Situation: A couple has two houses, modest financial assets and no boarding house
Solution: Sell a town house, pay debts, buy a condo until his wife's retirement, move to the cottage
A couple we will call Fred and Felicity, both 60, lives in British Columbia. Fred retired a few years ago from a job in publishing. Felicity does a seasonal administrative job. She earns $ 3,000 a month for nine months of the year and then earns $ 1,900 a month for the other three months.
On paper, the couple is rich. The roaring B.C. The real estate market values their home at $ 2 million and their rural cottage at $ 650,000. This is 6.4 times their total financial assets of $ 414,000, including cash. There is only one liability: a $ 150,000 mortgage on the cottage. Their net worth is $ 2.9 million. But their incomes are modest and they must face a retirement which, they fear, will be pinched. The solution: turn part of their expensive property into cash.
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Family Finance asked Eliott Einarson, Financial Planner at the Winnipeg Office in Ottawa the manager of Exponent Investment Management Fund, tasked with developing a strategy to free up wealth from their assets.
"We would like to know if we have enough income to live within our budget without Fred having to go back to work," says Felicity.
Fred and Felicity have monthly expenses of $ 7,260. Felicity generates a total of $ 32,700 a year, including her three months of annual Employment Insurance. After an average tax of 13%, she keeps $ 28,450 a year or $ 2,370 a month.
Fred will start his CPP soon with a 36% discount from the monthly benefit of $ 858 at the age of 65 to which he is entitled. That will leave him $ 550 a month or $ 6,600 a year.
Converting Property into Income
Their financial assets, $ 394,000 in RRSPs, $ 10,000 in TFSAs, and $ 10,000 in bank accounts, are not enough to support retirement before receiving benefits from the Canada Pension Plan and Old Age Security. They could keep their two houses and start withdrawing their RRSPs. The total, $ 394,000, if spent over the next 35 years up to the age of 95, would generate $ 17,800 annually. Even with Felicity's essentially temporary income, $ 32,000 a year and anticipated demand from both sides for CPP benefits, they would be a long way off from the $ 87,120 per year after-tax income they just need to maintain their mode of living. current life. They have two other alternatives:
First alternative: sell the house quickly for $ 1.9 million after fees (there would be no capital gains tax on the sale of a main residence) and get another accommodation in the city. Then pay off the $ 150,000 mortgage. They could buy a $ 750,000 condo to get closer to Felicity's workplace. Or they could keep the $ 750,000 and rent rather than own. With $ 750,000 set aside, they would have $ 1 million left.
Rents are doubtful. On $ 750,000, the price of the condominium, they would earn 3% after inflation, pay an average tax of 20% and have $ 1,500 per month for rent, not much for their country of residence. However, the condo, if purchased, will be sold five years later, when Felicity will retire. It's a lot of moving and spending, but it would work financially.
The $ 1 million reserve combined with the $ 404,000 already invested in RRSPs and TFSAs (we leave $ 10,000 in cash for living expenses) would give them $ 1,404,000 in investment . If this sum is invested to generate a return of 6% less an inflation of 3% for the 30 years of 65 to 95 years, it will bring in $ 65,340 a year. Felicity would still generate $ 32,700 a year through her work. With a CPP starting at $ 6,600 a year, the couple's gross income before age 65 would be $ 104,640. After splitting the eligible income and 15% income tax, they would have $ 7,412 per month. The mortgage on their cottage would be historic, so their adjusted monthly expenses would decrease to $ 6,310. They would have a surplus for traveling or other pleasures. The sale of the main house and later the condo would leave them $ 650,000 cottage, no debt and a $ 1.4 million financial asset.
Second possibility: sell the cottage at $ 617,500 after deducting the 5% costs, repaying the $ 150,000. mortgage and invest the difference, $ 467,500 over 35 years to exhaust all income and capital, for a return of $ 21,123 per year. Added to other sources of income, including Felicity's $ 32,700 essentially temporary salary and Employment Insurance and the RRSP's $ 17,800 for 35 years and Fred's $ 6,600 CPP at age 60, would a total of $ 78,223 before tax. Distributed and taxed at an average rate of 15%, they would have $ 5,540 to spend per month. This is not enough to support the current expenses minus $ 950 a month for the chalet mortgage, net $ 6,310 per month. This plan will not work, says Einarson. They should sell the house and keep the cottage.
Retirement Cash Flow
When Felicity retires at 65, the situation will change after the sale of the condo. They would lose their job and income of $ 32,700 before tax, but would receive an estimated benefit of $ 10,272 from the CPP. They would no longer need the apartment located near his former place of work. Assuming that the price appreciation covers selling costs, they could add $ 750,000 to their capital. Annuit to pay three percent after inflation for 30 years, it would generate $ 38,260 a year. They could add two old age security benefits of about $ 7,220 a year. Their pre-tax income would be $ 128,312. After splitting the eligible income and averaging 18%, they would have $ 8,770 a month to spend with non-mortgage expenses reduced to $ 6,310 or less.
They have three cars. In retirement, a car and a house would reduce the monthly insurance bill by $ 965 from about $ 600 a month. Selling two of their three cars and eliminating an electricity bill would possibly reduce $ 200 of the monthly electricity bill by $ 455.
Assuming they sell their house, their overweight with 80% of the net worth of property would have gone down by perhaps a quarter. If they aspire to go deeper into real estate, they could invest in diversified real estate investment trusts across cities and sectors. Einarson concludes: after the age of 95, they still had their social security, their CPP and their cottage,
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