Though their income is modest, Andy and Ada own their Toronto house – valued at $750,000 – outright.Darren Calabrese/The Globe and Mail
Andy is 68 and retired. His wife, Ada, who is 62, plans to quit working by the end of the year.
Together, they bring in about $3,455 net a month, including Andy's Canada Pension Plan and Old Age Security benefits. Neither has a work pension.
Though their income is modest, they own their Toronto house – valued at $750,000 – outright. They also have $258,600 in cash and savings, which they hold in bank savings accounts, term deposits and government treasury bills.
"The burning question for us is whether to sell the house, rent and travel occasionally, or stay in the house and travel if affordable," Andy writes in an e-mail. "Can we stay in the house and still afford to travel?"
When she retires at year end, Ada will begin collecting Canada Pension Plan benefits. She will get Old Age Security when she turns 65.
We asked Norm Collins of Collins Financial in Halifax to look at Andy and Ada's situation.
What the expert says
Andy and Ada are managing their expenses well given their level of income, Mr. Collins says. When Ada quits work, though, they will face a cash flow shortfall that will have to be made up from savings. Over time, their assets will diminish as a result.
When Ada retires, they will face a net decrease in income of $18,000 – her $25,000 employment income offset by $7,000 of Canada Pension Plan benefits. After income tax, which will be lower as well, the expected shortfall in 2016 will be about $17,000. By 2018, the shortfall is forecast to shrink to roughly $3,000 thanks to a full year of Old Age Security benefits for Ada and Andy's mandatory withdrawals from his registered retirement income fund.
"On the surface, this may cause some concern, but it does not take into account their most significant asset, their home," Mr. Collins says. Over time, while their investments shrink, the value of their home is forecast to rise by an estimated 2.25 per cent a year on average.
"Assuming Andy and Ada do not want to borrow against the equity in their home, which is always an option, they can increase their travelling for a number of years while still remaining in their home."
If they increased their travel spending by $10,000 a year (from $6,000 to $16,000) starting next year, they would have a projected cash flow shortfall of about $27,000 in 2016 and $21,000 in 2017. This money would have to come from their savings. The shortfall would be lower in 2018 due to OAS payments and RRIF withdrawals.
Even with the higher travel expenses, Andy and Ada's invested assets – excluding their house – are expected to last 10 years to 2025.
"These assets are more than sufficient to provide for increased travel for the next number of years without a need to immediately sell their house," Mr. Collins says. Eventually, though, they would have to sell the house and invest the proceeds to cover their expenses.
If, for example, they were to sell the house at the end of 2020 and rent an apartment for $2,000 a month, they would save on property tax and maintenance. They'd also earn investment income on the proceeds. The total savings and investment income would more or less be equal to the rent, so it makes little difference in the short term whether they sell or stay in the house, Mr. Collins says.
If they sell, and their rent rises in line with inflation (estimated at 2.25 per cent a year), their investment income will diminish over time along with their assets, with no rising house price to offset the decline.
"However, the forecast still projects $427,000 of assets in 2040, when Andy is 94 and Ada is 88," Mr. Collins says. When Ada is 95, there would still be an estimated $269,000 left.
"Ultimately, Andy and Ada need to consider how important travel is to them," he says. Given their sound total equity, "I encourage them to see the world while they have the interest and their health," he adds. "I expect 20 years from now, they will remember their trips far more than any extra money they might otherwise have invested."
As for their investments, which yield from 2 per cent to 2.25 per cent, "At this stage of their lives, I believe this is appropriate for Andy and Ada," Mr. Collins says. "Over the next number of years they will need to draw down their assets, which means a significant portion should be in liquid, short-term investments."
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Client situation
The people: Andy, 68, and Ada, 62.
The problem: Can they stay in their house yet still afford to travel? Or should they sell the house, rent and travel more?
The plan: Go ahead and spend the money travelling, bearing in mind that at some point over the next 10 years they will have to sell their home and invest the proceeds.
The payoff: A richer, fuller life.
Monthly net income: $3,455
Assets: Short-term bank deposits $98,000; his TFSA $31,500; her TFSA $16,700; his RRSP $109,400; her RRSP $3,000; residence $750,000. Total: $1,008,600
Monthly disbursements: Property taxes $310; maintenance $75; insurance $45; heat $95; power $105; water $40; transportation $480; health insurance $200; telephones $105; cable $50; Internet $70; groceries $500; restaurants, drinks $410; entertainment $50; clothes $150; gifts $100; vacation $500; other discretionary $275; donations $50. Total: $3,610
Liabilities: None
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