Does this 84-year-old suffer from the ‘Multimillionaire’s Dilemma?’

At 84, Louise* is looking to simplify her investment portfolio , minimize tax, and make sure she maintains her current lifestyle. This includes continuing to travel five to six times a year, albeit more locally than her past global adventures, and age in place in her home in Vancouver, bringing in any additional help she might need.

To this point, Louise has built and managed a portfolio largely composed of equities. About a year ago she sold most of her stocks and now has $1 million in nine guaranteed investment certificates (GICs) in three different financial institutions currently paying out about three per cent every other month. She has $70,000 in dividend paying stocks, $80,000 in two equity exchange-traded funds (ETFs), $220,00 invested in gold wafers, $110,000 in cash, $130,000 in a tax-free savings account and $110,000 in a registered retirement income fund, both also invested in GICs.

Last year her annual income was $66,000. This consisted of: $27,000 from an employer pension, Canada Pension Plan (CPP) and Old Age Security (OAS); $3,000 in dividends and $36,000 in interest income from her GICs. Her largest expenses are monetary gifts to her family, 18 charities that include support of two Himalayan children and personal costs. In total, she spends $10,000 a month to maintain her lifestyle. To meet shortfalls, she cashes in GICs.

She is single, has an independent partner who does not live with her and has no children. “I am not worried about leaving an estate and prefer to support people and causes while I’m alive,” said Louise, who is debt-free and, in addition to her investments, also owns her condo valued at $900,000.

“I made a healthy portion of my net worth in the stock market but as an octogenarian I have to consider that I may not have enough time to recover from … a downturn,” she said.

“I am no longer concerned with FOMO. I just want reasonable placement of my investable dollars and simplification of my financial picture.”

To that end, she would like advice on what to do with her holdings in gold and whether or not she should stay almost exclusively invested in GICs or direct a portion to an all-in-one ETF or other investment.

“Tax efficiency is also a concern,” she said.

What the expert says

There’s something called the “ Multimillionaire’s Dilemma ” in financial planning circles, said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger. The classic version goes something like this: A wealthy person with more money than they will ever spend sees a $100 bill on the sidewalk. Should they pick it up? They don’t need it. On the other hand it’s right there and easy to get.

This is how Rempel sees Louise’s situation . “Louise is 84, has more than $1.7 million in investments and spends about $66,000 a year. She has far more money than she will ever spend in her lifetime and she’s concerned about asset allocation.”

As far as dilemmas go, financial anxiety, even with a seven-figure net worth, is common, said Rempel. Given life expectancy rates, and to build confidence, he suggested Louise plan for the next 10 to 15 years. Regardless of how she decides to move forward — conservatively or investing for growth — Rempel said Louise will be fine.

“I meet wealthy people who say, ‘I’m already rich, why make more? I just have to avoid making a mistake and losing any money,’” said Rempel. “With this approach, investing in GICs will help maintain her investments so the portfolio won’t be down at the end of her life.”

Rempel calculated loss risks from the worst returns in the stock market since 1935 from historical S&P 500 figures.

“If she invests for growth over the next 10 years — even with the very real risk that equities will decline, history shows us there is only a three per cent chance that her investments would still be down at the end of her life and she is likely to miss about $500,000 of growth from compounding,” he said.

“Looking at expected returns and how often markets are down after 10 years based on history can make the decision much clearer.”

Rempel said Louise should consider a few questions to help her make her decision:

• What are the odds that her investments will be down at the end of her life?
• How much are they likely to be down in the worst-case scenario?
• How much less is she likely to make by investing in GICs versus equities?
• • The illusion of diversification: Most Canadian portfolios are far more concentrated than they appear and that’s not good
  • The importance of contingency planning as you — and your advisers — age

It all comes down to whether the focus is on money as security or money as freedom, he said. “For Louise, both options could be fine,” said Rempel, although, given that she was an equity investor for years and was comfortable with the risk, he recommended equities for her. “It’s a personal choice and any allocation is fine. If she does invest in equities, she can simplify by buying one broad-based equity ETF, such as the MSCI World index or S&P 500, or working with a portfolio manager to look after it for her.”

If she sticks with GICs, one GIC for each account type could help make things more manageable, he said.

When it comes to tax efficiency, Rempel said her income is comfortably below being affected by the OAS clawback.

*Names have been changed to protect privacy

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at [email protected] with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).