Author Topic: Helping Canadian mom w/ asset allocation  (Read 2085 times)

bolabin

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Helping Canadian mom w/ asset allocation
« on: July 15, 2014, 11:08:42 PM »
Mom just got divorced. She gets a good part of the assets from the marriage, and has a >$2M stash. My main concern is to help her live off income from the stash and grow it as much as possible.

- She lives in Canada
- She's retired
- She owns a house, no mortgage or other debt
- She's got a lot of dough tied up in a few US stocks, some dividend paying. But in Canada, tax benefits of US dividend stocks aren't as good, as she can't get the 15% withholding tax refunded.

I'm trying to steer her away from US stocks, due to withholding tax on dividends as well as possible tax liabilities to her estate when she passes away... and into a portfolio of Canadian dividend stocks, some index funds/ETFs that track the total stock market, and a small percentage into bonds/GICs, something liquid in case she needs cash fast.

Does the strategy of avoiding US stocks make sense for a Canadian? US stocks offer some juicy dividend returns, and there's such a diversity of them, so they're attractive from an investment point of view but the potential estate tax liabilities are worrisome. And the 15% withholding tax eats away a lot of the returns. With no other income, she can't claim a foreign tax credit.

Am I being too aggressive trying to get her mostly into equities? She's mid-50s, maybe so much risk isn't a good thing.

What would you do for your mom?

Goldielocks

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Re: Helping Canadian mom w/ asset allocation
« Reply #1 on: July 16, 2014, 12:26:21 AM »
I find it hard to own US stocks directly from Canada, between exchange risk, tax questions and fees.. Well it is just a lot easier to get a US Index fund, hedged for exchange.  (From a CDN brokerage acct).

Others may have found a better way.

I think the 4% rule after inflation is often with a high ratio of growth stocks.  Income funds don't pay so well.  Bond ladders used to be the recommended income strategy, I.e. rather than bond indexes, and you can choose a blend of short and long term ones that meet your income criteria.  Hopefully 3%+ returns are possible.

If she only needs a certain amount, like SWR 2% plus inflation a mix of index funds in dividend income and growth could work.   Will she get OASand CPP later?  If so she can withdraw some principal safely too.

bolabin

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Re: Helping Canadian mom w/ asset allocation
« Reply #2 on: July 16, 2014, 01:16:59 AM »
She'll get OAS, but I think CPP will be relatively limited since she's worked maybe half her adult years and wasn't making the max contributions.

Does SWR = safe withdrawal rate? I think she can easily live on 2%, although I'd love to see her be able to travel a bit and splurge just a little while she's still perfectly mobile.

AssetGrinder

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Re: Helping Canadian mom w/ asset allocation
« Reply #3 on: July 16, 2014, 01:55:55 AM »
I just recently helped my mother in law that just retired with far less. I put her in about 50% fixed income etf funds which consisted of short term 1-5 year laddered corporate bonds and a north America preferred stock fund. The other 50% i went with Canadian, American and international equity income funds. The portfolio yields around 4.11% but with withholding taxes we will be slightly under 4%. At this 50/50 ratio it is pretty safe to handle a market correction with the cushion of bonds and preferred fixed yields and steady dividend players on the equity side are also very steady with dividend streams in corrections as well.

I would greatly advise holding US stocks in your portfolio for diversity reasons because the Canadian market severely lacks certain sectors Canadians don't really have. By

bolabin

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Re: Helping Canadian mom w/ asset allocation
« Reply #4 on: July 16, 2014, 10:44:42 AM »
I just recently helped my mother in law that just retired with far less. I put her in about 50% fixed income etf funds which consisted of short term 1-5 year laddered corporate bonds and a north America preferred stock fund. The other 50% i went with Canadian, American and international equity income funds. The portfolio yields around 4.11% but with withholding taxes we will be slightly under 4%. At this 50/50 ratio it is pretty safe to handle a market correction with the cushion of bonds and preferred fixed yields and steady dividend players on the equity side are also very steady with dividend streams in corrections as well.

I would greatly advise holding US stocks in your portfolio for diversity reasons because the Canadian market severely lacks certain sectors Canadians don't really have. By

1) I like your idea of staying exposed to US stocks because the Canadian economy really lacks variety and interesting sectors, I live in the US for that reason

2) The 15% withholding tax definitely sucks and eats into the returns a lot, although this offsets much of the Canadian tax that might otherwise be payable, it's still a triple whammy when you consider the corp has already paid profits tax on it

3) I haven't really known about bond ladders until now and will definitely look into them, I didn't know you could be this creative with bonds

4) Turns out estate tax in the US isn't a problem if you have <$5M or so in assets, I'm not sure her portfolio is going to do that well anytime soon but you never know