Q: My wife and I receive about $2,500 a month each in pensions. Plus, we each have about $75,000 in our TFSA accounts and about $180,000 in our RIF accounts. I have never been a fan of bonds, so for the last few years, I have invested in higher yield shares and ETFs. This has proved very successful and has supplemented our pensions generously so that we can travel four or more times a year.
However, I am 80 years old now, and my wife is 74 and I suspect that interest rates are soon to rise, so this could cause the equity in investments to drop. I am confused as to what steps I should take in the future. We have no children, our home is paid for, and our monthly living expenses are relatively low. The simple solution is to convert everything to joint/last survivor annuities, but I am sure there is a better solution. (Incidentally, I do have a $100,000 annuity paying nearly 10%, but this is not joint).
— Terry C.
A: Terry, it’s interesting that you say there may be a better solution than an annuity while at the same time mention you have an annuity paying nearly 10%. That doesn’t sound like a bad solution to me.
I’ll bet when you took that annuity you wondered which direction interest rates were going and if it was the right thing to do at the time. Have you taken a look to see how much pension income the surviving spouse will receive? Will it be enough? If it is do you need the security of an annuity? If yes, then an annuity may be a good option.
Have you factored your home equity into your future income needs and investment allocation? If you sell at some point will you have additional money to invest and supplement your travel and other expenses?
If you see your home as part of the safety allocation in your investment portfolio would you be comfortable continuing to invest in your stock portfolio?
How much money do you draw annually from your TFSA and RRIF? Focus on securing that money for a fixed number of years.
As you mentioned, you can secure your travel money with an annuity. Here are the different payouts for various annuities using the $180,000 RRIF, assuming your wife holds the RRIF, and the single annuities are based on her life.
|Type of annuity||Monthly payment|
|Life annuity, no guarantee||$1,240|
|Life annuity, 10 yr. guarantee||$1,153|
|Term certain to age 90||$1,138|
The problem with an annuity in a RRIF is it always pays out a taxable income. What if some years you don’t travel and don’t need the money?
In your situation, it’s better to keep excess minimum RRIF payments in the RRIF if you don’t need it, rather than draw a little extra to make a TFSA contribution. If you had children it may be different.
You say you don’t like bonds, but what about Guaranteed Investment Certificates, or GICs?
If you convert all of your investments to GICs would you have enough money to cover all of your planned travels? If so, why take the extra risk of investing?
Do you still want to invest a little? Consider a GIC ladder. Each GIC would hold enough money to cover your annual travel expenses of $10,000 and the term on each $10,000 GIC would be 1, 2, 3, 4, and 5 terms. That means that in each of the next 5 years, one GIC of $10,000 would come due and supply the cash to cover your $10,000 in annual travel expenses. This would be your travel cash flow. Invest your remaining money in your stock portfolio. When a GIC comes due take the income, or if you are happy with your stock/dividend returns, take the dividends and reinvest the GIC money back into a 5-year GIC. The advantage of GICs over bonds is you know your rate of return in advance. The disadvantage is you can’t cash in a GIC at any time. If markets drop and you hold bonds you can buy into the market. If you don’t think you’ll buy into a falling market, stick with the GIC ladder.
Whatever approach you decide on it should be one your wife is comfortable with and can take over if needed. Happy travels, Terry.
Allan Norman, is a certified financial planner and Chartered Investment Manager with Aligned Capital Partners in Barrie, Ont. FP, firstname.lastname@example.org
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers investment advisory services and products through ACPI
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