So right now she thinks she needs about $2000 a month to survive.
Her Expenses per month
- $950 a month rent with utilities included- She is renting an apartment close to us which is alright, nothing fancy but not run down, About 750 sqft in a nice area but decent building. I told her it would be best to get a cheaper place but not much available under that. She could get a 2 bedroom place for $1300 and get a room mate to split the costs but she hates living with others.
- $400 Bills - Medical, Car Insurance, Gas, Phone, Cable , Internet, Gym. She could trim a few things down here by a bit but mostly they are pretty fixed costs
- $400 Food - I am just estimating here. $100 a week. This would include eating out twice a week and a couple of coffees. This number could be as low as $300 I think as she doesn't seem to shop or eat much.
- $250 Entertainment, gifts and clothes. This number will fluctuate as certain holidays spending will be increased. She does not go out and spend much money but she likes to shop for her grandkids. She is pretty frugal in these regards. I expect spending will fall in the range of $150 towards $350 a month so $250 is a safe bet overall
- Overall its not bad but I feel she could trim that number down especially if she lived in cheaper housing which is a stubborn topic for her. The rest of her costs I think she could trim $100-200 from pretty easily taking her down to about 1800-1900. Also she helps babysit for us one night a week for date night. With that I pay some of her bills for her. So I cover her about 100-200$ a month effectively bringing her total down towards the 1800-1900 level
Grandma Olga age 60 Income right now
$700 a month- municipal pension
$170 a month - from interest of $205,000 sitting in a high interest savings account at 1%
When she reaches 65
500$ municipal pension which drops from 700
513$ fedreal goverment pension
$500 old age security
1513 Total a month
So whats a woman to do?
Have her $205,000 sit in cash deposit gics in the bank earning what max 2.5%? That would net her $5125 a year or about 427 a month. Certainly this would be the safest route but her nest egg will slowly evaporate as she would require more capital to get by till she reaches 65. In theory she would lose close to $60,000 in that 5 year term leading up to 65. That a big chunk!
She said she is willing to take on more risk as she knows fixed cash deposit gic,s will not yield her the return she needs.
That is where I come in. First off I find this a very daunting task. I take it very seriously and even more serious than my finances. I have sent her to two financial advisers and they did not come up with very good plans for her. One of course was pushing their company funds on her with high fees and the other one she did not trust him as he came across a salesman. I am worried if I send her to a fee based adviser that their 1% a year asset managing would gobble up her returns and she would have to take on unnecessary risk to offset the fee.
I am no financial planner or wizard by any means which I made clear to her and yet she has faith in me. I am thinking of a plan that can get her dividend returns of a bout 4-5% a year without depreciated her nest egg. At 4.5% annual return that would provid her with $8775 return a year or $731 monthly if we were to invest 195k with about 10k in cash reserves. That way she would have about $731 from dividends and $700 from her pension for a total of $1400 a month and then she can draw from her 10k cash cushion to make up the difference in her monthly expenses. I like this method cause it will force her to conserve her cash cushion and hopefully she will cut down her monthly expenses in those regards. If she were to use the full cash cushion of $10,000 to cover the extra $600 in monthly expenses she would deplete the total in 16 months. At that point she would have to start pulling equity out of her holdings.
Portfolio Holdings Plan
So I have been racking my brain trying to come up with a safe plan for her where she can receive monthly income with a rate above 4% and enjoy some mild growth. Initially I picked out a long list of stocks to achieve this plan but over the course of a couple of weeks I am thinking of going towards the ETF route instead. This ETF plan affords me with some breathing room in management of the portfolio and it fits my goals of asset allocation.
- ETFs benefits
* Allows me to capture much more of the markets without making an extreme number of individual trades so its cost effective
* It allows me some breathing room as I dont have to personally have to manage its holdings
* It allows me to capture American and International stocks hedged to Canadian dollars so we don't have to worry about currency converting transactions
* It allows us more access to CAN and US preferred stock holdings with higher dividend payouts
* Allows us access to great laddered bond funds diversifying single held bond risk
* Low management fees, most of the ETFs I am looking at have their fees at .5% or lower
With that said I have chosen an ETF asset allocation mix of
- CBO - iShares 1-5 Year Laddered Corporate Bond Index ETF
- XHB - iShares Canadian HYBrid Corporate Bond Index ETF
23% in Preferred Stock- A mix of US and Canada preferred stock with yields above 5%
-XPF - iShares S&P/TSX North American Preferred Stock Index ETF (CAD-Hedged)
36% in Stocks - A mix of Canadian and US stocks with a small international section with yields above 2.5% for US and International and 3.5% for Canadian.
-XHD - iShares U.S. High Dividend Equity Index ETF (CAD-Hedged)
-XEI - iShares S&P/TSX Equity Income Index ETF-CYH - iShares Global Monthly Dividend Index ETF (CAD-Hedged)
16% in Reits - I am thinking good large Canadian Reits with good a good history of yield payouts over 5%. Since Canadian ETF Reits are not paying out over 5% I will skip ETF,s and get 5-6 individual Reit stocks.
- REI.UN - RioCanREIT
- HR.UN - H&R REIT
- DRG.UN - Dream Global REIT
- AX.UN - Artis REIT
- CWT.UN - Calloway Reit
This allocation is not set in stone as I am constantly tinkering with it. With this plan I think it will generate solid predictable income as all the ETF,s and Reits I am looking at pay monthly. The funds I have currently selected payout avg 4.4% yield monthly. I do expect some mild capital growth from the Stock ETF,s
Right now I have chosen Ishare Etf,s as they have met most of my criteria however I am not partial to them. I have been investigating offerings from Vangaurd, BMO and TD ETF,s but so far I tend to like iShares in my early findings due to their yields. When I find a certain different company fund to replace any of my initial findings I will do so.
Once the plan goes forward I am thinking of tracking her progress and updates on this blog as well. What you guys think?
Taking on this challenge of managing someone else,s portfolio I find it a good learning experience as I had to figure out their goals, estimate their expenses and construct a plan for a long term sustainability. Personally I would stay away from ETF,s but they do have some great advantages. Take for example bonds as it is not easy to assemble a good yielding corporate ladder that has open offerings. Also Preferred shares are not easy to obtain as they are generally reserved for institutional buyers. Not to mention International stock offerings as many good quality dividend stocks are not available on the US and Canadian markets and you dont have to worry about currency conversions. I may even look into acquiring a couple international or emerging markets ETF,s to bolster my international holdings in the future.
As my parents health dwindle I will eventually have to handle their estate. Right now they have no will or plan which I have been strongly urging them to do over the last few years. They have a large unprotected net worth in the multiple millions range and its quite concerning. They want to leave everything to me and their grandkids but they cannot agree with each other on many of the key points. I am looking to try and get them to start a trust fund where I can be the executor. I would choose the investments and make sure their wishes are put into action but its a slow process with them as they are putting up great resistance. I personally don't expect anything from them from their will but I don't want their estate being squandered from predator unscrupulous extended family either. This of course could be many years down the road but it is time I start preparing for it.
Also my blog has officially reached a month old. In that time I have developed it from scratch and built up a few regular readers while amassing over 7000 page views. I don't know if that is good or not but I am happy with it. I never knew how much time goes into writing and maintaining a blog and I have a new found respect for bloggers for the time they dedicate. I anticipate updating my net worth this Friday or Saturday as I think mid month tally's are a good time as I will reserve end of months for monthly review and dividend totals.
So what you guys think of the Plan Olga?
Any good Canadian dollar ETF fund recommendations?
Will my mother in law survive?
Will she be able to sustain her nest egg with this plan?
Will she ever find a boyfriend?
Any suggestions on asset allocation for Olga?