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Blair Gable/blair gable The Globe and Mail

Sonali and Sam are thinking of leaving their careers as officers in the Canadian Forces soon and retiring to the Okanagan Valley - or if that's too expensive, Ottawa - to run a bed and breakfast.

She is 40, he is 39; together they earn $190,000.

Their goal is to "continue to earn an income in a more relaxed setting," Sonali writes in an e-mail.

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They figure they'll have to pay anywhere from $1-million to $1.5-million for a suitable property in the Okanagan. The money would come partly from the sale of their Ottawa house, valued at $850,000 with a mortgage of $213,000, and partly from a new mortgage loan.

"We need some help to set the groundwork for a successful transition," Sonali writes.

We asked Dylan Reece, a financial planner and investment adviser at Rogers Group Financial Advisors Ltd. in Vancouver, to look at the couple's situation.

What the Expert Says

The longer they work, build up their savings and pensions and pay down their mortgage, the less income they will have to generate from the B&B, Mr. Reece notes.

If they were to quit now, they would have to bring in $5,400 a month (net of operating expenses and taxes) from the new business to supplement Sam's pension income of $2,600 a month (after tax) to cover their monthly expenses of $8,000. (Sonali plans to take a lump sum rather than drawing a pension.)

The estimates assume they buy a property for $1.25-million - halfway between their anticipated range - and take out a mortgage of $637,000 (house proceeds net of existing mortgage plus new borrowing) costing $3,362 a month.

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If they hang in for another five years, they would need to generate $4,100 a month net to cover expenses of $7,200. By then, their existing mortgage would only be $84,000, so their new mortgage would be $484,000, costing $2,555 a month. Sam's pension would have climbed to $3,100 a month.

The big unknown is how much money Sam and Sonali can generate from a B&B, Mr. Reece notes. It might be difficult for the business to pull in that much money year-round. He recommends they do some serious research into what B&Bs in their chosen area tend to bring in. If the amount falls short, they will have to consider buying a less-expensive property.

They will get a severance payment of $20,000 each after tax, which Mr. Reece suggests they put in a high-yield savings account to fund any cash flow shortfall they may have in the first year of operation.

He also recommends they take a long-term, fixed-rate mortgage to guard against interest rate risk, term insurance to cover the mortgage and disability insurance in case one of them falls ill.

As for Sonali's plan to take a lump sum instead of drawing a pension, Mr. Reece suggests she consider taking the pension instead.

"The additional benefit of a defined benefit pension is that it is payable for as long as they live, which reduces the risk that they will run out of income if they live well beyond the normal life expectancy," he says.

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In the meantime, he suggests the couple strive to maximize their RRSP contributions, use the resulting tax refunds to pay off the mortgage, and build additional savings in their tax-free savings accounts.

Once they have bought the B&B, they likely will get additional tax savings by deducting a portion of their housing expenses used in the operation of the business. When they turn 55, they will be able to split Sam's pension income for tax purposes, he notes.

When they retire from the B&B business in 25 years, Sonali at 65 and Sam at 64, their income will be the equivalent of $100,000 a year, Mr. Reece calculates. Inflation will lift that sum to $183,877, broken down as follows:

Sonali will get $29,469 from the Canada Pension Plan and Old Age Security and $50,129 from her registered retirement income fund, for a total of $79,598.

Sam will get CPP of $17,153, pension income of $72,349 and RRIF income of $14,777, for a total of $104,279. Altogether, that adds up to $183,877.

Mr. Reece's assumptions include a long-term average return on investments of 5 per cent a year and inflation of 2.5 per cent a year.

Client Situation

The People:

Sonali, 40, and Sam, 39

The Problem:

Preparing the financial ground for a transition from military officers to B&B operators.

The Plan:

Pay down the existing mortgage, get a firm handle on how much money they can generate from a B&B, use severance pay for an emergency fund, then take the plunge.

The Payoff:

A way of making a living that would afford them a slower pace, a home business in the Okanagan or Ottawa, and solid pensions to fall back on when they ultimately retire.

Monthly net income:



Home $850,000; timeshare recreational property $25,000; her RRSP $35,000; his RRSP $50,000; TFSAs $20,000; bank accounts $5,000; stocks $3,000. Total: $988,000.

Monthly disbursements:

Mortgage $2,500; RRSPs $600; food and eating out $800; clothing $500; miscellaneous personal $320; property taxes $300; house insurance $80; utilities, $400; phone, cable, Internet $200; repairs and maintenance $400; vacations $1,000; entertainment, sports $250; auto expenses $300; gifts $100; donations $50. Total: $7,800. Savings capacity: $3,184.


Mortgage $213,000.

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