-CHAD HIPOLITO/The Globe and Mail
Lionel is a 50-year-old, self-employed painting contractor who lives in British Columbia.
He is single again, owns his $540,000 home outright and has a rental property that brings in enough money to more than carry itself in spite of the fact that he took out a line of credit – and a substantial mortgage – to buy it.
In three years, when his truck is paid off and he no longer has to pay child support, Lionel will have an extra $1,450 a month.
"Will I accomplish my retirement monthly income goals by the time I'm 60?" Lionel asks in an e-mail. He is targeting $4,500 a month after tax. By then, he figures he will have whittled the debt on the rental property down to $408,000 (mortgage and credit line).
"Should I sell the house [then] or keep renting it out?" he asks.
Because he is in business for himself, Lionel is able to write off some household expenses, "hence the low transportation and phone amounts," he adds.
We asked Michael Cherney, an independent Toronto financial planner, to look at Lionel's situation.
What the expert says
Lionel hopes to retire at age 60 without having to trim his lifestyle and vacation expenses, Mr. Cherney says. Cut he must if he hopes to approach his $4,500 a month target, the planner says. "Perhaps some combination of cuts now, freeing up some more money for savings, and some cuts later, reducing his retirement expenses, will be the way to go," the planner says.
Perhaps the most important step Lionel has taken to achieve his goal is to buy rental real estate. Not only does he rent out a basement apartment in his home, he also has the separate rental property.
"This yields him a cash flow of $20,000 per year, which can reasonably be expected to increase at the rate of inflation," Mr. Cherney says. Lionel has unused RRSP contribution room of $96,705, which he plans to use up when he eventually sells his rental property.
Instead, Mr. Cherney suggests Lionel roll most of his non-registered investments into his RRSP because he is paying higher taxes now than he will when he retires. It could be years before he sells the property. As well, half of the capital gain on the sale will be taxable, so it is "uncertain if he will be able to use the entire amount," the planner says.
Lionel could roll $87,715 of his non-registered savings into his RRSP, leaving out his $25,000 investment with a private real estate company. Rather than using all of the contribution room in one year, he should spread it out over several years to keep his income tax rate lower, the planner says.
Starting in 2017, Lionel will be able to double his current monthly savings of $1,450, allowing him to contribute the maximum to his RRSP and TFSA, with the remainder going to a new, non-registered account. "By doing this, he will be able to build his financial assets to a total of $935,618 in 2024, when he would like to retire," Mr. Cherney says. That assumes an average annual return of 4.5 per cent a year.
At age 60, Lionel can begin drawing Canada Pension Plan benefits, which will be 64 per cent of what he would get at age 65. Lionel estimates this will be $545 a month. At age 67, he will begin drawing Old Age Security benefits of about $550 a month.
"Taking all of these sources of income together, Lionel can expect an effective annual income of $62,000 a year, indexed by a 2.5-per-cent inflation rate, until age 95," the planner says.
Based on current B.C. tax rates, Lionel's after-tax income will be $50,000 a year, or $4,167 a month – "within shooting distance of his desired $4,500," Mr. Cherney says. He could pick up some odd jobs to cover the shortfall.
As for whether Lionel should sell the rental property, "my answer is no, unless he is in need of a large lump sum all at once," the planner says. If Lionel were to sell, it is doubtful whether he could earn as good a return elsewhere.
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Client Situation
The person: Lionel, 50
The problem: Determining whether he is on track to retire in 10 years with $4,500 a month after tax, and whether he should sell his rental property then.
The plan: Plow as much as possible into saving and hang on to the income property. Be willing to trim costs now and later, and to do some odd jobs when he retires.
The payoff: Financial security.
Monthly net income: $7,100
Assets:Cash in bank $1,000; non-registered investments $112,715; TFSA $34,442; RRSP $173,048; residence $540,000; rental real estate $570,000. Total: $1.43-million
Monthly disbursements:
Property tax $148; home insurance $127; utilities $184; security $34; maintenance $100; transportation $25; groceries, clothing $440; child support $750; car loan $700; other loan $450; gifts, charity $140; vacation, travel $500; dining, drinks, entertainment $1,200; sports, clubs $300; grooming $40; other personal $215; dentists, drugstore $65; health, dental insurance $128; life insurance $29; telecom, TV, Internet $165; RRSP $1,000; TFSA $450. Total: $7,190
Liabilities:
Rental mortgage $415,000; line of credit (for down payment) $112,000; loans $52,000. Total: $579,000
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