Victoria resident Nancy Mittel need to make her assets work more efficiently.

By Andrew Allentuck
The Globe And Mail
GlobeInvestor Section
Saturday, October 25, 2003

At the age of 63, Victoria, B.C., resident Nancy Mittel (not her real name) has inherited a substantial fortune of $1.9-million. She has invested with four different investment advisers, yet she recognizes that they are not managing her money well.

Ms. Mittel contacted Financial Facelift to get a review of that management and to determine if the assets will be able to provide the $50,000 a year of pretax income in 2003 dollars that she wants to have until she dies. In her case, that could be many -- and hopefully happy -- years, for her mother, age 100, is alive and well in Norway.

"Given that my mother is 100 and that I have a prospect of living another four decades, I have to wonder if the assets that I have for my retirement will see me through," she said.

What our expert says

Facelift asked financial planner Adrian Mastracci, president of fee-only investment adviser KCM Wealth Management Inc. of Vancouver, to speak with Nancy and to examine her investments in order to determine their ability to pay $50,000 gross income for the next 42 years. By 2045, with a 6-per-cent annual return adjusted for 3-per-cent annual inflation, her $50,000 income target will have turned into $174,000. Ensuring that her assets track inflation and continue to produce the target income is the problem, he said.

"A lot of advisers have sold Nancy many products; no one has actually done a comprehensive plan for her and followed it through," Mr. Mastracci said. "With better planning and some assistance in management, she should be able to meet her target and pay much lower fees as well."

Currently, Nancy's assets are composed of a house she estimates is worth $585,000, financial assets of $1.3-million, and a life insurance policy that will pay taxes owing at her death, Mr. Mastracci noted. Since she needs only $1,025,000 of financial assets to produce the inflation-adjusted, pretax income of $50,000 a year, she has already met her income goal, the planner noted.

There are, however, serious management problems with her portfolio. Nancy has too many investment accounts that are filled with mutual funds sold with deferred sales charges that have cost her dearly in high management fees. Her 26 equity funds frequently overlap and cost an average management fee of 2.5 per cent a year.

Her stock funds total $818,000. Her bond funds total $495,000, including several money market funds. That's an imbalance for a person of her age, Mr. Mastracci said. Nancy reduced her stock fund holdings from $1-million earlier this year, but she should adjust the portfolio further to produce steadier performance.

An asset allocation of 45-per-cent stocks, 40-per-cent bonds, and 15-per-cent cash would do this, he said. He recommended a mix of Canadian, U.S. and global equities, a ladder of government bonds invested for one, two, three, and five years with each issue rolled into new bonds as they mature.

None of the bonds should exceed a term of five years, given the present climate of rising interest rates, he said. A maximum of 10 per cent of the bonds could be invested in federal real return bonds. The RRBs pace inflation, which should begin to rise as the Canadian economy recovers.

Looking ahead, Nancy will receive Old Age Security without the clawback that currently begins at $56,968 after she reaches 65 in two years. She already receives a Canada Pension Plan survivor benefit of $444 a month.

That will decline but be blended into her own $296-a-month CPP benefits payable at age 65. She currently does part-time work that pays $250 a month. She receives a life income fund payment of $123 a month. Investments, including draws of capital from her money market funds, provide the remaining $3,450 of monthly income.

Nancy was persuaded to spend $1,100 a month for premiums on a life insurance policy with a $250,000 death benefit and a cash surrender value of $24,000. The policy was purchased to pay taxes that might be levied on accrued capital gains after her death.

Yet Nancy has enough cash to pay any taxes due, Mr. Mastracci said. If she follows his advice to increase bonds to 40 per cent of total financial assets and cash-equivalent guaranteed investment certificates and treasury bills to 15 per cent, she will continue to have ample cash without paying insurance premiums. She should save the $13,200 a year she pays in premiums and drop the policy, Mr. Mastracci said.

Nancy needs to make her assets work more efficiently. She should observe the philosophy that less is more and simplify a portfolio that has grown unmanageable, Mr. Mastracci said. She needs to cut management fees, to reduce portfolio volatility and to eliminate one or two of the financial advisers who have sold her too many funds, he said.

Some funds have been held for five years and therefore can be sold without penalty while a few funds that have been held for just a few years can be cashed out over time by making use of the 10-per-cent annual allowance for penalty-free withdrawals, he said. Other redundant funds can be sold even with payment of penalty.

"The penalty after a couple of years is about the same as the MERs for a few years, so it's not such a large cost. Either you pay to sell or you pay the MER," he said. "If Nancy can make her asset allocations more appropriate to her age and reduce her fees, then over the long run, she will do much better."

Client situation
Nancy Mittel is a 63-year-old widow living in Victoria, B.C.

Monthly income
$4,267, including investment income and money drawn from capital.

Assets
House, $585,000; investments, $497,000; RRSPs, $816,000; insurance policy death benefit, $24,000; car, $20,000.

Monthly expenses
Food, $120; realty tax, $500; utilities, $250; health insurance, $125; travel, $1,200; clothes, $100; life insurance, $1,100; garden, $100; dining out, $400; car, gas and maintenance, $200; house alarm, $80; house upkeep, $60; miscellaneous, $30. Total: $4,265.

Liabilities
None.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.