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.
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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.
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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?
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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.
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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?
