Bev, 60, is wondering when she can afford to retire from her $67,000-a-year government job.
"I am ready now but expect to work until 65," Bev writes in an e-mail. She has a house in British Columbia valued at $500,000 with a $300,000 mortgage. She has a rental unit that brings in $1,200 a month.
"Should I sell the house when the mortgage is up for renewal in three years and buy something smaller?" she asks. She figures she could get a small condo for about $270,000. Or should she sell and rent an apartment?
When she retires, her defined-benefit pension plan will pay $1,657 a month at 65, indexed to inflation. She also has $86,000 tucked away in a registered retirement savings plan. "Do I have to work to 65 or can I retire earlier?" Bev asks.
We asked Gina Macdonald, a financial planner with Macdonald Shymko & Co. Ltd. in Vancouver, to look at Bev's situation. Macdonald Shymko is a fee-only financial planning firm.
What the expert says
Looking at Bev's situation today, it would make sense for her to stay in her current home and continue to rent out a portion of her property, Ms. Macdonald says. She is getting $1,200 a month in rent, while her monthly mortgage payment is $1,902.
"If you strip out the monthly principal payment, the mortgage is costing her $682 in interest," the planner notes. Bev is paying $572 a month for property taxes, insurance, heat, hydro and maintenance, lifting her total monthly home ownership cost to $1,254.
"The cost to stay in her home is substantially offset by her almost tax-free rental income – she nets about $956 a month, Ms. Macdonald says. "After breaking it down, she is effectively only paying $298 a month to live in her home. This is a great deal!"
Bev sometimes augments her income by renting out a room to a student.
Based on her pension income ($1,657), Canada Pension Plan ($1,065), Old Age Security ($565) and rental income ($1,200), for a total of $4,487, "it appears that Bev should just have enough income to maintain her current situation in retirement," the planner says. "That being said, retirement lifestyle needs and the interest rate environment will change," Ms. Macdonald says. Bev only has a modest amount set aside for leisure and travel "and this may increase during retirement."
As well, Bev will need to revisit her plan when her mortgage comes up for renewal in three years. "Given her desire to maximize flexibility and her close proximity to retirement at age 65, she may only want to renew for a two-year term" in case she decides to sell, the planner says.
Ms. Macdonald looks at ways Bev might enhance her financial security.
She should raise her tenant's rent by the allowable amount each year (2.9 per cent for 2016), taking care to give the required three months' notice. "It is important to do this to help mitigate the increased annual costs of home ownership," Ms. Macdonald says. Renting a room to a student during the school year could help improve her finances.
Next, Bev should scour her spending to see where she might be able to trim a bit, the planner says. "Looking at her budget, it appears that up to $1,000 a month is not allocated to expenses," she notes. "This is a significant amount of money. Her expenses should be closely tracked to focus on eliminating [her] $14,000 line of credit," Ms. Macdonald says.
Once she has paid that off, she should open a tax-free savings account and direct the extra money there to serve as an emergency fund. Bev has no contingency fund in her budget for major household repairs, new appliances or replacing her car, the planner says. Such expenses should be planned for so she is not forced to draw on her line of credit when she is no longer working and has "no ability to have it paid off in a timely manner," she adds.
Given her tight circumstances, Bev should work until 65 "to optimize her financial house and enhance her flexibility in retirement to achieve her goals," the planner says. In the future, if interest rates rise or if she decides she no longer wants to rent out her basement flat, Bev could always downsize, she adds. "Knowing that one is making an informed decision and has options can provide great peace of mind."
The person: Bev, 60
The problem: When can she afford to retire and should she sell her house when she does?
The plan: Staying put and continuing to rent out her basement apartment makes the most financial sense, as well as giving her the option of downsizing in the future
The payoff: Peace of mind
Monthly net income: $5,425
Assets: Cash $100; RRSP $86,000; defined contribution benefit plan from previous employer $8,363; current value of her government pension plan $67,701; residence $500,000. Total: $662,164
Monthly disbursements: Mortgage $1,902; housing expenses (property tax, insurance, heat, hydro, maintenance, garden) $572; groceries, clothing $350; transportation $155; loan repayment $350; gifts, charitable $120; personal discretionary (dining, entertainment, grooming, hobbies, clubs) $145; drugstore $110; telecom, TV, Internet $180; RRSP $150; pension plan contributions $410. Total: $4,444. Unattached surplus $981
Liabilities: Mortgage $300,580; line of credit $14,000; RRSP loan (Home Buyers Plan) $13,333. Total: $327,913
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