Financial Advisor For A Day: Can You Live On $1065 A Month?
Wayne Manderly recently separated from his wife after 30 years. He lives on a very small CPP disability pension of $745 a month. Part of the separation agreement means Wayne receives an additional $320 a month in support, bringing his monthly income to $1,065.
After selling their mortgage-free home, Wayne moved in to a townhouse that he rents for $1,125 a month, plus hydro – which could cost as much as $250 in the winter.
Wayne’s share of the house proceeds was just over $125,000. He knows he needs to top up his income if he wishes to stay in the townhouse, but he can’t buy a home and the other rental alternatives were not in good shape. He doesn’t own a car because he’s concerned about buying a lemon – plus the insurance and maintenance will only add to his monthly expenses.
Right now, Wayne has the pharmacy deliver his medication at no charge and gets his groceries delivered whenever possible. He’s in a tough financial situation with very little money in the bank, although he doesn’t run up credit card debt or have any other debt other than his monthly bills.
Related: 20 Simple Steps To Improve Your Finances
Income:
- Canada Pension Plan disability benefit – $745
- Spousal support – $320
- Total = $1,065
Expenses:
- Rent – $1,125
- Hydro – $150 – $250
- Groceries – $150
- Rental Insurance – $15
- Total = $1,440 – $1,540
If Wayne stays in his current rental, he’ll need somewhere between $375 and $475 a month to top up his income and cover his monthly expenses. And that still leaves things pretty tight.
Related: How To Make A Better Personal Budget
The professional advice?
Wayne wrote to me and asked what he should do with the $125,000 house proceeds. His financial advisor suggested he put some in stocks and the rest in a monthly income fund, because GICs are only paying 2.3%. He said the returns are much better on stocks and that he will get 4 – 5%.
“I don’t feel comfortable with this plan, but how do I tell him that? All of my money and accounts are with this bank”, said Manderly.
When I read Wayne’s email I felt really disappointed in our financial industry. Here we have someone who clearly has a low tolerance for risk and can’t meet his monthly expenses on income alone. And the financial advisor wants him to put his life savings into stocks and mutual funds?
Related: Do You Need Financial Advice?
I’m sure we’ve all been in a situation where a pushy salesman tries to bully you into buying what they think is best for you. It’s unfortunate that some financial advisor’s make their clients feel this way about their own money.
Here’s my advice to Wayne:
This is a tough situation since your housing expenses exceed your income before you even buy groceries and pay for renter’s insurance and transportation.
- Is it possible to get a part-time job to fill-in the gap between expenses and income?
- What about finding a roommate to share rent and utilities?
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You need income from your $125,000 investment and unfortunately stocks are much too volatile. You don’t want to risk your life savings in anything but a guaranteed investment vehicle, like a GIC.
Your financial advisor probably thought you should buy a monthly income fund, which isn’t a bad idea but it’s not suited for your risk profile. They should know this, but sometimes advisors prefer to push their own investment products that pay higher commissions. Be very careful.
Your risk profile describes how comfortable you are with investing your money. Low risk tolerance means you’re not at all comfortable with stocks.
You can set up a GIC ladder, splitting your investment over a variety of terms. If, for example, you have $100,000 and want to invest in GIC’s, you would put $20,000 into terms of 1, 2, 3, 4 and 5-years.
Every year you will have some money coming due that you will invest in a new 5-year GIC. And since the interest rate is higher for 5-year terms you will always be re-investing at the highest rate. The best 5-year GIC rate is currently sitting at 3.1% (Outlook Financial, Achieva and AcceleRate Financial).
My advice is to put $100,000 in the GIC ladder as I described above, and keep $20,000 in a high interest savings account.
Then take the remaining $5,000 and keep it in your chequing account, which can be used as a cushion in case your expenses are a bit higher one month. The high monthly balance will also waive any monthly chequing account fees that your bank charges.
If you’re not comfortable with your advisor, then you need to walk away. It sounds like he wants to sell you products that you don’t need.
Use a different bank to help you with your GIC ladder plan – they can help you transfer the money from your bank.
Once you set up the GIC ladder you will have money maturing every year (no monthly income, though).
You can use your savings account to top up your monthly income for about 5 years and then you’ll have to replace that money.
Related: Ways To Save Money
At that point I’d suggest taking one of your GIC’s – when it matures – and rolling it into your savings account to top that back up to $20,000
Financial advisor for a day
Does this sound like a solution that can work for Wayne? He’ll be living pretty tight from month-to-month, but at least this gives him a plan for the medium term future.
What kind of advice would you suggest for Wayne? Could you live on $1,065 a month?
I usually find this blog balanced and thoughtful but I was quite disappointed to read the comment that equated a stock’s volatility with its ability to produce sustainable income. Canadian bank stocks have been volatile but their dividends appear to be sustainable over the long term and splitting the house proceeds between the big five banks would generate close to a 5% return,I have a large portfolio of bank stocks that delivers $80,000 in tax advantaged revenue annually and did even in 2006, 2007, and 2008.
In any event, a stock’s volatility is relatively independent of its income producing capabilities
@Ron – If you’ve been reading this blog for some time then you should know that I’m a big fan of dividend growth investing.
That said, this advice was specific to Wayne’s situation and he clearly does not feel comfortable owning stocks.
If he split the entire house proceeds equally amongst the big banks he could generate enough dividend income to offset his expenses. One problem with this approach is that he needs the income monthly, not quarterly. Also, this approach leaves him with no liquid safety net in case something comes up (like if he decides to buy a used car).
The GIC laddering gives him at least $25,000 liquid cash as a buffer.
If he feels more comfortable investing one or two tranches of the $100,000 for the long term, then dividend stocks or a monthly income ETF would make sense.
I agree with Ron & am shocked at the idea of GIC’s. They won’t hold their own @ 3% with the rate of inflation. Plus the extra money in a high interest savings account to help with extra expenses will only last a few months, as he needs $500/month already to cover monthlys.
Dividend paying stocks are the way to go. I draw $1000. every month from $95,000 portfolio, and it is holding its own. Plus, $20,000 in good TFSA investing has got me $31,000.
Looking after your financial health is your responsibiliy…not someone else’s. Get on it!
@Cindi – Are you saying that you’re drawing $1,000 a month in dividend income from a $95,000 portfolio, or are you withdrawing some capital too?
I think Wayne’s focus on reducing expenses (finding a cheaper place to live) is the best strategy to cover that monthly cash flow shortage.
I agree about bank dividends. I personally use the iShares Canadian Monthly Income Fund (FIE-T), pays about 7%+, that would be about $900 monthly and you don’t depend on individual stocks. There are a number of bond etf’s or reit’s that pay about 7%.
Why was the ETF option not included in the advice??
@Malcolm – thanks for your comment. The iShares Monthly Income Fund looks like a good choice. Again, I still think Wayne should try the laddering strategy for a few years while he gets accustomed to his living situation and maybe he can start reading up on different investing options.
FIE has an MER of 1.02%. Don’t you think that’s high for an ETF?
FIE-T pays monthly which is to Wayne’s benefit but, as is the case with ETF’s, there is no dividend growth and total returns are eroded by a higher MER.
1) Is this gentleman receiving the Disability Tax Credit? If not, he can check into it at
http://www.servicecanada.gc.ca/eng/isp/cpp/receive.shtml/ He does not need to listen to anyone who tries to discourage him from applying. If he chooses, he can apply and the worst that can happen is that he’s denied. His physician will need to sign.
2) Also, that site states that he can earn up to $4,800 before taxes (for 2011) without telling Service Canada and without losing his benefit.
I don’t understand why, given his discomfort with risk, anyone would recommend any stock/mutual fund. And, why would anyone recommend that he put his money into only one category; bank stocks?? I agree with GIC laddering.
If he’s uncomfortable with the recommendation of his advisor, then he needs to seek out another advisor. He does not owe any loyalty to any advisor. It’s his money. My biggest money mistake was staying with a self-serving financial advisor for too long. There are good advisors out there. It takes time and effort to find one.
Could he revisit his accommodation decision? Are there ANY lower priced options?
This certainly isn’t a lot of money on which to live. One can learn to be really frugal, though. Maybe there are cost-saving alternative that he hasn’t thought of. $150 seems a little high for groceries for one person for a month. May be he could find a way to prepare nutritious meals that cost less? Has he considered bartering for some things? It would require some creativity and thinking outside the box but maybe something could be worked out. Just ideas.
@NormaK – thanks for the link on the Disability Tax Credit. I’ll pass it along to Wayne (or point him towards this thread).
In my last communication with Wayne, he mentioned that he is going to keep an eye out on Kijiji for a place to rent for $1,000 including utilities.
Great suggestions – thanks!
What about a high income fund? I own one that pays a good monthly dividend, better than some the stocks that I own, with far less volatility. The MER is high but the income is consistent. On 10k, the monthly dividend would be a little over $50 per month. If Wayne put $50k in, that would give him an income of $250 / month. Far better than what a GIC would generate.
@Mason – which income fund do you own? From my research I found that all of the monthly income funds offered by the big banks (except BMO) reduced their distribution after the financial crisis in ’08.
Remember that higher yield always comes with higher risk.
CI Signature High Income Fund
First of all, to answer the second question first…yes, I could live off of $1,065 per month, but ONLY if my mortgage was paid off, I had no car payment and I lived VERY frugally.
Back to Wayne, assuming there is no part-time job he could get nor a roommate to share utilities, I think he should be optimistic given the $125,000 he has to invest.
I think the money only in stocks, dividend stocks, is too volatile, and also assuming he doesn’t have much investing experience.
I would keep about $10,000 liquid, in a high interest savings account for emergencies; earn about 1.5% interest on that.
I would avoid all bank and investing products with high fees and MERs. I would do that anyhow.
You could put $80 K into XSB or CLF, the latter a bond ladder, would yield close to $250 in income per month (coupons yielding close to 4%). You wouldn’t have to worry about renewing any GICs, the ETF would do it for you, the income is on autopilot.
That leaves about $35 K to invest in equities. Pick a dividend ETF like XDV or CDZ and get the income from that. Yield on both is about 4%. That’s another $125 per month paid. This way, you can ride what dividend stocks would get in returns, with no investing experience.
Good luck to Wayne.
@Mark – I think it would be really tough to live on $1,065 a month, but it can be done with a really frugal mindset.
I like your approach; the investment income tops up Wayne’s income to cover his expenses. The only challenge is in the winter months when his Hydro bill goes up…but I suppose he could tap into the savings account for a few months.
I would put the $125,000 into BMO stock and use the dividends for income. The dividends would amount to approx. $1560 quarterly (or $520/month). In my eyes this blue chip investment is almost as secure as a GIC. The distributions should increase over time to account for inflation, at least once BMO starts regular increases again this year or next.
I agree. I know that the GIC has deposit insurance (which is why you suggested this option), but GICs in today’s climate are a joke.
Have him pick two banks, and divide the cash into buying their stocks. The old saying of “if you can’t beat them, join them” holds very true of the Canadian big banks. Why pay a MER fee at all (in his case he needs every penny)? Own the stocks directly.
I have to admit that I have, in the past, lived on close to that, but I believe that my rent was much lower. When your expenses are greater than your income, though, it is a tough situation.
I don’t know that much about investing (and even less about the specifics to Canadian investing), but I agree with you that if the financial planner he was using was pushing him to do something he felt uncomfortable doing, I’d be finding a new advisor.
I hope Wayne finds a way to make things work.
Wayne could move to a location where rent is cheaper. He could also buy a rental property with his proceeds, in some low cost market with a demand for rentals and get a real return on the money there. He could use the money to purchase a food kiosk of some sort and make good cash income there. I am not sure of the nature of Wayne’s disability so it is hard to come up with solutions for him. I know a guy paralyzed from the chest down who is working at a Honda Dealership selling cars and equipment. There’s always something you can do so long as you are mentally okay, and if you are not mentally okay, it might be time to check into government assisted living and give up on the stresses of trying to manage your own life on the tiny amounts given to the disabled. As long as you throw in the towel, suddenly the government is there for you 100%, paying upwards of $90,000 a year to have you institutionalized! Kinda crazy, but okay at least he’ll never end up on the street.
I cannot fathom why Wayne would rent a townhouse in his financial situation. I have many clients in similar situations who rent rooms in houses or basement apartments (one of two in the same house) for $400 to $500 per month.
I have another client who lives rent free with an elderly couple in exchange for doing all the leg work and minor repairs and maintenance around the house.
Everyone seems to be working with the constraints posed, but really, the accommodation expense is way out of whack.
Finally he should investigate how to apply for subsidized housing – it can be a very long wait – sometimes five, maybe ten years – but the day does come and when it does – it’s a life changer – beautiful apartments (or maybe even a small townhouse) for perhaps a couple of hundred dollars a month – if that.
The last few comments have identified the real issue. Making changes on the expenses side will make a huge difference, compared to varying returns on his investments. Dude needs to get his housing cost way, way down. Some options: a cheaper apartment (he may not like what he’s seeing, but hey, when you’re poor, you’re poor); a roommate; a room in a house; or, more drastically, moving somewhere that you can buy a little house for $50-75K, like parts of Windsor or Hamilton, at which point his $1065 would cover his other expenses with room to spare, and he’d still have $50-75K available to invest.
Wow I just hate reading stories like this. No person should have to be afraid of telling their banker no, and it isn’t right that his banker tried to push him into a situation he wasn’t comfortable with. I think you gave him some solid advice that he will be able to work with.
I read all comments. The townhouse in which I currently live is not close to any thing except a couple of variety stores. I have the grocery delivered on Monday’s that is the day they do this. Cost $5. per delivery. I order from well.ca for other items. I eat all meals in I have not been out since 3rd week May. I would like nothing better than to be working person contributing to society and support myself. All money from house sale is sitting still in high interest account. I was under extreme pressure to find a rental as the time wasclosing fast on me to get out of the house we sold. I should have never signed to sell house until I had a rental located.
I thank everyone for the comments.
Wayne
I saw no mention of OAS or GIS, so I assume Wayne is less than 65. How long does the money need to last? Just ’til age 65? If that’s the case, the GIC/savings account plan is not bad.
If the money has to last longer, then the expenses have to be brought down or inflation could eat him up.
Right now he’s looking at a ~$400/mo shortfall, and that’s probably on the low side since there are a lot of line items missing from that budget (e.g., clothes, taxis). Let’s call it $5500/yr. That would be met indefinitely with a 4.4% [real, after-tax] return on the $125,000. In GICs earning ~3% [nominal], that means the principal is being eaten away every month, and the gap gets larger every year due to inflation.
Is the spousal support inflation-indexed? The CPP disability should be… I’ll be generous and assume it is.
If I plug all that into my retirement planning spreadsheet, the money will last ~23 years, assuming inflation is about 2.5% and GIC returns are 3%. If he was married for 30 years, he’s at least into his 50’s, so that should be a fine plan (because at some point GIS and OAS will kick in).
If he doesn’t have OAS/GIS coming soon to help out, then it’s not such a good plan: if his personal inflation is a little higher than the rate his payments are indexed to, and if he expects to live 15-20 years or more, then the money will run out. If that’s the case, then his preference for avoiding short-term risk will mean he has to cut expenses (as others suggested, moving to a cheaper city or apartment). In that case, I might agree with some of the others about a dividend/preferred strategy: when you’re at the edge, your preferences won’t matter, and you have to accept the volatility in order to have an expectation of making enough return to meet the needs.
Reply to Potatoe:
I am 55. The money is still in high interest account 1.2%. Financial planner wrote: It is a Payout duration sample only –
If you have $100k making 4% , with inflation at 2% and taxes being deducted, your money will last ___/this amount of time…
It is not a recommendation on what to invest in.
For your money to last longer, you need to make more….However, that being said, your RISK TOLERANCE excludes you from ANY investment that is outside a GIC or Savings account.
I don’t know much at all about investing I just am trying to get by. I would be eligible for ODSP income support of almost $400.00 per month, but the amount of money you are allowed in bank is a maximum of $5,000.00 other wise I qualify. I am not able to apply to subsidized housing for the same reason. Tried both. I do budget for grocery and my prescriptions are covered. I was told that my CPP when it turns to retirement pension will reduce. I should have had a more of a plan before the mortgage free house was sold, especially where I was moving to which I was advised not to sign to sell home until details of this and other stuff were worked out. So, now I am paying for in more ways than just my wallet and bank account. I looked for rentals and could find cheaper ones but they were not good and they were dirty. I did not want to live in dump. yes the principal is getting eaten away every month by $500. I try to keep to as I do not go anywhere or spend money anything but the necessities of life.
I am trying to find other rental that is clean and I do understand that is foremost before investing. I have not been able to locate a good clean rental. This city is a landlords haven for the most part.
I do not take taxis, I do not buy clothes. I buy non-covered pharmacy items I need.
You can go without buying clothes for a few years… but eventually you’ll have to budget some of that stuff in.
One bittersweet truth of the ODSP is that it’ll be there for you after the cash runs out, so eating the principal is not so bad. Another is that owning a house is for some reason exempt, so if you moved somewhere cheap enough, you’d not only get more income from the ODSP, but also potentially save money compared to renting (if the price-to-rent ratio was low enough, which it often is in cities with $100k houses — this is not a plan to try in Ottawa or near Toronto).
You should contact Service Canada to get an estimate of your OAS, GIS, and CPP benefits at age 60 and 65, and whether you qualify for early OAS at age 60 (your MP’s office may be able to help if Service Canada is too slow). OAS and GIS can provide approx $1200/mo, so with (reduced) CPP you may be able to maintain at this level when you turn 65, in which case you only need to live for 10 years on the money you have (though it’s always good to keep some for emergencies, and not plan to run it all down by 65).
I saw that you were having trouble finding a good clean apartment in a decent area. Have you considered looking outside of the area you are currently in. I know it may be hard to move away from where you know but you may find cheaper alternatives and a place that is close to things that you need like the grocery store.
Reply to Potato and SE Book Yes, eventually I have to place clothes in my Budget spreadsheet I downloaded one for free from the Internet. I track all my spending, no matter how little the amount. Buying a house is out of the picture for obvious reasons. Also, I tried other apartments that are lower in rent then where I rent currently but was turned down on income. Yes, ODSP will be there when I drain all my funds. Yes, I will get OAS, reduced CPP when it turns to retirement, yes I will get the supplement. But, this all does not happen for 10 years.
Also, received some good news my landlord offered a rent reduction of 15% per month for the months of October to March.
The cheapest place so far I have found is a basement. Not in the best condition. $620.00 per month. It is pretty damp, although yes it has a small hot plate, small fridge in one corner with a laundry tub. Washroom is old metal shower, concrete floor. If, I took it I am not sure if it would be cold in winter?
I would look at trying to rent a room instead of an apartment or a town home, that should help you out.
I have made changes in my life now and things are much, much better!!
well, on the move again searching for a place to live. been living out of suitcase since February. got rid of all my furniture before I left. in motel paying weekly $220. every 7 night
Wondering how things panned out for you Wayne – hope you have found a decent long term place. I would also advise that you get on ODSP if you can once your money runs out, and apply for a geared to income apartment asap. My mother lives in geared to income and life is actually fairly decent for her. Life will be much better and more stable for you.