Mark Blinch/Globe and Mail
Karen and Christopher have planned their escape from work and the big city well. Now they’re ready to make the move. He is 54, she is 50.
Next year, they plan to sell their $1.25-million house and move back home to the Maritimes. He’ll leave his government job and she’ll fold her business. They already have a cottage and a condo waiting for them in Nova Scotia.
After they move, they plan to hang onto the Toronto condo owned by Karen’s business, which they hope to rent out at a profit. They’ll take some time to get used to their new digs and travel a bit, visiting family in other provinces. In time, they plan to look around for a business opportunity.
“We’re not ready to retire just yet, so we plan on exhaling, travelling and visiting Karen’s mom in British Columbia,” Christopher writes in an e-mail.
Still, he wonders how they’d fare if they did not earn any more income. Could they comfortably spend $80,000 a year without running out of money?
He wonders, too, how they should invest the proceeds of their house sale: add to their portfolio or buy more real estate? “What would be the most advantageous way to draw down our money?” he asks.
Christopher has a work pension that will pay about $15,000 a year, indexed to inflation, at the age of 65. Karen has cash and savings in her business. They both have substantial RRSP investments.
We asked Matthew Sears, a financial planner at T.E. Wealth in Toronto, to look at Christopher and Karen’s situation.
What the expert says
How long their money will last depends partly on how it is invested, Mr. Sears’ analysis shows. He assumes a 4-per-cent rate of return on investments, a 2-per-cent inflation rate and that Karen lives to age 95. The net proceeds of the house sale after expenses and paying off the mortgage would be $870,000.
The planner’s calculations show that using the house sale proceeds to buy another rental property would make sense only if the property was generating positive cash flow. Karen and Christopher did not indicate in which province they were considering buying real estate.
“If the property was only breaking even, they run out of non-real estate investment assets at his age 92 and her age 89.” If, at the same time, the return on their investment portfolio dropped from 4 per cent to 3 per cent, their investment assets would run out when Karen is 85. At that point, they would have to sell one of their properties to meet their cash flow needs, Mr. Sears says.
Real estate would account for about 58 per cent of their net worth.
If they bought a property that could generate about $11,580 a year (after maintenance, property tax and other condo costs), they’d have a rate of return of about 1.33 per cent a year, plus any growth in the condo price. “Under this assumption, they run out of investment assets at Karen’s age 94,” the planner says. They would still have all the real estate.
If, by way of comparison, they were to invest in a balanced portfolio of stocks and bonds, they would be able to hold onto the real estate they have and meet their lifestyle expenses “throughout retirement,” Mr. Sears says. At Karen’s 95, their investment assets would be $2.5-million, plus the real estate. That assumes an annual average return on investments of 4 per cent. With a 3-per-cent rate of return, they would have $1.2-million when Karen is 95, plus real estate. Only 36 per cent of their net worth would be tied up in real estate.
Before they invest, Christopher and Karen should consider using part of the house sale proceeds to pay off the $270,000 mortgage on their Nova Scotia condo and their personal loan, Mr. Sears says. As it is, it won’t be paid off for another 20 years. Rising interest rates could put pressure on their retirement spending budget of $80,000 a year. Paying off the condo mortgage would lower their retirement spending needs from $80,000 a year to $63,540.
Because they will be drawing on their investment capital as soon as they quit working, Christopher and Karen should sit down with their accountant to do some tax planning, Mr. Sears says. “It will be important to take advantage of the low-income years prior to age 65, when they start getting Canada Pension Plan and Old Age Security benefits and Christopher’s pension.”
To take advantage of the lower-income years before reaching 65, Christopher and Karen may want to consider drawing some of their cash flow from each of their own RRSP accounts or from Karen’s business (or a combination of the three), Mr. Sears says. Doing so will help smooth out their taxes throughout retirement.
To cover their lifestyle expenses of $80,000 a year, they will each need to draw between $40,000 and $45,000 (from RRSPs and/or the business), in addition to either net rental income if they buy another investment property or the investment income from the house sale if they don’t. As they each begin to collect CPP and OAS benefits at age 65, and Christopher his pension, their need to draw on savings will lessen.
Client situation
The people: Christopher, 54, and Karen, 50
The problem: Have they saved enough to quit working completely and spend $80,000 a year after tax?
The plan: Sit down with an accountant to figure out how best to take advantage of the low-tax years between 2019, when they retire, and age 65, when they begin collecting government benefits and Christopher his pension. Use some of the house sale proceeds to pay off the mortgage on the Nova Scotia condo and their personal loan.
The payoff: Financial security with a comfortable cushion for any unexpected expenses they might face as the years go by.
Monthly net income: $13,083
Assets: Savings account $70,000; her business assets $445,000; business real estate $800,000; her TFSA $32,000; his TFSA $26,000; her RRSP $634,000; his RRSP $394,000; principal residence $1,250,000; N.S. condo $375,000; N.S. cottage $100,000; estimated present value of his work pension $125,600. Total: $4.25-million
Monthly outlays: Mortgage $2,815; property tax $1,049; water, sewer $65; home insurance $156; electricity $202; heating $150; maintenance $790; transportation $520; groceries $367; clothing $221; personal loan $2,000; gifts, charity $55; vacation, travel $610; grooming $38; dining, entertainment $595; golf $40; pets $80; subscriptions $16; health care $109; phones, TV, internet $341; TFSAs $1,250. Total: $11,469
Liabilities: Residence mortgage $250,000; N.S. condo mortgage $271,000; personal loan $67,000. Total: $588,000
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