Martin Pelletier: Downsizing doesn’t have to mean giving up control over how you live to strangers
Retirement brings for many the need to simplify. And a trend in paring down has even hit close to home within my own family.
In retirement it’s natural to want to remove the stress that comes with owning a single-family home.
The most common decision is to sell and move into a condominium, which, in theory, makes a lot of sense. However, relinquishing the management of one’s home to complete strangers can bring its own anxieties.
One option is to join the condo board. I tried this once and all it did was massively ramp up the level of stress once I saw how poorly things were being run. The stuff I’ve witnessed would send shivers down your spine and truly make for a great horror movie.
The most common issue is poor financial decisions being made by others, leading to big consequences for everyone, including huge monthly condo fees, or worse, a special assessment and a massive cash call.
My parents and my in-laws finally decided to call it a day, unlock all of their equity and become renters. This gave them tremendous freedom, both financially and emotionally.
No more calls for cash, no more excessive condo fees, no more property tax hikes, no more rude and secretive condo board members and, if an appliance quits working, oh well, call the landlord and get it fixed.
How to invest the proceeds from a home sale
The primary issue with that decision is how to invest the proceeds from the sale in a low-risk manner that will generate enough income to pay for the rent without drawing down the principal.
This is because interest rates are falling and expected to continue falling. Therefore, the go-to GIC laddering strategy of the past no longer works unless you can make a paltry 3.5 per cent long-term rate work for you, or stomach the pain of locking in at such a pathetically low rate.
Luckily, we have found a solution that is working very well for our clients, including my family: using structured notes with embedded downside barriers, some of which are even CDIC insured and 100 per cent principal protected, that have been able to generate yields well in excess of longer-term GICs.
Structured notes as alternates to GICs
A structured note is similar to a bond issued by a Canadian bank and so it is backstopped by their credit rating. Like GICs, there are many different terms and interest payments. The benefit from notes over GICs is the higher level of interest, and the ability to sell them before maturity. Both are taxed as income.
For example, we came across a recent note being issued by a Canadian bank that is quite similar to a GIC in that it is fully protected. It will pay a floating rate of CORRA (the Bank of Canada’s Canadian Overnight Repo Rate Average) plus a spread of 0.96 per cent paid out quarterly. As at the beginning of October, the 2024 CORRA is an annualized 4.30 per cent plus the spread, resulting in a 5.26 per cent rate, which is significantly higher than GIC rates.
Then there is a note on Canadian blue-chip stocks with an annualized 5.04 per cent. Coupons are paid out on a monthly basis as long as these stocks don’t fall more than 15 per cent. If they do, you miss the coupon payment each month that it remains below this threshold. The term is seven years, although you can still sell at any time, and the principal is 100 per cent protected.
For a little bit more risk, there is a note on the Canadian banks that will pay an annualized 6.3 per cent coupon paid out monthly as long as the Canadian banks don’t fall below 50 per cent and stay there. It has a seven-year term, but these notes have a callable feature, meaning they will be bought back and closed out should the underlying index — Canadian banks, in this case — rise higher than 10 per cent any time after the initial 12 months. They, too, can also be sold any time prior to maturity.
These are all pretty low risk notes, similar in nature to GICs. However, there are notes out there varying in levels of downside protection with yields ranging from seven to 10 per cent that we think make excellent investments within a well diversified note portfolio for long-term investors looking for near-term income, including my own family.
So, downsizing or living a simpler life in retirement doesn’t have to mean giving up control over how you live to strangers, if that makes you uncomfortable. All you have to do is find the right financial solutions to avoid the condo board.
A professional advisor can be an excellent resource and should be consulted before making any investment decisions.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus. Structured notes are not suitable for all investors. These examples are for illustrative purposes only and should not be construed as estimates or forecasts.
