National Post (National Edition)

Plan would see couple with $3.4M net worth retire comfortabl­y

- ANDREW ALLENTUCK Family Finance Financial Post email andrew.allentuck@gmail.com for a free Family Finance analysis

Acouple we’ll call Arnold, a 51-year-old engineer, and Sandy, a 46-year-old educationa­l administra­tor, have made a home in Ontario for the past 20 years with an intermissi­on from 2006 to 2015 when they worked abroad. Their monthly takehome pay totals $9,660, plus they generate cash flow of $4,680 per year ($390 per month) from two rental properties. They have two teenage children — one in university, another with two years of high school remaining — whose educationa­l costs they subsidize. Their goal is to retire when Arnold turns 57 with $8,000 in monthly after-tax income, but they need to be more efficient in how they handle their substantia­l assets to ensure that will happen. “Given our financial situation, is it realistic to plan to retire in five to seven years?” Arnold asks. “Should we downsize our house?” Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Arnold and Sandy.

INEFFICIEN­T ASSETS

The couple has total assets of $4.46 million, but 77 per cent of that is in Toronto real estate, including their $2.1 million home and a pair of rental properties. The rentals are poor money makers. Condo 1 with a $650,000 estimated market value and a $220,000 mortgage has net income of $4,680 per year. That is a one per cent return on $430,000 equity plus or minus capital appreciati­on or depreciati­on. Condo 2, valued at $700,000 with a mortgage of $340,000 has a zero return after costs.

The two properties have profits so low that they are not worth keeping, Moran says. After selling costs and legal fees they would net about $700,000 for the pair. They could pay off their $470,000 home mortgage, thereby eliminatin­g their monthly payments on the home mortgage and have about $230,000 left. Capital gains after property improvemen­t would be modest and tax therefore negligible, Moran says.

FUTURE INCOME

Investing that $230,000 at three per cent per year after inflation, and adding their former mortgage payments of $2,893 per month to the pot, they would have $499,000 in six years. That amount could generate $21,500 annually for the next 38 years to Sandy’s age 90, all taxable.

If Arnold and Sandy sell their $2.1 million home, downsize by buying another home for $1 million, which was the original cost of their home, at the beginning of their retirement in six years, then invest the $1.1 million in proceeds at three per cent for the following 38 years, it could support taxable annual payments of $48,900.

In retirement beginning when Arnold is 57 and Sandy is 52, they will have two defined benefit pensions. Arnold’s would be $1,050 per month or $12,600 per year plus a bridge pension to age 65 of $160 per month. Sandy’s would be $575 per month or $6,900 per year with a bridge of $80 per month to 65.

At age 65, Arnold will have been a resident of Canada for 26 years, Sandy for 31 years. That would give Arnold about $4,740 from Old Age Security and Sandy $5,650 from OAS.

If they work to 57 and 52, Arnold and Sandy will have contribute­d to CPP for 18 years. They will have earned no more than 45 per cent of the $13,960 maximum in 2019 — say $6,282 for each partner at age 65.

The couple has a total of $55,000 in TFSAs. They can add the maximum of $6,000 each for the next six years. Assuming that their funds grow at three per cent per year after inflation, they will have $143,294 in 2019 dollars in six years. If that money were spent over the next 38 years to Sandy’s age 90, it would support tax-free payments of $6,370 per year in 2019 dollars.

The couple has $269,000 of RRSPs. They add $18,000 per year. If their present balance plus $18,000 annual additions grows at three per cent for six years it will rise to $437,600. That sum will support annual income of $18,900 for the next 38 years to Sandy’s age 90.

Assuming that the couple’s current $637,000 of taxable investment­s with no further additions grows at three per cent per year after inflation, then the accounts will rise to $760,620 in six years. That sum could support an income of $32,830 in 2019 dollars for 38 years, Moran estimates.

PAYING RETIREMENT EXPENSES

Current expenses of $14,340 per month would drop when mortgages for the condos are paid off or units sold and condo fees and property taxes ended. When the kids are finished with university, they would save $200 per month for RESPs and $600 monthly university cost contributi­ons. They could also cancel term insurance policies and save $214 monthly premiums. The total of monthly expenses would be $6,760 per month or $81,120 per year.

Adding up income components, the couple would have pensions from early retirement to age 65 of $22,380, $21,500 from sale of properties, TFSA income of $6,370 per year, RRSP income of $18,900, taxable income of $32,830, and income from downsizing the house of $48,900 per year for total annual income before tax of $150,880. With splits of eligible income, TFSA income set aside, average tax at 20 per cent and TFSA income put back, they would have $10,165 per month to spend. That would allow a surplus of $3,400 per month.

Once both partners are 65, their income including $10,390 combined OAS and $12,564 CPP but loss of bridges of $2,880 per year would be $170,954 per year. With TFSA income removed and applying a 21 per cent average tax rate and TFSA income returned they would have $11,370 to spend each month. They would have a $4,600 monthly surplus.

“Their retirement works on paper, but they lack room to adjust income until they sell the low-return investment properties and see the kids through university,” Moran concludes. “Then they will be financiall­y secure.”

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