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January 30, 2019
1:13 pm
savemoresaveoften
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Hate to say it but given their relatively young age, half a mil is NOT a comfortable number esp with no company pensions other than govt programs.

Also surprised to hear they are able to just use their part time job income to get by, without touching their principals at all. $350k only earns you ~$11k a year at 3%.

If they really dont have any plans to touch that money for next 10-15 years, its prob much better to have the $350k partly invested in cad bank / utilities stock earning 4%+ dividend, and the rest in some kind of GIC ladder.

January 30, 2019
2:22 pm
stoidi
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I too have a concern, about any one that retires to a lower income because they won’t have any work income, if they don’t own a home of some kind.

But never the less...not to judge.....but answer the question.

Assuming they can continue to fully fund their TFSA here is what I would recommend.

$10,000 in HISA for emergency fund.
$70,000 1 year GIC best rate in Feb
$70,000 2 year GIC best rate in May
$70,000 3 year GIC best rate in Aug
$70,000 4 year GIC best rate in Nov
$70,000 5 year GIC best rate in month of your choice

Use 3-5 FIs to keep with in CDIC principal plus interest insurance coverage. Keep in mind Oaken has 2 CDIC coverages and some credit unions have unlimited insurance.

GICs joint, compounded, interest pays at maturity. Ask that all funds at maturity to go into HISA to allow reinvesting elsewhere at a higher rate. Stagger the deposits to every quarter so if sometime you turned on interest to pay annually you would have income quarterly.

So not until you see GICs invested for 5 years and renew always at the best 5 year rate would they ALL be at the highest, usually, 5 year rate.

As far as stocks with dividends I don’t know if they would like the fluctuation of the stock price especially if they cashed them in at a lower rate that what they were purchased for. It happens!!

Assuming they keep their day to day banking in place. Things to look for in the FIs to invest $350,000.
Can you transfer funds online to your day to day FI.
Do they supply cheques.
Do they supply an ATM card.
Do they have interac e transfer.

If they go for the stock with dividends then another discussion for stock broker or online broker is needed. But I think these folks will be very conservative with their investing.

And lastly make sure the TFSAs have beneficiaries, they both have wills, and both have POAs.

What FIs?
Oaken
Accelerate
Hubert

And where are their TFSAs at? May consider the withdraw in December and reinvest in January in an FI that is consistent with high rates.

January 30, 2019
3:16 pm
martik777
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I would be very concerned about future rent increases. The avg rent for a 2bed condo in Ottawa is 1500, by the time they get OAS and CPP, rent could easily be 2000 consuming 1/2 their income. A 200k condo could eliminate their rent and protect them from future increases and they would only forgo 6,000 in interest income at 3%.

January 30, 2019
4:09 pm
promise
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Loonie said
OK, we're almost there.
Why do they think HISA is the only thing that offers safeguard? Are they talking about insurance? Or do they want to always have access to funds for emergency? If emergency, how much do they think they need to keep handy? (I believe you said they had 10K for emergencies, but it sounds like it's all for emergencies as it's all in HISAs.) Or other reasoning?
Have they checked with CPP to see how much they will receive? My main concern is whether they will receive approximately equal amounts as survivor benefits are not what they appear to be when you look at the info CPP provides.

To summarize, so far:

Assets:
350K cash
10K emergency fund
25K RSP
130K TFSA (approx)
TOTAL 515K (approx)

No liabilities; tax due on RSP can be avoided with use of Pension Tax Credit on RIF after 65 yrs.

NET WORTH 515K (approx), all of which is invested in HISAs.

Is that correct?  

You got it summed nicely. They think HISA is safeguard because they had bad experience in 2007/2008 as they lost money in the market. For emergency they are good with $10K in HISA to have it handy in case they need it is the plan. For the rest they don't need it so if they can get a good rate they don't need to have it readily available. No i haven't checked to see how much they will get for CPP i will mention it to them.

January 30, 2019
4:15 pm
Loonie
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I'm not prepared to make recommendations yet until I hear about the reluctance to go with longer GICs, but condos don't eliminate rent; they just call it "maintenance fee and property taxes" - which can be quite substantial.
in addition, you have to keep an eye on the condo's infrastructure needs and board management. I've known more than one person who was suddenly hit with an extra levy they couldn't afford.
I agree though that rent inflation is a risk. But, then, so are property values , which can go up or down - but at least you have a roof over your head.
Property is a good diversifier at least. And it doesn't count against you when qualifying for this or that benefit as income typically does.

January 30, 2019
4:20 pm
promise
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savemoresaveoften said
Hate to say it but given their relatively young age, half a mil is NOT a comfortable number esp with no company pensions other than govt programs.

Also surprised to hear they are able to just use their part time job income to get by, without touching their principals at all. $350k only earns you ~$11k a year at 3%.

If they really dont have any plans to touch that money for next 10-15 years, its prob much better to have the $350k partly invested in cad bank / utilities stock earning 4%+ dividend, and the rest in some kind of GIC ladder.  

That's why i envy them they are also vegan so they save a lot on the meat cost and there daughter have a good paying job so she is always buying them stuff and they somehow make it work as they got it in a system. They live beyond there mean. Those are good suggestion if they get over there scare from 2007/2008 as they lost money in the market so they just took the safe road of HISA. Different folks different storks.

January 30, 2019
4:29 pm
promise
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Charlotte said
I too have a concern, about any one that retires to a lower income because they won’t have any work income, if they don’t own a home of some kind.

But never the less...not to judge.....but answer the question.

Assuming they can continue to fully fund their TFSA here is what I would recommend.

$10,000 in HISA for emergency fund.
$70,000 1 year GIC best rate in Feb
$70,000 2 year GIC best rate in May
$70,000 3 year GIC best rate in Aug
$70,000 4 year GIC best rate in Nov
$70,000 5 year GIC best rate in month of your choice

Use 3-5 FIs to keep with in CDIC principal plus interest insurance coverage. Keep in mind Oaken has 2 CDIC coverages and some credit unions have unlimited insurance.

GICs joint, compounded, interest pays at maturity. Ask that all funds at maturity to go into HISA to allow reinvesting elsewhere at a higher rate. Stagger the deposits to every quarter so if sometime you turned on interest to pay annually you would have income quarterly.

So not until you see GICs invested for 5 years and renew always at the best 5 year rate would they ALL be at the highest, usually, 5 year rate.

As far as stocks with dividends I don’t know if they would like the fluctuation of the stock price especially if they cashed them in at a lower rate that what they were purchased for. It happens!!

Assuming they keep their day to day banking in place. Things to look for in the FIs to invest $350,000.
Can you transfer funds online to your day to day FI.
Do they supply cheques.
Do they supply an ATM card.
Do they have interac e transfer.

If they go for the stock with dividends then another discussion for stock broker or online broker is needed. But I think these folks will be very conservative with their investing.

And lastly make sure the TFSAs have beneficiaries, they both have wills, and both have POAs.

What FIs?
Oaken
Accelerate
Hubert

And where are their TFSAs at? May consider the withdraw in December and reinvest in January in an FI that is consistent with high rates.  

Lots of good points to consider. I don't recall where there TFSA is but i know it's earning around 3%

January 30, 2019
4:30 pm
Loonie
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Once burned, twice shy, for sure.
So, why are they afraid of longer term GICs?
Was my summary in post #20 accurate?

January 30, 2019
6:10 pm
martik777
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Loonie said
I'm not prepared to make recommendations yet until I hear about the reluctance to go with longer GICs, but condos don't eliminate rent; they just call it "maintenance fee and property taxes" - which can be quite substantial.
in addition, you have to keep an eye on the condo's infrastructure needs and board management. I've known more than one person who was suddenly hit with an extra levy they couldn't afford.
I agree though that rent inflation is a risk. But, then, so are property values , which can go up or down - but at least you have a roof over your head.
Property is a good diversifier at least. And it doesn't count against you when qualifying for this or that benefit as income typically does.  

Oops, I had no idea taxes and fees were that high there (~$600), was thinking ~$250 lol. I've always owned a house and probably spent under $50/mo on maintenance over 30+ years. Can you defer taxes in Ontario?

January 30, 2019
6:30 pm
Loonie
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I don't know what condo fees are in Ottawa, but 600 would not surprise me. In Toronto, they can be over 1000. The older the building, the higher they often are.
You may only have spent 50/month, but does that include new furnaces, major appliances etc - all the things that a landlord would normally be resopnsible for?
Seniors on limited incomes can sometimes defer property taxes in Ontario, but it is a municipal decision. I don't know what the rules are in Ottawa.

January 30, 2019
8:56 pm
promise
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Loonie said
Once burned, twice shy, for sure.
So, why are they afraid of longer term GICs?
Was my summary in post #20 accurate?  

They are fine with going with the longterm GIC all there funds with the exception of the $10K emergence fund obviously.

Your summary was right on post 20

January 30, 2019
11:04 pm
Loonie
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Thanks, @promise.

I have a number of thoughts, and may not get them all out at once!

I'm going to start with "risk".
All investment strategies have risk, even the simple one that they are now pursuing, of using only HISAs. So, it's not possible to avoid risk. All you can do is try to mitigate it, and to make decisions about which risks threaten you the most or which ones you think are most likely to come to fruition (very tricky to do, and not reliable).
It's really important that this couple recognize risk in their situation and investment decisions..

Right now, they face these risks:

Currency risk - they are entirely invested in Cdn dollars. The value of that dollar fluctuates. In the event of a serious downturn in the Cdn economy (which many think is coming), they will lose purchasing power. This could be as serious as what they experienced in 2008 or even worse. It may not happen, but it is a real risk.

Interest rate risk. HISAs pay the lowest return, and that's where all their money is. Even five-year GIC rates may not exceed returns from other kinds of investments or return a profit or even keep pace with inflation after taxes.

Longevity risk - This is related to inflation risk but is also independent of it. Bluntly, if they live a long time, they could see their nest egg dwindle substantially, so that they run out before they are finished with life. Their daughter could be retired by then and not able to provide much help. (I am in my 70s and have a living parent for whom I have sole responsibility.) These people are very young retirees and have apparently chosen personal freedom over reducing longevity risk. They could have many years yet. Suggest looking at Frederick Vettese's book, Retirement Income for Life: getting more without saving more. They and/or you can pick this up at the public library at no cost. At least read the first chapter or so, which demonstrates in frightening detail how quickly you can run out of money. The rest of the book outlines how you can avoid this. Worth reading, although more applicable to people with more substantial RSPs. Vettese is an actuary - their job is to do the precise complex financial calculations which suggest what may happen inasmuch as it can be calculated.
Another related issue is the cost of living in an assisted living facility, if required. I'm not talking about nursing homes or getting help with baths etc for a fee. I'm just talking about a place where they provide meals, some social and recreational activities, change the linens, and have some staffing to help out - the kind of place you move to when you can no longer cope in on your own in an apartment but don't need nursing care. These are EXPENSIVE! In Toronto, I doubt you could get anything decent for less than 3K/month for an individual, perhaps 5K for a couple. Daughter may not be able to supply all their needs and they may need something like this for several years - which they may not be able to afford = crisis.

Regulatory and chronological risk. Governments change, and they change policies. You can be sure there will be changes to the Income Tax Act. Nobody can predict what the government policies will be towards seniors in the 20 to 50 years which they may have left. They should take a few minutes and consider all the things that have changed in society in their lifetimes and multiply it by two to get a sense of just how unpredictable the future is. Fifty years ago there was no such thing as a personal computer or cell phone of any kind and we all used typewriters and carbon paper, for example. 15 years ago, there was no such thing as TFSA. 20 years ago, the survivor benefit for CPP was guaranteed to be 60%, assuming the couple had been together all that time; now, it is much less, the result of a complex formula which few can understand. I can't remember when GIS and GAINS came in, but they have not been around forever. When I was a child, government health insurance such as OHIP didn't exist. In years past, there was no OAS clawback. And so on.
A new set of changes in how seniors are funded is now overdue. Remember too that OAS is not an entitlement ike CPP. It's a federal budget item, and thus can be changed. It would be foolish to assume that in 10 or 15 years when they hit 65 that things will be the same as they are now. And, another 10 years or so down the road, they will change again. And again. TFSA rules changed twice in the first 8 years. RSP rules have changed more times than i can count. RIF withdrawal rates have changed once that I can remember. and so on.

Cash/GIC investment risk. We don't know what interest rates will be in future or whether they will keep up with inflation. Over the long term, other kinds of investments have often performed better. These people are still young enough that this might apply to them. Most people who lost money in 2008-9 did so because they sold their investments at that time. Those who hung on have mostly recovered and gone on to greater profits since then.

There may be other risks that are not occurring to me at present.

The best defense against risks is diversification. This can be achieved in a number of ways. I will elaborate in another post.

January 30, 2019
11:20 pm
Loonie
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How to mitigate risks:

They really need to take another look at whether they are willing to diversify their investments beyond GICs and HISAs, given the risk of remaining in them exclusively. It would be impossible for me to suggest which specific investments they should make because everyone must decide what they are comfortable with. And there are people on this forum who know more about these than I do. However, these are some possibilities to consider:

a. Invest in US dollars and/or whatever other currencies you consider likely to be more stable. Some FIs , such as Hubert, offer not-bad interest rates on USD HISAs, but they are still low compared to Cdn. You can, however, do reasonably well in some USD GICs available at Cdn FIs. I think I have seen rates of at least 3%. So, if the Cdn dollar tanks, you have some protection. Being a primarily resource-based economy and in the shadow of an elephant which has too much power over our future, we are more vulnerable than the US. Bear in mind that CDIC-insured FIs do not cover USD investments. MB CUs do cover them; I am not sure about Ontario CUs.

b. GIC laddering. This enables you to get the best rates over longer period. It takes five years to get it fully set up, then it just rolls along. Charlotte has given you an outline of how this works.
If they are not in the habit of raiding the emergency fund, I would keep it in the one-year GIC at Hubert. It pays well, you can cash it any time, and the greatest penalty for cashing out between quarterly interest payments would be slightly less than 3 months interest.
If you think the emergency fund might be raided more often, then I would just put it in Tangerine (along with a chequing account) and leave it there. You need quick access for emergencies, so a chequing account is required. I would suggest Motive but some people have had some problems with them, and you don't want problems in an emergency. I suggest Tangerine not because of a great rate (not!), but because I have found it very reliable for chequing access and their phone service is 24/7, and i think this is your main priority for this money, not the rate. You could also try AlternaBank or Meridian perhaps, which have higher interest; I'm not sure if they have 24/7 phone service, which I think you need. It's not worth moving around such a small amount from one bank to another frequently as it could be stuck in transit when you need it. Be sure to move a dollar in or out once a year in order to keep the account from going dormant - put it on the calendar.

c. Conservative stock market investing. I know they got dinged on this earlier, but it is one of the fundamental ways of diversifying, and it ought to work with a long life ahead of them yet. 25 to 40 years is, in my view, a good time line to consider, and that is pretty much what they have available to them. However, in order to do this, you have to commit to hanging on when things look bad. If you don't have the nerves of steel required for that, then, regretfully, you need to stay away from it. If you decide to go ahead with it, you should only put some of your money into it -I would say no more than 40% at this age and a minimum of 25% as it won't make enough difference if you put in less. I would divide the amount equally among a handful of ETFs (Exchange Traded Funds), to minimize costs. For specific recommendations on which funds to use, take a look at the Canadian Couch Potato system (online), which is more serious than it sounds. Make sure you choose funds which represent different parts of the globe; just see how you get on with ETFs and avoid particular stocks. This would be a good thing to do with the TFSAs as it will simplify your accounting and that is where you can use the longer time horizon
What you then have to do is monitor these funds every six months or so and "rebalance". This means that when one fund has a significant profit, you take some of it and put it into one of the funds that hasn't yet done so well. More can be said about that if interested. Alternatively you could use a good global balanced fund, where the rebalancing is supposedly done for you, but they include a lot of bonds.
Avoid all "financial advisors", "wealth advisors", etc. Some may be wel intentioned and a few may even do a good job, but you need to remember that their main job is sales. There really isn't any category of advice that I know of that will be in your best interests, be as conservative as you want, and be affordable considering the amount of money involved. So, welcome to the forum! - where advice is free, but you still need to check that it is right for you and accurate.

d. It's probably too early to do this yet, but I would consider using annuities for some of the non-registered funds. The question is when to start this. The sooner you start, the less you'll get per annum; and rates might improve if you wait (but might not). I am not sure what the minimum investment in an annuity might be. Perhaps 50K? (I doubt it would be any less.)
The reason I suggest this is because it is a kind of protection against longevity. It doesn't deal as well with inflation. You can get inflation-indexed annuities, but the premiums on them are too expensive IMO. One of the advantages of non-registered annuities is that you can bump up your income, keep getting that income as long as you live, and pay very little tax on it. If you do this, make sure to get an annuity which covers both partners (continues after death of first) until death. You can use an annuity in this way to top up OAS, CPP etc without incurring much of a tax liability, and you know you will continue to get it. Consult an annuity broker if this is of interest.

e. Honestly, i would consider working more hours or looking for a job that pays better. Is there anything they can do that is related to their previous occupations that would pay more? I am not sure why they retired so young, but, while their next egg looks good if nothing changes, you can be sure some things will change. Whether it be rent, OAS, inflation, early death of a spouse (reduces family income significantly, putting more strain on fixed costs such as rent), govt decisions, or something else, they are not very well protected against unexpected changes. More income resulting in more savings would be better. If concerned about tax, put any extra into RSPs.

f. Instead of buying a property, which could break the bank at this point, considering condo fees etc., check whether Ottawa has any Seniors apartments that you can apply for. We have some in Toronto that are owned by the city. The wait list is about 4 to 5 years for non-subsidized right now and much longer for subsidized, but the rent is affordable and the units are decent - ideal for the frugal who don't need a huge amount of space because they are not weighed down by "stuff" and complexity. Some fraternal organizations also have affordable housing for senior members - e.g. Foresters, Lions, Elks, Oddfellows, etc. - you need to check into it. Also, some ethnic organization have this, if these people belong to a particular ethnicity. I can't remember which ones have it or where, but it's not too late to join such an organization, and it could be a good match as they are already giving back to the community, which demonstrates the desired attitude. Requires a bit of research. There must be some agency in Ottawa that keeps track of this kind of thing. Having this option open to you at a later date could insulate you from skyrocketing rents, and you can start planning ahead now for this rather than getting caught in a crisis.

g. Look into getting private insurance for some of the following: life insurance (especially useful if one spouse dies, at which point the other can be cancelled - can help cover fixed costs now that total income reduced), extended health insurance (may cover dental, drugs, various additional professionals, assistive devices etc), catastrophic illness insurance , and long term care insurance. I am not saying they will necessarily want to buy any of these. Be aware that rates can and will go up and that you need to read the fine print very carefully. I only mention them because I consider the situation of this couple to be marginal, given the risks and their assets, and they need to protect themselves if they can reasonably do so. For people who have a lot of money, it's not so much of an issue, and I don't normally recommend them, but should be at least investigated as an option. I think CARP has a group rate for extended health, and some other organizations may also have some group rates.

I will probably have more to say but it will have to wait for later.

January 31, 2019
5:38 pm
promise
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Thanks Loonie. Looking forward to your additional thoughts

January 31, 2019
9:23 pm
Loonie
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Nothing else occurs to me right now.
I think the best thing would be for you to discuss these ideas with your in-laws and see what the reaction is. They will probably have questions, and will probably reject some ideas. There is a lot to absorb.
Let me know what the response is.

February 1, 2019
11:08 am
Newcommer_80
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VERY INFORMATIVE INFORMATION LOONIE

February 1, 2019
12:17 pm
2of3aintbad
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Regarding the RSP in HISA, it is unlikely that they will consistently earn as high as 3% (which is likely a temporary promotional rate). The RSP is the only place that I would put GICs.

The common argument against HISA and GIC income is that it is fully taxable, and not likely to keep up with inflation. However, that is true only if the income is high enough to pay any income tax (if they are working part time, it may or may not be). They really should consider investing some of the 350K in Canadian dividend paying stocks / ETFs because of the favourable tax treatment. However, that might be a big step from where they are now.

February 1, 2019
1:02 pm
promise
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Loonie said
Nothing else occurs to me right now.
I think the best thing would be for you to discuss these ideas with your in-laws and see what the reaction is. They will probably have questions, and will probably reject some ideas. There is a lot to absorb.
Let me know what the response is.  

sounds good i am going to talk to them over the weekend and i will let you know what there take is on it and follow up questions i am sure they will have. thanks again

February 1, 2019
1:02 pm
promise
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Loonie said
Nothing else occurs to me right now.
I think the best thing would be for you to discuss these ideas with your in-laws and see what the reaction is. They will probably have questions, and will probably reject some ideas. There is a lot to absorb.
Let me know what the response is.  

sounds good i am going to talk to them over the weekend and i will let you know what there take is on it and follow up questions i am sure they will have. thanks again

February 1, 2019
1:04 pm
promise
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2of3aintbad said
Regarding the RSP in HISA, it is unlikely that they will consistently earn as high as 3% (which is likely a temporary promotional rate). The RSP is the only place that I would put GICs.

The common argument against HISA and GIC income is that it is fully taxable, and not likely to keep up with inflation. However, that is true only if the income is high enough to pay any income tax (if they are working part time, it may or may not be). They really should consider investing some of the 350K in Canadian dividend paying stocks / ETFs because of the favourable tax treatment. However, that might be a big step from where they are now.  

Thanks for the advice i am going to have a chat with the in-laws over the weekend and i will see what they say. Hope to get all of your responses based on their follow up questions.

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