Tim emailed me regarding his father in law’s financial situation.  Basically, his father in law is single, no retirement savings, but a ton of equity in real estate which he’s going to liquidate soon to fund his retirement.  Tim realizes that I’m not a financial advisor, but he wanted my opinion anyways.  Here is more about the situation below, perhaps you can chime in with your opinion.

My Father-in-law (Dave) is currently finalizing a sale of an investment property that has appreciated to from his $600k purchase price to a selling now of approximately $1.2 million. The property is fully owned with no mortgage.  The appreciation will be subjected to capital gains tax as this is not a primary dwelling.

My Father-in-law just turned 60 years old and has no pension and limited cash savings other then this ‘paid-for’ land asset.  He only has experience investing in real estate and now that he is ‘retired’ with no fixed income, his priorities have also changed.

  • Debt: None
  • Dependent Children:  None, two adult children.
  • Retirement Status: Has been retired for several years, funded by the sale of another property, but that money is running out – just turned 60
  • Marital Status: Divorced
  • Employment: He was a business owner – did not have salary, thus no CPP.
  • Portfolio: Zero portfolio holdings/RRSP’s or savings of any kind.
  • Other Income: None.

House hold expenses:

  • Property taxes $4500/yr
  • phone/internet/tv $140/mth ($1,680/yr)
  • House/car insurance $250/mth ($3,000/yr)
  • Utilities Gas/H2O/Hydro $265/mth ($3,180/yr)
  • Food $400/mth ($4,800/yr)
  • Misc spending $200/mth  ($2,400/yr)
  • Gas $200/mth ($2,400/yr)
  • Travel $6,000/yr
  • Home Maintenance $3,000/yr
  • Medical Insurance: $2,000/yr
  • Unexpected Expenses: $3,000/yr

Total: $31,960

There could be rental income later on in retirement but for now there is nothing. He does have other land assets – primary dwelling which he does not yet want to sell -it is fully owned. Worth $500k or so. No other plans for future employment. Would like spending cash for travel but MOST IMPORTANTLY wants to have the money invested in a way that he cannot easily access the capital to spend on frivolous items – just have a regular income off the principal investment to play with and live off.

None of this money to be left to the children – so every last penny of this million dollars will be spent. It would likely be preferable to the have current primary residence (approx $500k) as the last remaining asset at death for the children if possible.

Okay – here’s the question, Let’s say you wake up tomorrow morning, sign into your online savings account and BAM! $1 million dollars  – your journey is over – you retire, and now with no fixed income where do you invest your wad of cash to keep it working for you long into your golden years (& beyond?)

The Nest Egg

With $0 in retirement savings, the father in law (Dave) will have to depend on the sale of the investment property to pay for his regular expenses.  With the sale price of $1.2 million net of all costs and $600k being capital gains, there will be substantial capital gains tax to be paid.  According to Tom, the father in law had very little or no income on the year of the sale.

With around $600k capital gains ($300k added to income), Dave will owe approximately $120k income tax (assume Ontario).  Normally in this situation, I would suggest a large RRSP contribution, however apparently, Dave hasn’t drawn a salary (only dividends) for most of his working years thus most likely very little RRSP contribution room is available.

Thus, the proceeds from the sale of his property would be approximately $1.08 million, but we’ll call it an even million in case there are other fees from selling that we aren’t aware of.  With a million dollars in cash, how can a 60 year old ensure that his money will cover his expenses and last for the rest of his life?

Income Generation

According to Sherry Cooper, BMO’s chief economist and author of The New Retirement, a portfolio can survive a 4.2% annual withdrawal rate (increasing annually for inflation) for 30 years with a high certainty of success.  This withdrawal rule was popularized by William Bengen’s research, a MIT grad and CFP, which also suggests that a 50/50 equity bond asset allocation be kept, even during retirement.

Assuming that Dave will live until 90, 4.2% withdrawal from the $1 million in cash will result in the cash flow of $42,000 per year adjusted for inflation annually.  As the portfolio will be non registered, if we assume that 50% of the income will be from dividends (Canadian sources) and 50% from bonds with an average portfolio yield of 4.0%, he will owe approximately $2,200 income tax.

This results in an after tax income of approximately $40,000. As this more than enough to cover all of Dave’s expenses of $32,000 / year,  it will likely result in leaving a nest egg behind for the children which is great news for Tim. :)

In addition to this, when Dave turns 65, he will qualify for old age security.  Assuming that Dave meets the qualifications for maximum OAS, it will mean additional cash flow of $6,200/year in 2009 dollars.  When that time comes, Dave will only be withdrawing 2.78% (including income tax) from his portfolio to meet annual expenses.

Next up is the portfolio for the soon to be retired Dave.  As this article is a bit on the longer side, I decided to split it up into 2 parts.  Stay tuned!

As I mentioned above, I am not a financial advisor. The above is not meant as recommendations but merely for informational purposes only.


  1. Alexandra on May 20, 2009 at 8:43 am

    FT: the withdrawal rate you are using assumes the dad dies with the $1M intact, when his son says his goal is to “die broke.” He can draw down more than 4.2% per year…the question is how much more?

    I suggest you run some scenarios which assume different levels of drawdown (and different rates of portfolio return) in order to take a look at this more closely.

    You will also want to account for varying portfolio rates of return over time, either by using a Monte Carlo tool (this is not my favourite way to do this), or by addressing sequence of returns risk in another way.

  2. Chris L on May 20, 2009 at 9:07 am

    Put 1 mil down on an apartment building and hire a company to run it. He will get monthly checks and he can spend them. You can get units for around $65k each and they’ll give you about $750 in rent/unit. That’s about 15 units x $750 = $11,250/month. You’ll pay a management company about 5% of gross rents and then there is taxes and maintenance, etc to be paid by the owner. He wont burn through even close to half of that and he can preserve his capital wealth to be passed on (please don’t squander this). As a fee, you can will the apartment building to me, I will more than appreciate it.

    He can also lever his money up and put only 30% down (by buying a bigger building with more units). He’ll make more money since apartments yield from 7-9% and you can borrow at 5% or less, thus you’ll make money on the difference.

    Think outside the box, it’s how the rich stay rich more than one generation.

  3. BIGINTOBONDAGE on May 20, 2009 at 9:19 am

    If you look at the real returns (historically and currently) offered by the stock market and a properly constructed (mixed corporate, provincial, real return), laddered and diversified bond portfolio, it is much easier to achieve a higher return than 4.2% without risking 50% of his capital in the stock market.

    Investing 80% or 90% in high quality and high value bonds will allow only portions of his capital to be returned at regular intervals (making it more difficult to spend it on frivolous items, but also allowing him to withdrawl more than he’s earning if he wants to eventually spend it all (it should be quite hard to spend all that money at his age- unless he loves gambling, drugs and women).

    any extra income tax from the conservative approach can be offset, seeking out higher yield and more risk in the smaller stock allocation (the dividends from the stock market, if appropriately invested, should cover all the income tax of the fixed income portfolio) – because he has no job, this man’s marginal tax rate will always be low.

  4. FrugalTrader on May 20, 2009 at 9:24 am

    Alexandra, I thought the same thing until I read “The New Retirement”. I believe they stated in that book that the 4.2% withdrawal rule adjusting to inflation every year will last approximately 30 years. I will have to do some more research into William Bengens rule.

  5. Alexandra on May 20, 2009 at 9:41 am

    FT – right. I should avoid responding to posts before I have at least one cup of coffee in me. Adjusting for inflation will deplete the capital.

    I think I got stuck because the idea of 4% as the “safe withdrawal rate” often does not take into account inflation – 4% with no incursions on capital is the maxim we’ve been hearing for years; when 4% with inflation-adjusting will deplete capital.

    Huh. One cup of coffee in and I’m not sure I’m much more articulate!

    All that said, what is the assumed rate of return in the 4.2% inflation-adjusting model? I guess I should read more on Bengen or Cooper’s book!

  6. archanfel on May 20, 2009 at 9:48 am

    I don’t think it’s a good idea to buy an apartment building because there are too many variables. You may need to do major repairs, the tenants may not pay, you might have a a fire, you might have a grow op, the government could increase taxes, the government could control rent, etc… BC’s leaky condos is a great example. More importantly, he simply do not need the risks given his low monthly expenses.

    Bond is a good way to go, but I would be wary of any fixed income investment that pays more than 5%. The ABCP was marketed to be safer than GIC, and we all know how that went.

    He should definitely utilize the TFSA to avoid not only taxes, but OAS/GIS clawback (it could be up to 75% if I remembered correctly from one of FT’s post).

    I suspect he can play some tricks with his daughter if they are on good terms.

  7. DavidV on May 20, 2009 at 9:54 am

    Ok, can we do a case study for me? I’m 30 without the real estate! I’d love to retire! :-)

    On a serious note, it’s nice to read about case studies and see the options of people.

  8. Chris L on May 20, 2009 at 10:18 am

    Don’t dismiss apartment buildings. They’ve been making steady predictable cashflows for as long as we’ve had organized existence. Just like any other investment, you have to do your due diligence. Other ideas have WAY MORE variables (and are subject by people and companies that steal and make mistakes) than does a building that you can see and touch and control 100% by your own merit and decisions. Don’t be fooled, be informed.

  9. Four Pillars on May 20, 2009 at 10:53 am

    Alexandra – the “4% rule” has always assumed inflation adjustment but I think it sometimes gets shortened to just “4% per year” which is more conservatie.

    Four Pillars of Investing covers the 4% rules indepth and is a pretty good read.

    One clarification – FT, you said that the portfolio will last about 30 years with a 4.2% withdrawal (+ inflation). This isn’t really wrong but it’s more about probabilities with different time frames based on historical numbers.

    Ie the odds of that portfolio lasting 30 years might be something like 85%, the odds of it lasting 20 years might be 95%, the odds for 50 years might be 70% etc.

    Those models are great for estimations but your reality could be quite different which is why it’s important to be flexible in retirement. If there is a strong bull market for the first part of your retirement then you could probably do a 5 or 6% withdrawal rate. On the other hand if things don’t go your way then the 4.2% withdrawal might not last 20 years.

    One last point – these models assume no flexibility in withdrawals. In reality – if your portfolio is getting too low you will likely cut back on your spending (if you can) so your odds of actually running out of money are usually much less than the models indicate.

  10. Daniel Morel on May 20, 2009 at 11:31 am

    Assuming that the children are well off and we wants to spend it all and leave nothing there is an extra 500k in the house’s equity that he could draw on. He could borrow as much as he could against the house and invest it.

  11. Genius Boy on May 20, 2009 at 11:59 am

    Chris: I’d love for you to go a little bit more into what you’d do with a multiple-resident tenant buildings, and argue the pros/cons for each.

    I’ve tended to go commercial, because of the longer leases, and less hassles involved.

    In this scenario, he doesn’t have to take risks given the assumptions above, so I think a high yield bonds is the route I’d go. He just needs to make as much as inflation, and he’ll do fine. The question is where are the risks to a sudden cash loss, and what should he do to cover them? Does he need to insurance against this or is his primary residence a sufficient buffer, if problems arise.

    Interesting post …

  12. Finance Matters on May 20, 2009 at 12:16 pm

    I would use an approach that uses a variety of financial products to give him diversification, minimize risk and also “limit” access to some of the money. A combination of the following might work, you would have to play with the proportions: use a GIC ladder (5year), life annuity, variable annuity (income plus etc), dividend paying stock portfolio or mutual fund. Obviously the life annuity and variable annuity would provide a set income base with full guarantees. The GIC ladder would be guaranteed to some extent, laddering would soften the blow of rate changes. The equity portion would provide income and growth and you could limit the downside as it is only a portion of the total portfolio.

  13. DAvid on May 20, 2009 at 12:18 pm

    I think a large part of the answer could be hidden in this comment:
    Retirement Status: Has been retired for several years, funded by the sale of another property, but that money is running out – just turned 60

    Learning the value of this sale, and the expenditures from it could provide a baseline from which to determine future spending. Also, the comment about being worried about “frivolous spending” causes me to wonder if the budget quoted is accurate.


  14. cannon_fodder on May 20, 2009 at 12:48 pm

    I would invest it in blue chip dividend yielding stocks and it shouldn’t be too hard to put together a portfolio that yields more than 4%. In a couple (or few) years when the interest rates start climbing, that might be an opportunity to look at annuities. I’ve heard that annuities are not a good idea right now because of the historically low interest rates.

    Any excess income can be put into a TFSA to help when he gets to 65 because he might be subject to OAS clawback.

    I’m assuming that he can’t simply switch primary residences for a period of, say, 6 months and then sell the larger valued home to avoid capital gains tax, can he?

  15. shane nixon on May 20, 2009 at 1:22 pm

    Seems like there are alot of good ideas above. I have to say though that i really don’t believe an annuity would help in this instance as his principal will dissapear when he does. (even with a guaranteed term on the annuity)

    By the way, i do like the idea of making a large one time RRSP contribution if there is any room AND setting up a TFSA though being limited to $5000 when we’re talking $1 million it won’t make a noticable difference….though every bit helps right?

    As a CFP i’ll throw in my “2 cents” in hopes that it helps.

    In order to address the income need (~$32,000 net after tax/year) he’ll need a before tax income of about $42,000 which will leave him with $34,650 net after tax/year…this will give him the little extra spending money he needs for his trips too)

    I would suggest a program like a CI sunwise elite plus program where they guarantee an income of 5% per year for life (at age 65) or for 20 years (pre age 65) there by paying him $50,000/year. Obviously the full $1 million doesn’t need to be used for this to achieve an income of $42,000.

    What are the benefits of this program?
    1. Guaranteed income for 20 years or life depending on age.
    2. Tax preferred income (ie. most of it is considered return of capital and thus not fully taxable like interest from GIC’s or BONDS)
    3. Still has access to the capital if he needs it.
    4. Takes the worry out of HOW to invest the money knowing you’re getting a stable income that’s tax preferred for life. You’re better off to invest in all equity in hopes of getting resets AND knowing that it won’t affect your income.
    5. Principal (minus withdrawls) is guaranteed after a certain time period (it’s a seg fund program after all)
    6. If the investments perform well there is potential for “RESETS” after every 3 year period which “locks in” any gains and resets the 5% income based on that new amount. (ie. if the $1 million grows to 1.4 million, it’s locked in and his income of 5% is calculated based on that which basically gives him a raise for life. With the markets bottoming right now there is a very good chance that even a balanced portfolio (50/50 equity/fixed income) will be up substantially in the next 3 or 6 year time periods.
    7. Even though he wants to “spend every dime” he might not. IF he doesn’t, being that this is an insurance/seg fund product, anything remaining will go directly to his named beneficiaries around the estate thus saving them probate fees etc also.

    As with any seg fund product though there are downsides and the obvious one is higher fees. (3-4% annual MER’s)

    That said, i think that something like this would be perfect for this man as it achieves his income goals tax efficiently, allows him access to the money if he needs it BUT can be set up to make it more difficult for him to get it also. It also solves some potential estate tax problems down the road.

    Hope that helps and let me know if anyone has questions.

    Shane Nixon CFP

  16. Jack on May 20, 2009 at 1:37 pm

    I think someone already said it (and it links back to a post I made before about how the last cheque I ever write is going to bounce), but if he’s got 500k wrapped up in his primary residence then why not spend that too!? He can borrow it in a HELOC and only pay the interest and then the bank can have the house when he dies. He probably shouldn’t do it now, but in 15 years or so if he’s feeling a financial pinch then he’ll have 500k + anymore capital appreciation to date to draw on. I don’t think he has anything to worry about financially.

    I do think though that if he DOES have any RRSP room he should use it when the house sells. He’ll also have $5000 to contribute to a TFSA (plus more in subsequent years). As long as he doesn’t do anything stupid (unless he, like me, puts a “stupid money” component in his budget), this guy is laughing all the way to the grave.

  17. FrugalTrader on May 20, 2009 at 1:41 pm

    Shane, great comment. One thing though, his money is non-registered, so he will not owe as much tax as you expect.

  18. shane nixon on May 20, 2009 at 1:48 pm

    Hi Frugal Trader,

    You’re right, as it is all non RRSP money there will be very little if any taxes payable when he passes (capital gains) but there are still probate fees by having about $1 million left in your estate. In ontario probate fees are $250 + $15/$1000 over $50,000 which would just be a pain in the butt. This insurance program allows you to name beneficiaries and eliminate these fees unlike putting the money into other mutual funds/GIC’s/Bonds etc where they would be subject to this.


  19. MM on May 20, 2009 at 2:53 pm

    Keep 5 years of required income in cash/cash equivalents. Keep 5 years or required income (today’s dollars) in laddered bonds and the remaining money in blue chip, dividend paying stocks. Rebalance to maintain allocation.

    If he is selling his investment real estate, he likely doesn’t want to own an apartment building, and since he has no experience investing in equities, he would likely be uncomfortable with anything riskier than blue-chip dividend stocks.

  20. FrugalTrader on May 20, 2009 at 3:08 pm


    As well, with your seg fund strategy, does the 5% withdrawal adjust for inflation every year? And what exactly happens with to the account when the account holder passes away?

  21. Finance Matters on May 20, 2009 at 3:37 pm

    Frugal Trader, you could set up a number of the variable annuities, one large one and a few smaller ones. The advantage is the GMWB will increase 5% each year you don’t take money out. Leave the smaller ones untouched for a while and when he need as raise because of inflation he could start withdrawing from one, then another if needed down the road etc.

    When he passes the amount remaining based on the guaranteed death benefit would go to the beneficiary tax free because it’s an insurance contract.

  22. Dividend Growth Investor on May 20, 2009 at 5:02 pm

    I agree that a nice way to generate income is to have a 50/50 stock/bond allocation. If he invests in dividend growth stocks, he would generate an inflation proof source of income. With the fixed income portion of his portfolio he is immuned against deflation. If he allocated some TIPs to his portfolio ( up to 20% of the total) he would also do ok in a stagflationary environment.

  23. shane nixon on May 20, 2009 at 5:14 pm

    Hi Frugal,

    “Finance Matters” just answered that so thanks “Finance”, good idea.

  24. cannon_fodder on May 20, 2009 at 6:21 pm

    Shane/Finance Matters,

    There are many sites which scour the market and post mortgage rates for various terms at many different FI’s… is there an equivalent site that posts annuity income based on amount purchased?

  25. Bernie on May 20, 2009 at 9:18 pm

    I suggest he invest the whole amount in blue chip stock that have a solid history of increasing their dividends. The increasing dividends would take care of inflation. As stock is value priced right now he could get a very good dividend yield for his money. His dividend income would easily surpass his expenses. The 4% rule wouldn’t apply here. He would be getting far more than 4% in income and wouldn’t have to liquidate any stock. His taxation would also be more favorable with dividend income.

  26. Nathan on May 21, 2009 at 12:24 am


    Almost all mutual fund companies allow you to name beneficiaries on your accounts so in most cases probate can be avoided. Having gone through the estate process recently we were able to take close to 750K out of various accounts without any probate. If you plan correctly and ensure that the Mutual Fund companies/Brokerages allow you to name benificeries there should be no reason to go through probate. A notarized copy of the Will and/or Letters of Indemnity guaranteed by your bank will satisfy most institutions these days.

  27. shane on May 21, 2009 at 1:25 am

    Hi Cannon_fodder,

    To be honest i don’t know of any sites where you can get an instant annuity quote because they’re dependent on prevailing interest rates. As an advisor i usually shop them out to my insurance companies who take a day to get back to me with numbers. If you find a site though, let us all know! lol

    First of all, sorry to hear that you had to go through the estate process and sorry for your loss. With most RRSP accounts people wil name beneficiaries thus by-passing the estate true. It’s when somebody either doesn’t name a beneficiary OR in the case of a non registered account (and not jointly held) where these accounts will typically go through the probate process and get caught up in fees etc. There’s definately ways around it luckily you found them because if you did the math it could have cost you and your family about $12,000 in probate fees. Well done on that!

  28. Ms Save Money on May 21, 2009 at 3:40 am


    I don’t know about investing in any stocks these days – let alone blue chip stocks. Because GM was considered blue chip until they went under.

  29. cannon_fodder on May 21, 2009 at 10:10 am


    If an annuity quote is ONLY dependent on prevailing interest rates, then why can a bank post their rates for savings/chequing accounts, term deposits, loans and mortgages and insurance companies (which also offer many of the above) can’t post annuity quotes? Do they ever factor in the age/health of a person?

    I’m curious as to what other information you need to provide to get a quote.

  30. shane on May 21, 2009 at 10:46 am

    Cannon fodder,
    My apologies and yes you’re right. You do need basic information on the person like: male/female, date of birth, province of residence. Also, you need to know the type of annuity you want (registered/non/prescribed etc), when you want it to start (date), do you want a guarantee period (ie. 10 years), frequency of payments (ie. monthly etc). There’s alot of little details which is why it might be tricky to find a place online (of course i haven’t done a search) that does them instantly. We usually send away to insurance companies to do it. Here’s a link to an example quote that someone did… http://www.lifeannuities.com/samples.html


  31. Bernie on May 21, 2009 at 8:32 pm

    Ms Save Money

    You’re right about GM, although I’m not sure if they ever were a dividend aristocrat. Regardless, I never considered them a dividend grower. The key is diversification and due diligence with the fundamentals. There are still a lot of great dividend growers out there. I’m not giving up on them yet.

  32. Lisa on May 25, 2009 at 5:50 pm

    Just a quick thought, can your father in law move into the house 1.2 million dollar house for 1 year and sell his 500 k home first? The 1.2 million dollar home will then be his primary residence saving him thousands of dollars in taxes.

  33. Nathalie on May 25, 2009 at 10:18 pm

    capital gains would still apply for the time when he had not lived in the investment property. (e.g. if he owned it for 25 years as investment, then lived in it for 2 years, he would have to pay capital gains for the first 25 years pretending it sold at year 25, the last two years would be capital gain tax exempt.)

    I agree with dividend investing or purchasing a large apartment building and hiring a property manager. This is much smarter then dying broke.. what a stupid concept. With the right planning you can pass it on to your children without touching the principle.

    I can’t believe all the sheep investing in sinking funds and RRSP’s it’s so stupid. Most people don’t even realize that the government controls your retirement if you invest in their programs… They make the rules, they tell you when/how much to withdraw, they tax you to death. You can’t even borrow from your own RRSP’s to invest in something else without penalty/having to pay it all back.. why even give them anything to begin with? The paltry tax savings they dangle in front of you can easily be won by investing in something with much higher returns. We looked for the right rental property for 1.5 years and have a 30% R.O.I. from it right now (not looking at capital gains, that’s the cash flow after expenses). It takes time to find it but it happens.

  34. Grand Admiral Jawn on May 25, 2009 at 11:11 pm

    These RRSP and sinking retirement funds things are a bad idea. It’s based on the assumption that you know when you’ll die. If you save enough money to live up to 85 years then what do you do after that? Go back to work? Some people have lived up to 120+ years. The gov will “graciously” give you a tax break now but will tax you in the future (it will be income taxed). This is great but only if you assume that taxes in the future are the same or lower than it is now. Now, look at the historical record of taxes. They only seem to go one way. UP!

    To Dave:
    Keep your property. Fight the urge to dabble in those other investments. It always seems greener on the other side.

  35. Alan on May 26, 2009 at 7:38 pm

    RE: Your idea of moving out and selling the Principle Residence to avoid Capital Gains tax can be extended to include ‘…then living in the other house and build up “Principle Residence” status for a few years”.
    This is what I have done recently myself, I plan to be in my ‘new’ house for another 10 years, effectively reducing the capital gains payable since ownership of 16 years.
    Plus, it’s nice and relaxing to be out of the Land-lording business!

  36. fern on May 29, 2009 at 1:05 pm

    Could you do a case study in me please please please? I have all my numbers at the ready + my goal. the question would be, could I retire before age 60?

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