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My 79-year-old mother has received a monetary gift. What’s the best way for her to use it to supplement her income?
My 79-year-old mother received a gift of $70,000. She currently collects OAS and GIS but not CPP.
I’d like her to do something with the $70,000 to generate interest or income—or even to have a plan to draw it down. And whatever option is chosen needs to be risk-free, as she is very risk-averse.
The interest on a GIC is negligible. Is an annuity a better option? Or is the $70,000 simply not enough to do anything with?
Although this question may sound simple, it provides a great example of how complex retirement income planning can be. It sounds as though your goal is to find a solution that provides income to supplement your mother’s standard of living while she is alive, versus creating a financial legacy upon her passing.
FP Canada projections tell us that, at 79, a Canadian woman in good health has about a 50% chance of living to age 92, but a 10% chance of living eight more years beyond that, to age 100.
As a starting point to anchor our calculations, let’s say your mother wanted to withdraw $450 per month from her $70,000. Ignoring any interest she might earn, that would provide 155.6 months (13 years) of income, to her age 92—that is, to average life expectancy.
In today’s ultra-low interest-rate environment, the GIC is a solution that’s intended to preserve capital, versus generate income.
If your mother put the $70,000 in a one-year GIC, with a rate of 1.5%, she might earn about $1,050 (equal to $87.50 per month), and the $70,000 would remain untouched. She could get a higher rate—as much as 1.8%—if she bought a five-year GIC, but she’d need to wait until the end of the five years to get the $6,531 she earned over the GIC term (equal to $108.85 per month). You can check current GIC rates here. Keep in mind that if she’s able to put the $70,000 into her TFSA, none of the interest she receives would be taxable. The yearly interest is also unlikely to keep pace with inflation.
Another option would be to use the funds to buy a prescribed annuity. A prescribed annuity is designed to generate income for your mother while she’s alive—but doesn’t preserve the capital used to generate the income. Instead, the $70,000 would be transferred to a life insurance company in exchange for monthly lifetime income.
Using the average of the top three quotes from Cannex.com generated on Feb. 21, 2021, a prescribed annuity would pay her $465 per month ($5,580 per year), only $12.34 ($148.08 per year) of which would be taxable. (The payments from prescribed annuities purchased at advanced ages are largely non-taxable, as the most of the monthly income is treated as “return of capital” for tax purposes.)
You can see that the annuity option pays an amount that’s roughly similar to withdrawing $450 per month from the $70,000 lump sum. This isn’t surprising, as annuities are designed to provide income to average life expectancy, while also continuing to pay if you live beyond average life expectancy. That’s why annuities are known as “longevity insurance”—they protect your income in the event you live longer than the average. In this case, the annuity pays considerably more than leaving the funds in a GIC.
You say your mother is very risk-averse. Both the annuity and the GIC are guaranteed options—the principal of the GIC is guaranteed by CDIC and the annuity is guaranteed by Assuris.
The right choice for your mother will be the one that most closely matches her goals.
In your mother’s case, if she’s in good health (relative to her peers), she thinks she might live longer than the average for people like her, and she is less concerned about using the gifted funds to leave a financial legacy than using them to provide current income, a prescribed annuity might be a worthwhile course of action.
This response was provided by FPAC Member Alexandra Macqueen, CFP®. Alexandra lives and writes about personal finance in Toronto. Follow her on Twitter at @Moneygal.
Qualified Advice is written by members of FPAC (Financial Planning Association of Canada) is a MoneySense content partner. The association’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession that ultimately commands the credibility, public awareness and respect of other respected advisory professions, working closely with governments, regulators, financial planners, academia, vendors and the general public.
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Ms. Macqueen has provided a concise, clear explanation of the options for post-retirement windfalls. Very helpful, thank you.
I am surprised something like VRIF was not mentioned. It would be a bit less per year but should preserve the capital indefinitely (and can be cashed in for extra money at any time). Its not guaranteed but should be very low risk and is another option.
Also how does one ask a question to Moneysense, i can’t seem to find a way to submit a question on your website.
You mentioned that if she bought a 5-year GIC she wouldn’t get the interest for 5 years. I’m surprised that you didn’t mention the option of a 5-year GIC with simple interest that pays out every year. Or, since she hasn’t specified the income she might need, but has stressed security over income, what about a 5-year ladder of GICs.? This would allow her the flexibility of increasing her income each year, if she needed it.
Hello
I wonder why blue chip dividend stock was not an option….while stocks are volatile canadian blue chip are pretty safe and could give approximately 450 per month (5.5%) and she could end up with more.
Once explained perhaps another option
“She currently collects OAS and GIS but not CPP.” It is pretty rare for a senior to not be eligible for ANY CPP amount. She never worked? In 2013, only 1.3% of seniors were in this situation (fraserinstitute.org). I hope she does not have an unclaimed entitlement to CPP!
If you are citing the Oaken GIC at 1.8% it says on your link page that they pay out the interest annually. While building wealth I used to have the interest paid out at the end of the term, but in retirement I take the GIC interest annually, especially as you get taxed on it annually even if you have it rolled over into the principle. I would suggest she do several GICs of different terms (if the institution would take a smaller deposit then I’d do the 5 year ladder) which will give her the option of cashing in the GIC yearly as it matures if she needs the lump sum or changes her mind on the investment strategy
I believe that a TFSA should also be considered.
Congratulations to Alexandra Macqueen. What an excellent answer to the question. She could not have made it any simpler or easier to understand the choices available.
Open up a TFSA and purchase shares of BCE with the $70k (this assumes she does not have a TFSA, if not she has the room to do so). BCE would generate approx $4500.00 per year in dividend income which she can withdraw and pay no tax on it. This would work out to about $375.00 monthly which is not too bad at all to add to ones income in retirement.
You split the money in half and purchase shares in BCE & FTS and have a good solid dividend income stream that is taxed reasonable.
As she is currently receiving the GIS, she needs to be careful how much income she withdraws as she could lose part or all of her GIS.
In relation to the the 70,000 gift for 79-year-old mother I would add a 3rd option, which is investing the amount in a blue chip Canadian company that pays a dividend of 6% annually. This will provide her 350 per month as dividend income for the expected life of 13 years plus she will have more or less her 70,000 in the value of shares which she bought. This is less than the annuity insurance by 100 dollars per month, but the benefit is obvious as she will have her principle money by the end of 13th year of her live.