At 85, Millie is healthy and active, but she’s worried about outliving her savings. She’s a widow with two grown children. “Do I have enough income to carry me through my remaining years?” she asks in an e-mail. Millie has about $250,000 in financial assets and owns her Toronto condo outright. Her income is made up of withdrawals from her registered retirement income fund (RRIF), monthly payments from a non-indexed annuity that she bought when interest rates were higher, her defined-benefit work pension and Canada Pension Plan and Old Age Security benefits. Altogether, this adds up to about $60,445 a year before tax. “My RRIF is getting depleted because I have to take out about 9 per cent a year,” Millie writes. She wonders if she should increase her exposure to stocks to boost her returns. Her adviser assures her she is on track. She also wonders whether her tax-free savings account is properly invested. We asked Michael Cherney, a independent Toronto financial planner, to look at Millie’s situation.


“More than half of Millie’s income – her pension and government benefits – is indexed, which gives her a nice measure of income security,” Mr. Cherney says. Of the remainder, about 18.5 per cent of her income comes from a non-indexed, registered annuity and 27 per cent from her RRIF.

“She has some concern about her minimum RRIF withdrawal rate, which will be 8.51 per cent in 2019. That rate is likely to outpace her return on investments, so she is concerned that her RRIF assets will dwindle too quickly,” the planner says.

“My advice to Millie is that there is nothing to stop her from saving some of her RRIF withdrawals in her TFSA, which is precisely what she is doing,” Mr. Cherney says.

Based on his projection, Millie is on track to maintain her current level of income. This assumes an average annual inflation rate of 2.5 per cent a year and a rate of return on her investments of 4.5 per cent. “Based on those projections, she will be fine to age 100.”

Because her annuity is not indexed, “she will likely not be able to continue saving $300 a month for much longer (to her TFSA) and may eventually have to start withdrawing from it instead,” the planner says.

Millie’s safety valve is her $750,000 condo. If her health was to take a turn and she needed assistance, she could sell the condo, invest the proceeds then rent an apartment in an assisted-living place. “Another option would be a reverse mortgage,” which would allow her to stay put.

“Another safety valve is simply reducing spending,” Mr. Cherney says. Millie currently budgets about $500 a month for her car, $160 for golf and $170 for gifts. Some of this “is likely to drop off in the future.”

Looking at Millie’s investments, Mr. Cherney notes that some carry fairly high fees. Her entire RRIF is in one income fund, an “F” class mutual fund with a management expense ratio of 1.11 per cent a year, with about 41 per cent stocks and 59 per cent bonds. “While not terrible, there are better choices, including low-cost exchange-traded funds,” the planner says. In addition to the MER, Millie is paying an annual account fee – based on assets under management – of 2 per cent, which is “very high,” he adds.

Millie’s TFSA holds a dividend mutual fund (16 per cent), a savings account (16 per cent) and a guaranteed investment certificate (GIC) whose return is linked to a stock market index. “Unless there are short-term needs for cash, I don’t agree with the savings account over the long term,” Mr. Cherney says. Instead, Millie could buy a balanced ETF.

As well, there are lower-cost alternatives to the dividend fund. Again, the planner recommends a balanced ETF.

As for the index-linked GIC, “I can see this may have some appeal, and it certainly does during market downturns,” Mr. Cherney says. His quibble is that the return is tied to price changes in a portfolio of stocks – without the dividends included – with a cap on her return that works out to 3.78 per cent a year. “So while there is no downside risk, the upside is quite limited.”

Millie has a small non-registered holding of bank shares that she has built up using a dividend reinvestment plan. “That is a wonderful way to slowly build up a nice nest egg,” Mr. Cherney says.

Millie says the money in her TFSA came from the proceeds of selling her previous home. Given how well her bank stock has done, she wonders whether she should have used the sale proceeds to invest in dividend-paying shares instead.

Millie’s question reflects a common misunderstanding about TFSAs, the planner says. Millie could have bought dividend-paying shares or ETFs in her TFSA rather than what she has now, but she might have had to move her account to a discount broker, Mr. Cherney says.