Personal Finance

Almost retired parents: Savings account vs Investing

  • Last Updated:
  • Oct 27th, 2014 1:32 pm
Tags:
None
Deal Addict
May 2, 2006
1362 posts
269 upvotes

Almost retired parents: Savings account vs Investing

Hi Everyone,

Looking for some advice here. My parents (who are in their late 60's & early 70's) recently sold their rental home and after paying capital gains have about 200k sitting in their bank account. They've done a terrible job planning for retirement, so this is all the money they will have as there is no pension, RRSP's or investments to pull from. They own their current home worth approx. 500k.

One parent is still working but I predict within the next couple of years he will need to throw in the towel.

As this is all of their money I am unsure if they should put it into any sort of investments as:
A) There is always risk they could lose money and they can't afford that as well their timelines wouldn't be long term
B) I predict they will need to frequently pull from these savings to subsidize their monthly/yearly expenses, so having them tied up in investments may not be such a good idea

That being I've suggested at the very least to put the maximum into a TFSA.

Eventually I think they'll need to downsize and again use any equity from the sale of their home to live off of.

Thoughts? advice?

Thanks in advance.
18 replies
Deal Addict
Sep 19, 2009
2280 posts
991 upvotes
Toronto
Your parents did pretty well and I don't think you need to worry to much about them.

Assuming that your parents lived in Canada for more than 20 years they would probably collect $2500-$3000 per month from the government in CPP, OAS and GIS. In top of that, depending on the province the live, they should collect certain senior benefits. For Ontario there is a collection of benefits / tax credits pretty generous as it could go to about $2500. Add almost free prescription medication in top that and free health care.

This amount would insure them a comfortable / worry free retirement and you and your siblings will get a nice inheritance.

I know that for you it is a bit frustrating to see $200k plus $500k equity "not producing anything". You probably are reading to many financial blogs where financial advisers or guys like Garth Turner, are only talking about "steady 8% returns on balanced portfolios".

The last thing you want is your parents losing their life savings or their house due to some dubious investments.
Deal Addict
May 2, 2006
1362 posts
269 upvotes
andrew4321 wrote: Your parents did pretty well and I don't think you need to worry to much about them.

Assuming that your parents lived in Canada for more than 20 years they would probably collect $2500-$3000 per month from the government in CPP, OAS and GIS. In top of that, depending on the province the live, they should collect certain senior benefits. For Ontario there is a collection of benefits / tax credits pretty generous as it could go to about $2500. Add almost free prescription medication in top that and free health care.

This amount would insure them a comfortable / worry free retirement and you and your siblings will get a nice inheritance.

I know that for you it is a bit frustrating to see $200k plus $500k equity "not producing anything". You probably are reading to many financial blogs where financial advisers or guys like Garth Turner, are only talking about "steady 8% returns on balanced portfolios".

The last thing you want is your parents losing their life savings or their house due to some dubious investments.
Thank you andrew4321 for the good advice and taking the time to reply. And yes I do frequently read Garth Turners blog :D
Cheers
Deal Addict
Sep 19, 2009
2280 posts
991 upvotes
Toronto
Corinthein wrote: Thank you andrew4321 for the good advice and taking the time to reply. And yes I do frequently read Garth Turners blog :D
Cheers
Nothing wrong with that if you occasionally read him as entertainment.
Sr. Member
Mar 31, 2010
832 posts
453 upvotes
Cowgary
If they are looking to downsize or rent, they could sell that house to have a combined $700k in the bank. For retirement, you probably want at least 75% of your nest egg in HISA, short-term bonds, or 5-year laddered GICs to reach a relatively risk-free 2-3% yield. The remaining 25% could go into dividend ETFs or large-cap portfolio to offset inflation (assuming 2% inflation/yr, you will need about 25% invested in equity returning on average 8%/yr to keep up).

The 2-3% yield + CPP/OAS/GIS will probably provide enough for them to live off of indefinitely while the 25% equity portion will keep their nest egg in line with inflation.
Deal Guru
Feb 9, 2009
12381 posts
11307 upvotes
Cop and OAS alone should cover their expenses. They can also invest in preferred shares that earn around 5% that should give them another 10k in income.
Member
User avatar
Jan 24, 2014
404 posts
86 upvotes
Toronto
I would say they are in good financial shape for late 60s and early 70s. No need to worry.


p
Deal Expert
Oct 6, 2005
16872 posts
2557 upvotes
bizcoach wrote: I would say they are in good financial shape for late 60s and early 70s. No need to worry.
Maybe OP wants to ensure that some money remains for his inheritance :D
Deal Addict
User avatar
Apr 2, 2010
4018 posts
4409 upvotes
GTA
I would say only invest in near no risk investments (GICs, maybe several GICs with different ages of maturity, savings accounts, etc).

I think its good if they keep their house, if the $200k runs low after their expenses over the years then and only then look at downsizing since their home ideally will be gaining value, selling it now would mean they would loose that opportunity to gain on the house value.
Deal Addict
May 2, 2006
1362 posts
269 upvotes
coolspot wrote: Maybe OP wants to ensure that some money remains for his inheritance :D
Not at all. I want my parents to be financially secure and to enjoy the rest of their lives without stressing over making ends meet, whatever money they have been able to attain I want them to enjoy for themselves.

Thanks everyone for the feedback.

Cheers
Banned
User avatar
Jul 17, 2008
11042 posts
3878 upvotes
andrew4321 wrote: Your parents did pretty well and I don't think you need to worry to much about them.

Assuming that your parents lived in Canada for more than 20 years they would probably collect $2500-$3000 per month from the government in CPP, OAS and GIS.
Where the heck did you get that sum?

CPP is max ~1000$ after I think 40 years. The average CPP payout is ~550$
OAS is another $563.74, and I'm not sure if they qualify (they have 700k savings/equity).
GIS is $764.40, and again not sure if they are eligible

http://www.servicecanada.gc.ca/eng/serv ... tml#topic1
Member
Nov 29, 2011
203 posts
33 upvotes
[quote="Messerschmitt" post_id="20285653" time="1414286898" user_id="171171"]Where the heck did you get that sum?

CPP is max ~1000$ after I think 40 years. The average CPP payout is ~550$
OAS is another $563.74, and I'm not sure if they qualify (they have 700k savings/equity).
GIS is $764.40, and again not sure if they are eligible


And don't forget, one cannot live as cheaply as two (with 2 pensions) My sister 67( retired) found this out when her husband ( 75) died and she lost a % of his pension. A hit she was not prepared for nor the fact that losing a spouse makes the house/ yard upkeep all the more difficult and expensive if you have to hire out for every little job.
]
Deal Addict
Jan 28, 2014
3926 posts
1039 upvotes
Toronto
merry53 wrote: Agreed. My husband will be retiring mid next year. His pension is guaranteed for 5 years whether he is living or not. If he should die at 4 years and 11 months, I would receive 1 month of the full pension - and then it would be reduced to 60% of the amount. Should he die at 5 years and 1 month then in the second month following his death I would receive 60%. Should he outlive me then he would receive the full amount for his lifetime. Note that he will be receiving a lower pension amount because he chose the option to have me continue to receive his pension for my lifetime albeit at the lower amount. The companies I worked for did not provide pensions.

Then there would be the loss of his CPP. My CPP will be about $400 a month less than his. I am not taking it until I turn 65 because I did not want the hit. He is already 65.

Unfortunately there are fixed costs that cannot be reduced. Food, clothing, personal grooming costs yes - but not as mentioned by merry53 the costs of running the house. And selling is not always an option depending on the property and timing of sale.

We are running a few scenarios - one obviously being my downgrade to 60%. He will have limited medical benefits - but with an annual deductible of $1,200 - and we don't spend nearly that amount. The ODB does not pay 100% of his 2 prescriptions - he pays about $25.00 per prescription per month. I have 2 prescriptions and the ODB will not pay anything towards the cost.

But I will lose all of his medical/dental 12 months post his death.

Obviously, I will have to die first. In the scheme of things he would only lose my CPP. People in both of our families tend to live a long time. Frankly longer that I would care for (no children - but having children does not mean they will be around to help out). All I ask is that one of us outlives the dog.
Member
Nov 29, 2011
203 posts
33 upvotes
Taxes, a big house to heat and repair. a pool, weddings ( kids marrying later these days so parents older too, ) and a chronic illness for the last 10 years drained a lot of my sisters savings. The OP would be very wise to talk to other retired seniors and see how they managed because investments mean zero if they outstrip the specific needs of your parents. Sadly,there was a general reluctance to talk about money ( they NEVER talked finances to children or family) so no one to advise them even if they had asked for it. You are a good kid to be trying to help your folks.
Deal Addict
Oct 29, 2010
4475 posts
811 upvotes
I would put a large part of the money in some good mutual funds (like Mawer) or some solid ETF's. Chance of taking a hit on your investment is like rolling a dice and hoping it doesn't land on 6. As long as it lands on 1-5 you're fine, otherwise it's a problem. So overall speaking it should be fine. If it's a problem, then the question becomes, how big of a problem? If you check back, it can be bad but usually it's not a game breaker that you lose a large chunk of it. It isn't often that everything drops more than 10% and then again, if you have solid investments they will usually minimize the damage.
Deal Addict
Sep 19, 2009
2280 posts
991 upvotes
Toronto
Messerschmitt wrote: Where the heck did you get that sum?

CPP is max ~1000$ after I think 40 years. The average CPP payout is ~550$
OAS is another $563.74, and I'm not sure if they qualify (they have 700k savings/equity).
GIS is $764.40, and again not sure if they are eligible

http://www.servicecanada.gc.ca/eng/serv ... tml#topic1
CPP $1,038.33
OAS $563.74
Add them and multiply by two.
GIS will compensate part of the shortfall.

The average CPP payment is $512.64 a month and the average OAS payment is $508. GIS is $206.59 for this income.
Messerschmitt wrote: OAS is another $563.74, and I'm not sure if they qualify (they have 700k savings/equity).
Really? The equity in your house diminishes OAS payments? Any credible reference for that?
Banned
User avatar
Jul 17, 2008
11042 posts
3878 upvotes
andrew4321 wrote:
Really? The equity in your house diminishes OAS payments? Any credible reference for that?
Don't know, there was a thread called "ask me anything about CPP" and people were posting questions about OAS.

OAS is a supplement, so is GIS. So I am quite sure if your parents have savings/equity they would not qualify for it. They would only have what they have now, (700k assets) and CPP which is a maximum of 1038$. Will they get the maximum 1038$? I doubt that. I think there is a calculator or they can call the govnt, give them their information and they will let them know.

If they both get 2000$ from the government once they retire I would call themselves very lucky. Pretty sure they must have worked 40 years, and have contributed the maximum ~1200$ something a year to qualify for the maximum CPP
Deal Addict
Jan 28, 2014
3926 posts
1039 upvotes
Toronto
CPP is based on earnings and the number of years worked during which a person contributed to CPP. If a husband and wife are both collecting CPP and one dies, the surviving person will lose the CPP pension being paid to the deceased. There is a process where if one person is receiving a lower $ amount that the payments can be equalized. It is not run the same way as social security is in the U.S.

OAS is based on income - equity in a house does not apply. So basically someone could be living in a home worth $10 million and not have any income - or income below the cap and that person would receive the OAS. GIS works the same way.

OAS is calculated based on the period July through June. Service Canada is advised by the CRA if a person is subject to clawbacks etc.

I asked. Or you can read all about it on Service Canada's website. There are people with major assets who are collecting all 3 pensions.

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)