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.
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.
“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.
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.
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?