Losing sleep and nest egg!

Question: I’m a 74-year-old widow. After raising a family and working hard all my life, I am now left with small government pensions of about $1,000 a month and a small amount of income from the investment of my nest egg which is managed by TD Waterhouse. I have $160,000 to support me for the rest of my life and would very much like NOT to continue drawing on my capital to survive. I have four grandchildren who I would like to pass something on to. The $160,000 nest-egg generates about $1,000 per month before tax (this is in addition to the CPP/OAS money) and consists of:

 $45,000 in a RIF (AGF Equity Fund)
 $60,000 in short/medium/long bonds (5-9 per cent)
 $15,000 various stocks/mutual funds
 $10,000 cash (ING)
 $30,000 Income Streams III (TSX: STQ). The broker bought 1,700 at $26 and it is now $18 and thus pays no distribution.

Up until STQ, I chose all my own investments. Now I have lost 10 per cent of my vital capital. My total income per month (CPP, OAS, investments) = $2,000. My expenses (rent, tax, living) = $2,200. I’m desperate to maintain my capital yet require $2,200 a month to just g by. Could you recommend a better strategy and a vehicle for these funds which will help me with my two main goals and also to sleep better at night? My first thought is to place the majority of the money (everything except the medium and long bonds) in the Phillips, Hager, and North High Yield Bond Fund. Please Help! – B.J., Toronto


First, I have to remind you that it is not my function to replace your financial advisor. I can offer some general observations but you should then sit down with him to work out the details.

Start by making it clear that you wish to increase your cash flow. For example, you say that your RRIF is invested in AGF Equity Fund. There is no fund with exactly that name but I assume you are referring to one of AGF Canadian Growth Equity Fund or AGF Canadian Stock Fund. Neither of these pays regular distributions.  If you need to stay within the AGF group to avoid deferred sales charges, you might ask your advisor about switching to the AGF Canadian Conservative Income Fund. It pays monthly distributions that have been averaging slightly more than 3c a unit. Over the past year, the cash yield has been about 4 per cent.

However, there is one concern about this move. At your age, you are required to withdraw a minimum of 7.71 per cent of the value of your RRIF in 2004. This percentage increases annually. The cash flow from the Conservative Canadian Income Fund will not cover that, so you would have to draw the rest from capital which you say you do not want to do. An alternative plan would be to accept more risk and use the money in the RRIF to buy an income trust fund, such as one of the Citadel funds that trades on the Toronto Stock Exchange. For example, Citadel Diversified Income Fund (CTD.UN) currently distributes 8c a unit per month for a yield in the range of 9 per cent to 9.5 per cent. Ask your advisor about this option and be sure you understand the risks.

As for the $15,000 held in “various stocks/mutual funds”, you should make sure the money is invested in such a way as to generate good cash flow. If this money is outside a registered plan, look for securities that offer some tax advantages. Real estate investment trusts or preferred shares are worth considering.

The money invested in Income Streams III has not produced a good result for you. The fact you are receiving no distributions suggests you invested in the Capital Yield shares. The Equity Dividend shares, which trade as STQ.E, currently pay 8.75c per month. Ask your broker if you can switch your Capital Unit shares to the Equity Dividend shares which, based on 1,700 shares, would produce almost $150 a month in income.

You’re going to have to be realistic about this. Given the amount of capital you have, you need to generate an average annual return of 9 per cent to produce the $1,200 a month in investment income you require in order to meet your expenses. This means you have to accept more risk than you currently have in the portfolio. The alternative is to forget about the idea of leaving anything for the grandchildren and concentrate on meeting your own financial needs, making modest withdrawals against capital if required.