Having been raised by two hard working immigrate parents, I was expected to help out with the household chores. Like most rebellious teenagers, I would have preferred going out with my friends. My complaints were answered with “someday this house will be yours.” I responded that I will be retired by then and won’t even need the money from your house. Funny thing is that I was right. Counting on an inheritance to fund your retirement can be very disastrous. (BTW, my mother still lives in the same house)
Thanks to bidding wars for real estate in Toronto and Vancouver, there are a fortunate few who will receive a sizable inheritance. Case in point, I recently got a call from a family friend of my wife’s whose deceased parents’ home sold for 50% over asking. Turns out that her inheritance was going to be much bigger than expect and she was hoping for some financial advice.
Her first question was “do I have to pay any tax on the inheritance”? In Canada, the short answer is “no”, the estate of the deceased will pay all applicable taxes and what is left over is dispersed among the heirs.
My first question to her was rather delicate. “How stable is your marriage”? A sizable inheritance, if not kept separate from family financial assets, could be included in a divorce settlement. (Using the inheritance to pay off the mortgage is a prime example)
What advice would you give to this couple in their mid-fifties who will be getting a windfall of $300,000?
Some personal information:
- Empty nesters, very stable marriage
- Own their own home, mortgage free, no other debts
- Husband works part-time, can’t find work in his field
- She has been working contract to contract for many years
- No company pensions
- Total savings of $55,000 in self-directed retirement accounts, combined unused contribution room of $80,000
- Zero dollars in tax free savings account, unused contribution room of $52,000 each
- Contributions to their retirement accounts will only generate a tax refund of 20%, tax free compounding but withdrawals are 100% taxable, required to start taking money out at age 72
- Maximum contribution to TFSA is $5,500 each per year going forward. No time restrictions on withdrawals or amounts
- The Canadian dividend tax credit has an extra 1.25% yield over interest income. (4% dividend equal to 5% of interest income)
- Foreign dividends are 100% taxable plus have an extra 15% foreign tax
Their goal is to retire in 8 to 10 years.
Recommendations assuming the couple are willing to open different investment accounts.
How much money would you allocate to each account. (for example)
(a) $80,000 in tax differed retirement account, $104,000 in tax free accounts, $112,000 in trading account
(b) $104,000 in tax free account, 196,000 in trading account
(c) $300,000 in trading account
(d) put in an alternative mix
What asset allocation percentage would you recommend (equities / fix income, or gold…)?
What diversification mix would you suggest, short or long term bonds, index funds, ETFs, dividend stocks, growth stocks….
Would you be willing to pay 1% fee to an adviser for a selection of index funds and ETFs or an additional 1.5% to buy mutual funds? (Total yearly cost of $4,500 to $9,000)
Please email me your suggestions to firstname.lastname@example.org and I will comply all the recommendations in a follow up post.