Retired Widow: Case Study
We’re delighted to present you with another financial planning case study as part of this year’s theme. This one was drawn from a mash-up of typical clients and scrubbed of identifying detail, because privacy.
Remember, we’re writing these case studies to illustrate the value of financial planning centred around the unique life story and personal values each person brings to the process. We also want to demonstrate how the decisions one person makes in light of those values might be very different than the decision you would make in the same circumstances.
What follows isn’t meant to be universally applicable advice. The solutions articulated below were designed for the client, and while you may see yourself in some of the details, these are the recommendations that created success for her. You should seek professional advice before applying these solutions to your own situation.
Zoe Retires Alone
After Zoe’s husband, Wash died, she was worried. Suddenly becoming a widow at age 55, receiving a big lump sum from insurance, and not knowing what to do next left her feeling insecure, overwhelmed, and embarrassed.
Although Zoe was the one who paid the bills and managed the budget, she felt like she hadn’t paid enough attention to their money over the years. She had “only” paid off their mortgage and contributed regularly to savings invested at the bank.
After losing her husband and moving, Zoe’s lifestyle hadn’t quite settled into a predictable pattern of expenses. Her income was coming from a patchwork of survivor benefits and she was topping up her pensions from the insurance money. This money was still sitting in a savings account at the bank because she didn’t know what to do with it. Her uncertainty and lack of knowledge about her investments led her to believe that she was just bad at money!
There are two things you need to know about Zoe, though:
First, she’s a master of living within her means. For the 25 years leading up to this period of disruption, she kept her expenses safely below her (sometimes quite low) income. She had the bare minimum amount she could live on down cold.
Second, she is an enthusiastic student. Although she had a dim (and incorrect) view of her own money management skills, she came to Spring keen to learn. She had already spent some time investigating how well her bank-managed mutual funds had performed over the years and how much she was paying in investment fees.
Zoe came to Spring with two questions, one very specific and one very broad:
- How much can I spend every month?
- My bank is offering me a discount to invest the insurance money with them. Is that the right choice for me?
As lead planner for Zoe, Sandi was keen to help her realize just how well she had actually managed for all those years, and to build a simple plan that Zoe could follow with confidence.
Testing her portfolio
The first thing Sandi did once she received Zoe’s information was to have her teammate Darryl Brown to look at her portfolio and help her figure out two things:
- If she was receiving value for the high investment management fees she was paying, and
- If the amount she needed to withdraw from savings was likely to work, given the amount she was starting with and her asset allocation.
Darryl found that Zoe was paying more than 2.5% for her mutual funds, and receiving no guidance beyond fund-picking in return. The fact that Zoe came to Spring to ask about investments was a pretty good indicator that the advice she was supposed to be getting in return for her fees was insufficient.
The next step was to prepare a shortlist of investment managers that charge reasonable fees (including discounted fees for higher account balances, similar to what Zoe’s bank was offering) and consistently deliver valuable advice. Darryl requested a proposal from each of the managers on the list, sat in on the introductory calls with Zoe, and helped her find a match for the kind of advice-relationship she wanted at a cost that made sense.
The difference between what Zoe would have paid at her bank and what she is paying to her new investment manager is $9,500 per year!
Next, Darryl examined the amount of money Zoe had between her investments and the insurance proceeds. He tested how much she could withdraw from her portfolio under a variety of scenarios that included:
- Contributing more or less of the insurance proceeds to her investments and leaving the rest in cash
- Reducing the cost of her investment management in the future
- Changing the balance of stocks to bonds
- Living much longer than the average life expectancy for women her age
- Facing spending shocks, like long term care
Darryl found that Zoe had a good chance of making it through retirement without spending her whole portfolio if she simply stuck with her bank and added her insurance money to her current investments. However, this would only work if she didn’t live much longer than age 94 and didn’t have any increased healthcare or nursing costs as she aged.
Darryl also found that Zoe had a great chance of living comfortably through her whole retirement when her annual investment management costs were reduced by 1% and she withdrew 10% less from her portfolio each year. This scenario would work even if Zoe’s retirement was really long or got very expensive near the end. He sent his recommendations to Sandi so she could figure out how to reduce Zoe’s withdrawals without reducing her spending or leaving her without cash reserves to fall back on.
Qualifying for Allowance for the Survivor
Knowing that Zoe is a widow with relatively low income, Sandi looked to the Allowance for the Survivor program. She checked to see if there was any way to boost Zoe’s government benefits during the years between age 60 and 64, and reduce the amount she had to withdraw from her own savings over the same period.
Zoe’s qualifying income was projected to be slightly too high to qualify for the Allowance, but fortunately she also had some unused RRSP room. Making contributions to her RRSP at age 59, 60, and 61 will reduce her qualifying income for those years and result in just over $35,000 in tax-free income she would have otherwise had to withdraw from her savings.
Deferring Canada Pension Plan and Old Age Security
With a $35,000 boost from government benefits, Zoe had that much less to withdraw from her portfolio. The next thing Sandi looked at was when Zoe should apply for her own Canada Pension Plan (CPP) and Old Age Security (OAS) benefits to see if that decision could reduce her portfolio withdrawals even more.
Zoe’s income from her survivor benefits was too high for her to qualify for the Guaranteed Income Supplement, and she only had enough RRSP room to qualify for the Allowance. This means that the common strategy of applying for CPP and OAS as early as possible to keep taxable income down and increase income-tested benefits wasn’t going to produce much of a result.
Deferring benefits as late as they could go, however, did produce a result! Zoe would:
- Wait until age 70 to start collecting CPP and OAS benefits
- Withdraw from her RRSP while she waited
- A 45% increase in OAS benefits
- A 36% increase in CPP benefits from age 70 on
This scenario would ultimately reduce the total amount she would have to withdraw from her portfolio over her retirement.
And – bonus! – these higher benefits at age 70 were actually more than the amount she estimated to be her minimum comfortable standard of living. She could leave the rest of her portfolio alone after age 70, and let it act as a reserve that she will be able to draw against to protect her from spending shocks.
Darryl tested this scenario in more detail. He found that with lower investment fees and increased government benefits (resulting in the same amount of spending but lower portfolio withdrawals), Zoe’s plan was likely to work. Sandi drafted an annual review strategy to check in with Zoe’s income, spending, and portfolio each year.
Zoe’s reaction? She’s delighted with a concrete monthly income that’s substantially more than she thought she’d have. She’s happy to have found an investment manager that communicates regularly and provides the simplest, clearest statements and client education we’ve ever seen… All for less than half of the cost she used to pay each year. And she’s grateful that we planned from the start to review her progress regularly.
She’s not quite as confident as we think she’ll become, though. From our work with similar clients in the past, Sandi thinks it will still take a few years yet before Zoe truly understands that she didn’t mess up for all those years and is really, actually going to be okay in the future.
It’s unfortunately common that single women in their 50s come to us doubting their own competence, even in the face of evidence that they’ve done extraordinarily well for themselves despite often very tough circumstances.
Building these women up is one of our favourite things to do at Spring, and we’d love the opportunity to do the same for you! Please contact us if you would like to discuss your own definition of success and how we can help you reach it.