Hi Mark, hope you don’t mind me blogger bombing with one of my posts, but since we’ve been all over this, and I appreciate the learning opportunity on this thread. Here’s my latest, a review of Retirement Income For Life: Getting More Without Saving More.
https://cutthecrapinvesting.com/2018/12/18/retirement-income-for-life-getting-more-without-saving-more/
Perhaps the optimal allocation would be $100,000k in annuity, then $250 GICs and $250 VGRO or ETF Balanced Growth Model. Pull evenly from all, no rebalancing.
Or perhaps 60% GICs, 40% Balanced Growth. Mr. Vettese suggests annuities are not applicable after age 80 or so, at least that’s how I read it.
I appreciate any further replies and info from Owen, Alexandra, Mark and others.
Dale
No problem. Here is my review.
https://www.myownadvisor.ca/retirement-income-for-life-review-and-giveaway/
My biggest takeaways:
Vettese recommends investors consider one, two or more of the following:
1. Invest in passively managed funds to lower your investment costs and fees over time – keeping more of money working for you (versus in the hands of advisors of financial companies).
2. Start your Canada Pension Plan (CPP) later in life – something I wrote about on my site…..
3. Use some (not all), maybe between 25-50% or so of your RRIF assets to purchase a non-indexed annuity. I will likely do this in my 70s.
4. Make adjustments to your spending habits. In “good times” when the market is hot (like 2017 was), consider spending more. In bad times, when the market declines for a couple of years or remains flat, consider spending less.
5. Consider the “nuclear” option of using a reverse mortgage, later in life. I will not consider this myself 🙂
Personally, I would probably lean on a blend of Owen, Alexandra and my own personal preferences.
This means:
$200K annuity – no rebalancing and less estate worries.
$200K in VBAL – no rebalancing and some estate planning.
$200K in laddered GICs – keep it simple.
🙂
I could definitely go along with that model.
“I will likely do this in my 70s.” Interesting to read that. I will seriously consider this for us too- maybe 15 years away.
Thanks Mark, again we are in the same situation with my in-laws who are 91 and with $800k. We might suggest a small annuity with a survivor benefit, I’d imagine that reduces the income.
We’ll have to see about their tolerance for risk. My mother in law likes the idea of leaving all or most to her daughters (likely made possibly by a Balanced Portfolio approach) but will she like the idea of risk that will be clearly described and demonstrated for her? She is as sharp as anyone.
Hopefully we could end in the range of $100k annuity, $400k GICs $300k Balanced Growth model.
The annuity and GIC will cover their additional needs for assisted apartment living. The Balanced Growth Option should actually growth the inheritance, perhaps $15k to $20 per year average over time.
Dale
I don’t think there is much wrong with your approach, a bit of annuity, more GICs and use of VBAL. There is certainly far worse products or decisions to make Dale. Only the future will tell if you make the right decision 🙂
Hi Mark, as a self directed investor I will not do an annuity. I can create that level of income that grows at 8% a year or so by way of dividend growth. And if all goes well I will not ever have to adjust spending plans (downward) I will hopefully have increasing income. There is the opportunity for share harvesting as well for additional income.
As a self directed investor I could not pay the high fees, and have no need to pay the high fees.
Retirement Income for Life is a wonderful option for most, as most retirees have a very low risk tolerance level. Self directed investors who’ve put in their thousands of hours of study will usually go a different route. If I write the word Annuity on Seeking Alpha I get slaughtered. ha. 🙂
I think Seeking Alpha readers are not representative of the entire investor population. They may or may not need annuities just like everyone else – “it depends”. Wouldn’t you agree?
Hi Mark, no that is a select group of self directed investors for the most part. Most have individual stock portfolios. Many hold ETFs and stocks. Some do more complicated ‘things’ to create income and manage risks.
The self directed investor (or many of them) will see no need for an annuity as they can create very good and growing income and can manage the risks. Many will use growing dividends as you know.
Some claim to have all-stock portfolios in retirement. I will stick to Dividend Growth stocks plus bonds and GICs for managing risks.
No, I understand Seeking Alpha. I guess that’s my point Dale – those folks have a bias. The would run you out the room if talked annuities there.
Just like Dan Bortolotti has a bias to indexing.
Just like John Heinzl has a bias to dividends.
We all have biases. It’s good to know them and understand them – that’s all I’m saying. 🙂
Thanks Mark, I couldn’t agree more on bias. I try real hard not to have them. We should not get attached to one idea. We should be open to new ideas. I am open to annuities and delaying CPP and GICs instead of bonds and flexible spending in retirement.
We know those dividend devotees can love ’em too much, but it’s a useful distraction for many.
Unfortunately it’s human nature. Biases are formed and they are very difficult to break. The anti-thesis of flossing for most people!
“Self directed investors who’ve put in their thousands of hours of study”
I’d love to see a survey to see if most self directed investors achieve that level of study. I know I do not.
As to the “plans”, I can see all of them being viable and acceptable to all sorts of situations.
Hi LLoyd I’ve been on Seeking Alpha and have been writing on Seeking Alpha for quite some time. I know many of them quite well from comments and emails. I know their level of knowledge and study. All said, it does not take much to create a sensible stock portfolio – individual stocks. I simple steal the ideas from the indices, ha.
For Canada I simply buy several with a wide moat and big juicy dividends. There are also great ETFs for that of course.
G’day Dale, I don’t know what “Seeking Alpha” is so I am not able to comment on it. But again, I doubt that a lot of *average* DIYers are as committed to research as “thousands of hours of study” might imply. Other than the plethora of bloggers that seem to be in abundance, I’m not sure that many of us are that savvy.
Most of my holdings are holdovers from when I had an FA and any new ones that I personally chose were just picked from the top ten lists of some index funds with a dash of bias thrown in. I don’t even bother looking at non-TSX traded stocks, I just use a couple of TD e-series for that. But I’m lucky in that I used an FA for many years before branching out on my own and I give him a lot of credit for where I am today. That and starting very early thus letting time heal all mistakes (having a very secure job with an abundance of overtime helped). Now that I’m older, I acknowledge that *time* is not as abundant as it once was hence a degree of seeking some safety has crept into my portfolio.
Hi Lloyd, I love your 3:03 pm comment. I’ve done a lot of research on index skimming. Folks would be shocked as to how few it takes to replicate an index, especially if you buy the larger caps. You can also shade for performance and risk return characteristics.
There’s really no need to buy an ETF for Canadian and US equites if you’re comfortable holding individual stocks. Most folks will need a managed portfolio. Others will do that ETF thing, a few more will do the individual stock thing.
Don’t tell anyone, but I only hold 7 Canadian companies. I call it my Canadian wide moat 7, ha. I don’t expose my wife’s portfolio to that concentration risk, I use VDY for her. She’ll have to suffer through the underperformance for that 🙂
Dale
If your 90 – Don’t get annuities! (especially the ones that END when you die). If your 90 – you probably have lived more than 90% (or more) of your life. Whats the odds of living to 105? If your getting CPP, OAS, GIS – then why would you want (at this age) to be doing GIC ladders? For what? 3% taxable income and waiting each year for one to come due? Use a HISA (not GICs) and be liquid! (your 90!) AND…. BTW – if you go to 3 different FAs (fee based included) – they all will have different ways for the 90 year old to invest. My advice (if your 90): Don’t call a FA. Don’t do GICs. And Never do an annuity! (these are all too stressful for grandma – who is 90!). Oh – Ontario is the same (we had to hold Grandma’s $$$ while in the retirement home – goes by income (and they ask for net worth).
” Use a HISA (not GICs) and be liquid! (your 90!) ”
I’m probably going to regret this but in the off chance I’m not following a train of thought, why would a 90 Y/O need to have $600K liquid?
Maybe for an expensive walker!
Perhaps the last line might explain the thinking – it’s all about the heirs – get around rules with grandma not having 600k anymore – gifting everything to save money on home care. No stress in that.
I’m likely confused then because in my mind, a retirement home as described in this case study is not a personal care home. I took this $5-6K home to be like an all inclusive seniors facility provided by non-governmental entities as opposed to a government run facility for people that are unable to care for themselves. In Manitoba, the cost for placement into a PCH is shared and the resident’s portion is calculated on income and taxes paid.
https://www.gov.mb.ca/health/pcs/calculator.html
Good point Lloyd. You’re not confused. Rereading the case study it would seem that way, so that PCH consideration really doesn’t apply, at least at this time, and quite possibly never will.
Hi Mike, every situation is different and even when the situation is the exact same the plan will still be different because everyone has different personal goals, estate goals, personal values, risk tolerance etc. Nothing can be said definitively until we know all those factors.
Totally agree and well said.
I agree, after reading Fred vittesse I like the out come for longevity insurance . For my self I would consider an annuity at a later age if the market forces provided a strong incentive. In my experience a self directed combination of fixed income and maybe a little equity beats the general holdings of most seniors. Usually they’re invesments are laden with high fees and too much risk. I’m still waiting for the venture capital fund the last advisor put him in to open up for sale. Going from fees that we’re roughly 5% Dundee wealth to 10-20 basis points changed the outcome more than all the fancy computer programs plans:)
Good discussion here.
Big fan of straight-talk and pragmatic Fred Vettese. I’ve read all of his recent books. Thanks for being a fan Phil!
15% vce 15%vsb 35% gics 35%hisa that’s how I have my grandpas. The hisa is very useful if there are life changes. His home is 5k a month as well. Similar size portfolio and pensions. Up until last year I also had some vfv 7.5% and xef 7.5% and more bonds to match. Turned 88 years old. Try convincing a 90:year old hand over their money to an institution. They know the house always wins.
Ha, well, I think annuities still have a place in an investor’s portfolio. Are they for everyone? No, not at all but they are an option. Lots of bonds/fixed-income for grandpa – a good thing at 88 – well done 🙂
That sounds like a good plan Phil! I agree that liquidity is an important consideration, especially when expenses can increase suddenly or there could be a major one-time expense.
Hi Mark, I don’t see the problem. $600,000 divided by $36,000/year = 16 2/3 years. That is if all she does is put her money in a mattress. If she makes the maximum contribution to her TFSA she’ll have $148,500 in there after 15 years without interest. Also, I’m not sure about other provinces, but in Manitoba your nursing home fees are based on your income. So if when she can no longer look after herself, her annuity payments will be taken as nursing home fees; up to a maximum of $50,000~ per year. Not a good strategy. Get it all into TFSA’s, that will not be considered income when withdrawn.
Fair…16 years to fully deplete capital. I think it depends on what the retiree wants for an estate, legacy, etc. as well. I know that is not factored into the assumptions but we took a small leap in the article that she didn’t want to go to zero AND she wanted income security.
I didn’t know that about MB. I don’t think that’s the same in ON where there is a maximum. I could be wrong of course!
Hi @May: the taxation of annuity income depends on three factors: the funds used to purchase the annuity (i.e., in a registered account or with non-registered funds), the age at which the annuity purchase is made, and the type of taxation that is selected for the annuity income. In this case, because the funds are non-registered, because the annuity I used to model the payout was in the “prescribed” form (which describes how tax is assessed on the income), and because of the age at which the annuity would be purchased, the income would be tax free. This won’t be the case for every annuity — it is specific to each case!
@RBull and @Mark: I know that “annuities are not for everyone” — and certainly this post was not providing any advice or recommendations, but meant to illustrate the impacts of an option beyond a more standard “GIC ladder + balanced portfolio.”
One aspect of including an annuity here that I think is being overlooked in the comments (so far) is how the use of an annuity can preserve income-tested retirement benefits. If someone is receiving GIS, for example, the interest from a GIC is fully taxable at their marginal rate, and may impact GIS income as well, meaning the effective rate of taxation on the GIC interest is very, very high.
In contrast, an annuity purchased with non-registered funds (such as in this example) at sufficiently advanced ages is taxed as return of capital, which means the income can be received with no clawback of GIS income. The difference between annuity income taxed at 0% and GIS benefits preserved versus interest income from a GIC and GIS benefits clawed back can be startling, in the range of hundreds of dollars per month — and can mean the amount annuitized to provide the same after-tax benefit can be relatively small vs. the total portfolio.
Additionally, with a “floor” of guaranteed income via an annuity, the remainder of the portfolio could be invested with a higher risk profile, leading to higher expected estate values — if providing or preserving a financial legacy is a concern.
This example is somewhat unusual, as age 90 is fairly advanced to be considering an annuity purchase. However, depending on the retiree’s preferences — for security of lifetime income, for example, or maximizing the value of a potential estate — an annuity can add safety of income at a high yield, and because the annuity can be so tax-efficient, a relatively small amount may need to be annuitized to provide the desired after-tax monthly income.
By definition, annuities are not a DIY solution and thus can attract suspicion about the motives of a salesperson whose involvement would necessarily be required — but annuities are a genuine option for providing safe retirement income, and in the right circumstances can provide purchasers with a solution that meets their individual needs, comfort level, and desired outcomes.
Hi Alexandra, you made some good points re the income floor, the use of the remaining assets, tax efficiency, safety, high yield etc, although in this case obviously GIS isn’t a consideration.
My guess is the hard part with anuities might be for those with heirs and probably the breakeven point – 100 is getting up there.
For me they may be an option in 20 years or so.
I enjoyed your book Pensionize Your Nest Egg.
Thanks Alexandra – happy to hear your thoughts on this stuff…
“…but annuities are a genuine option for providing safe retirement income, and in the right circumstances can provide purchasers with a solution that meets their individual needs, comfort level, and desired outcome.” I could see this for my wife should something happen to me many years down the road actually – advise her to convert part of her portfolio into pension-like income should she be alone and not worry about financial decisions too much other than GICs.
I certainly see the benefits of this approach beyond VBAL or a similar ETF that requires some oversight. GICs also require some oversight. The portion of the portfolio to the annuity does not AND is tax efficient with using non-registered assets.
Thanks for the information. I don’t know annuity is tax free. I was considering to use part of my portfolio to buy annuities in my 80s – still a long long time for me down the road. Without any pension, the main consideration is to provide an income floor without worrying about running of money and without time and energy to take good care of a portfolio. With this information, it certainly becomes even more attractive.
Thanks Alexandra, I appreciate the added context. Wondering if your fees are factored into the above calculations. Also would an advisor also get a fee payout from the annuity company if the client passes away at 95 or 96/ aka when the annuity company walks away with a sizeable profit?
With an advisor who chooses the annuity option the advisor fees would be ongoing, every year?
Dale
I will take a moment to reiterate that this was not a planning exercise and most definitely was not “recommendations” or “advice;” it was intended as an illustration of how an annuity might compare to other alternatives, including alternatives with similar guarantees. This is essentially just envelope math with no allocation for “fees” of any kind!
Annuities are one-time transactions for the salesperson and the issuing company. There is no ongoing payment of fees by the issuing company to the salesperson and the transaction results in a commission, not a fee, for the salesperson. There is no later payment of any compensation depending on how “profitable” the annuity purchase may have been for the issuing company.
As a further note, there are many guarantees and riders that can provide ongoing income or a return of capital if the annuitant passes within a guarantee period specified when the annuity is purchased. For example, an annuity might pay during the life of an annuitant and then continue to a spouse, beneficiary, or the estate if the annuitant passes within 5, 10 or 15 years of purchase. Every rider and guarantee adds a cost at the time of purchase and not every rider or guarantee will be available on every annuity; however, for those who want to hedge against the risk of passing shortly after an annuity purchase is made, guarantees can help “insure” against that outcome.
Thanks Alexandra I appreciate the clear and honest reply. And yes readers should always keep in mind these are not ‘real’ financial plans or reco’s. These snapshots are done often on blogs and with major newspapers or popular online sources.
Thanks for the clarity on fees? They might be in the area of 2, 3, 4 or 5%? As we know fees can be the one of the most important factors over time. Frederick Vettese lists fees as one of the factors to address in Retirement Income For Life.
I appreciate your measured replies and will certainly attempt to educate myself in the ways of the Annuity and will read Pensionize your nest egg.
Dale
Annuity commissions are *typically* 3% on the first $100K deposited, then 2% on the next $100K, then 1% on anything remaining.
Keep in mind that the client doesn’t pay the fees, they are “paid” indirectly as part of the issuer’s cost (and thus the annuity amounts paid out to the annuitant). This is very different from the fees paid during accumulation, which directly impact a client’s wealth.
@Dale, I would also state annuity-based commissions are hardly the focus especially when a fee-based-planner typically has a duty to do what’s in the best interest of the client.
Great to hear Dale. Again, we could have easily written the response as – keep everything in GICs because the aged parent has a low chance of realizing age 105 – but that doesn’t give any readers any insights into better and potentially more estate oriented possibilities 🙂
I’m looking forward to learning more about annuities. I know a bit Alexandra and I appreciate your clear explanations. Cheers.
Great post Mark. Interesting scenario and solutions presented. Must be a lot of boomers out there dealing with a similar situation for their “great generation” parents now, or that will be in coming years, and also for your generation with boomer parents. I can see the possibility of this situation not too many years away in my family as well, and I’m the designated lead.
I am thinking more along the lines of what Lloyd said with all in GICs. Keep it simple, its enough etc. No sequence of returns risk, minimal transactions.
Dale, did you have a calculator to figure out your suggested scenario?
Thanks. Credit goes to Owen and Alexandra since they did some math on this but I did give them the case study, assumptions and offered my take 🙂
Sure, GICs would be simple, but that also requires a family member to monitor that stuff too. No sequence of returns risk but not optimal to combat inflation and long-term unknown risks either. Again, pros and cons to every financial decision as you well know!
Good stuff.
Everything will take some measure of assistance but GICs are going to be mcuh simpler IMHO. Just an annual renewal for the best 5 yr rate available. Written instructions at the beginning of the process to a family member, POA should suffice.
POA is very important as well. For sure.
I see the financial planners circling the sky.
Hi Bonnie, that’s benefit of seeing a fee-for-service financial planner (like us!), there is absolutely no incentive to recommend a specific product, our entire focus is on advice.
+1 Agreed. Take or leave advice, that’s part of the benefit I believe vs. a product.
Thanks Owen, are your fees factored into the above calculations? It appears an advisor would be required each year to do all o those moves. The fees might be in the area of $2500-3000 or more each year?
Dale
Hi Dale, I don’t think an advisor/planner would be necessary on an annual basis, this is a fairly simple portfolio and the “moves” are no different than what is required for annual rebalancing, in fact I would recommend they do it all at the same time so there would be no extra effort/fees at all. I would also assume the son/daughter who wrote in would have power of attorney to help manage their mothers affairs. If a power of attorney is not in place then I would certainly recommend they set one up.
Bonnie, fee-only-planners are very different than some investment planners whereby the former focus on unbiased product advice. That’s a good thing no?
Annuity seems pointless and the client and family would lose the amount at death? A simple Balanced Portfolio would deliver $30,000 annual income, inflation adjusted and keep its original $600,000 portfolio value even with a terrible 2007 start date. Yikes.
We are in the same situation and ironically I had the exact same conversation last night with in-laws, about to sell $800,000 home, and move to assisted apartment care at $5000-6000 monthly. I can assure you the world annuity did not enter the conversation. The in-laws want to leave the house monies to their two daughters. They have about $40,000 annual from pensions.
Not about to give a few hundred K to a financial institution. Not a difficult task. I will certainly get some tax advice for them.
Dale
Hi Owen I didn’t use a guideline I used actual returns from ETFs with fees taken into account. Go back to 2000, worst start date since the Great Depression, we’d have over $400,000 or more of portfolio value left.
Actual historical returns say YES! ha. Moving forward returns may or may not be more muted. We don’t know.
I would bet that shown the math and odds, most families would take the simple approach with a high probability of keeping most of the monies in the family.
Wondering what your asset allocation is in Balanced model from this post, thanks.
Dale
If one is willing to accept a $200K market loss, then what’s the difference with purchasing a $200K annuity? I don’t get the logic there. In both cases the money is gone. I’d also take your bet, I don’t think that many people in their 90’s are going to take on much market risk.
I should add a disclaimer to all my posts…I’m a farmer who dropped out of grade 12 with absolutely zero qualifications or training to be giving financial advice.
well put lloyd. i have more education than you — i got grade 12 after 6 years — lol. i’m from farm country and a lot of my farmer friends are doing quite well because they worked their asses off for what they have. they know the value of a dollar!!!! at 90 plus years i don’t think the markets are the right choice. mho.
I used to tell people that one good thing about doing grade 8 so many times was that I was old enough to date my teacher. Apparently now it is not politically correct so I stopped.
LOL. You are welcome to have the odd joke on this site Lloyd – geez – folks are far too uptight these days on some matters at least.
Hi Lloyd that $200k loss was a worst case scenario for our lifetime. That said, it was not that bad. $30k annual delivered more than they needed or asked for. Likely scenario IMHO is maintaining portfolio amount at their spending requirements.
Annuity breaks even when clients are 102? Chances of living to 102?
Would also ask if advisor fees are taken into the above calculations?
Dale
In our lifetime perhaps. We are all familiar with the “past performance does not…” adage. In any event, it’s the issue that if one is willing to accept that risk (200K loss) then why not be willing to accept the risk of losing it via an annuity (it might not be that bad)? That was my point. I myself, in this given scenario, would not opt for the annuity option but I can see where others might find it a viable alternative. Having said that, I’ve never researched annuities so I would be opining from a position of ignorance.
I have no clue what fees have been calculated. For my option (nothing but GICs) there would be none.
Good points Lloyd, especially for a farmer! J/K
… grade 8 many times, dating teacher, politically correct…..ROFL
You’ve done very well with your finances as far as I know Lloyd. Education in life doesn’t always have to be formal.
If I understand correctly you are saying with a balanced portfolio one can generate a REAL RETURN of 5% (30k plus inflation) and not touch 600K capital, even initially moving quickly into a 30% drop. ie 400K not 600K
How do the ETF actual returns factor in inflation and maintaining capital? What ETFs?
If correct maybe I could make some serious improvements to my own portfolio.
If you can get 5% real return from a balanced portfolio in the coming 10-20 years, guaranteed, I want to talk to that person too 🙂
You read my mind!!!
Hi RBull I ran the numbers on portfoliovisualizer.com and I hit the inflation button. I think they add 2 or 2.5%. All I can say is it worked, and it worked from the worst start dates. I just put in basic large cap indices, broad based bond fund.
One might even do better with some slight massaging. I’d mix GICs with bonds for that shock absorber potential inverse relationship. Bonds have done their thing in every recession. GICs pay more now than broad based bond funds, so some income boost would be nice. But again, bonds offer the shock absorber to manage sequence of returns risk. Stocks and bonds need to be together of course. I’d use some longer term dividend growth for US stocks (lower volatility) and juicier dividends for Canada.
I am a big fan of the magic of the simple Balanced Portfolio, obviously ha.
I think the client had it right when they came in wondering if they should mostly use a balanced fund, perhaps such as VBAL. We should not underestimate the power and beauty of a simple Balanced Portfolio.
Dale
Thanks for the reply Dale.
I am an advocate of and owner of a balanced portfolio. I haven’t used portfoliovisualizer.com so don’t know anything about their assumptions.
My plan is built on a much more conservative model regarding returns. I wouldn’t feel comfortable living in retirement with anywhere close to a 5% real return expected from a balanced portfolio, and probably not even from 100% equities if I were so inclined.
Hey Dale,
I have no problem with a balanced portfolio suggestion here, in fact, I offered that one up as well but that requires some work and not all adult-Boomers want that responsibility in their senior years either. Something to consider. Thoughts?
I would have a hard time seeing how most investors will realize 5% from any portfolio in the coming decades. Hey, if I’m wrong, great, more money! But I’m a conservative investor for sure.
Mark, why so pessimistic, ha. Of course if would have to be a Balanced or Balanced Growth model. Balanced Income is too conservative to do the task here. Earnings yields are decent for Canada. US is not all that expensive these days. Lots of growth potential there, always. Bonds suck, but you can’t have everything.
Dale
Yes, bonds do suck now. Only going to get worse over time!
I suspect your challenge is the annuity. Are you suggesting all $600K in VBAL or something? Thoughts?
Hi Mark, yes a very good portion in a VBAL or similar asset allocation by way of individual ETFs. I spoke with a couple of advisors that I trust, they liked the simple use of GICs and a Balanced Portfolio for this scenario. Depending on how much is in GICs one might use VGRO or create that Balanced Growth Model.
Net, net, GICs and bonds for fixed income, plus a good mix of Canadian, US, International equities.
Do the above advisor reco’s include their fees?
Thanks, Dale
These advisors are fee-only-planners so they don’t have a bias to products.
As for the VBAL, that all-in-one fund could likely work for 50% of the investors out there. A great product.
Thanks Dale. I think annuities can make sense in some cases. Investing the entire $800K doesn’t have to be in annuities. There can be even $100K in that and $700K to invest in your balanced and preferred….portfolio. I think it’s all about knowing the best risk-based, longevity options. If we knew how long we’d all live I suspect your decision and others would be rather easy 🙂
How does your $150,000 GIC ladder return $30,000 of interest each year? That’s a 20% annual return, isn’t it?
Hi Linda, good question, with the GIC ladder we’re not spending the interest, we’re actually spending 1/5th of the ladder.
Each year one of the GIC’s will mature and becomes available for spending. Then we replenish the ladder by buying another 5-year GIC using the remaining investments, this will mature in 5-years and be available for spending then. We don’t want to take risks with the next 5-years of spending so a GIC ladder helps to create a steady steam of income.
I’m going to lean towards the Warren Buffet belief that it’s insane to risk what you have for something you don’t need. With a shortfall of $2K per month, the $600K would provide for 300 months or 25 years. Throw in a fudge factor for some inflation and there still isn’t a problem. I’d put it all in GICs.
Thanks for the comment Lloyd! We want to be careful about being too conservative because it depends on what health case costs do in the future. Even if costs rise at a modest 5% per year their ‘need’ will increase substantially over the next few years. This could be additional 1:1 care or perhaps health equipment like a mobility device. Plus we’ve factored in an extra $500 per month for miscellaneous expenses like personal items, personal care, clothing, gifts etc that wasn’t specifically mentioned in the case but we wanted to account for anyway.
With a 70/30 allocation and a $150,000 GIC ladder we’ve essentially put $420,000 into no to low-risk options that will last 15+ years at $2,500/month with the rest providing a hedge against higher inflation.
Yup, your plan is certainly viable (so is the other one) and there is nothing wrong with the assumptions. I just don’t see a need for it. All the government benefits are inflation indexed. A GIC ladder will adjust to inflation as well. As to health care costs, sure a catastrophic event could happen, but it has been my experience that at that age, it is not a long term event. Truth be told, if it really was me with these parameters, I’d be looking for some grand/great/great-great grandkids TFSAs/RESPs that needed some boosting.
i’m with you on this one lloyd. my mom is 92 and in good health for her age. i have her monies in laddered gic’s and so far she just spends the interest. it’s safe and she likes to know that her principle is always where she can look at it when ever she feels the notion. i guess it’s a personal thing.
Nothing wrong with laddered GICs. That can be an option as well…a good one….it really is a personal decision but also a longevity decision, risk decision, time-effort to maintain portfolio for decision, inflation-protection decision, tax decision, etc. Lots of factors.
I personally think the hands-off-the-steering wheel approach to an annuity + ETF portfolio and/or GICs would be good.
Nothing wrong with laddered GICs for all of it. I really “depends” on what the aged senior wants any estate plans too. We didn’t put those assumptions in but rather, to show what might be possible beyond GICs or a HISA that might a loser to long-term inflation.
As you with money stuff, it really “depends” 🙂