If you had asked Bernard a few years ago how he'd be doing now, he'd have said, "Fine, thank you." He had an executive job paying $100,000 a year in the hotel industry and his prospects were good. But he was growing tired of the long hours, so, two years ago, he decided to strike out on his own. Now here he is, 61, in debt and with no net income to show for his venture into residential real estate sales. He earned a paltry $13,000 in commission last year, not enough to cover his expenses.
Bernard, who is divorced, lives with his two college-aged children, 19 and 21, in suburban Toronto. Their home is valued at $330,000 with an $80,000 mortgage and a line of credit that is $31,000 and growing quickly.
Bernard spent part of his salaried work life in the United States, where he amassed a company pension plan known as a 401(k) worth about $229,150. He also has registered retirement plans totalling $50,660.
"Given that my house value has been on a flat trajectory for seven years and my retirement monies are going backwards [he's been losing money on his investments] I am likely to have to work for the rest of my life," Bernard writes in an e-mail. His main concern is kick-starting his real estate business but that's tough to do when you can't make ends meet.
We asked Gordon Stockman, vice-president of Efficient Wealth Management Inc. in Toronto, to look at Bernard's situation.
What the expert says
Bernard jumped into his new career without having a proper plan in place, Mr. Stockman says. In so doing, he missed out on some tax-saving opportunities. For 2010 and 2011, he had no taxable income, so he lost the advantage of his personal tax credit.
"He should have withdrawn at least $10,000 from his RRSP in each of those years," the planner says. Instead, he continued to contribute. Bernard would have had any tax his financial institution withheld refunded when he filed his income tax return, and he could have used the funds to help pay his family's living expenses.
Few businesses are cash flow positive from the outset and real estate sales is no different, Mr. Stockman says. "What was and is still needed is a viable plan to support his basic expenses (less than $30,000 a year before debt repayments) to allow time for the business to take hold."
Bernard should apply immediately for Canada Pension Plan benefits, which the planner estimates will be $470 a month. Next, he should apply for U.S. Social Security benefits, which he had forgotten he was entitled to. Mr. Stockman estimates the benefit at about $1,320 (U.S.) a month when Bernard turns 62 this summer.
He should also tap his RRSPs.
"RRSPs by their design are best used when the withdrawals are in years of low income," Mr. Stockman notes. He suggests Bernard draw on his RRSPs to the tune of $1,300 a month until the money is used up at age 65. At that point, he would begin collecting Old Age Security benefits of about $540 a month.
As for his American pension plan, Bernard can roll it into an individual retirement account or IRA, the U.S. equivalent of an RRSP, Mr. Stockman says. Without the rollover, he would have to pay 25 per cent withholding taxes to the U.S. Internal Revenue Service. He could transfer the sum to his Canadian RRSP but this would trigger taxes, effectively wiping out the benefits of the tax deferral, the planner says.
Instead, he should leave it in the United States, investing about half the portfolio in bonds and the other half in stocks. At age 70½, Bernard will have to begin making minimum annual withdrawals from his IRA in much the same way Canadians do from their registered retirement income funds. Taxes on such withdrawals, which the planner estimates will be about $13,200 a year or $1,100 a month before tax, will be withheld by the IRS at a rate of 15 per cent under the Canada-U.S. tax treaty.
Given Bernard's uncertain business prospects, he may well have to tap his U.S. retirement savings beforehand. Indeed, Mr. Stockman suggests Bernard plan on withdrawing about $1,060 a month ($900 net of tax) starting at age 65 just in case.
"With all his retirement income in place early, Bernard can concentrate on his new business," Mr. Stockman concludes. If his business can contribute $1,000 a month from now until Bernard is 70, the line of credit will be retired and the mortgage will be paid off by the time he is 75.
How to get through a financial drought caused by leaping into a new business venture without sufficient planning.
Tap government benefits including CPP and U.S. Social Security, draw down his RRSP and, if necessary, plan to draw on his U.S. company pension plan as well.
Relief from the stress of trying to build a business while living on his line of credit.
Monthly net income
House $330,000; 401(k) $229,150; RRSPs $50,660. Total: $609,810.
Mortgage $550; property tax $322; utilities, insurance $266; car expenses, including insurance $340; groceries $350; clothing $50; dining out, entertaining $150; personal $120; pet expenses $30; real estate fees $300; dentists, prescriptions $120; cellphone $175; telephone, TV, Internet $165; line of credit $400; vacation, travel $100; RRSP $200. Total: $3,638.
Line of credit $31,000; Mortgage $80,000. Total: $111,000.
Special to The Globe and Mail
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