Woman who splits year between Prairies, Mexico mulls B.C. retirement
In a prairie province, a woman we’ll call Holly, 62, makes her living as a landlord. She has three rentals with mortgages on each. Together, the three units provide monthly income before tax of $3,470. She adds $1,705 from stock dividends, for a total of $5,175. It is not a lot given that she leads a life in two countries, spending half the year in Canada and half in Mexico, following the sun.
She considers a compromise: B.C., perhaps Vancouver Island. Though she has no mortgage on the Mexico home and her cost of living there is low, a move would give her the moderate temperatures she craves without the travel and duplicate costs that come with living in two places.
Holly needs to know what’s possible.
“How much money will I be able to spend annually without going broke if I live to 95?” she asks.
And is her expectation that a move to B.C. would be a fresh start really feasible? It is a financial question, of course, but it is also a matter of judging whether she should undertake what would be a transformational move from blizzards to rain.
Family Finance asked Graeme Egan, head of Castlebay Wealth Management Inc. in Vancouver, to work with Holly.
THE BALANCE SHEET
The first issue, for Egan, is what should be done with the rental properties.
Two of them boast returns of 6.8 per cent on equity and 9.9 per cent on equity, respectively. They pay Holly a total of $3,358 per month or $40,296 per year after expenses but before tax. They are worth keeping, Egan says.
The third is not so profitable. Its original cost was $485,000 and is now valued at an estimated $435,000 — a $50,000 paper loss. Holly makes a $1,400 monthly mortgage payment and after expenses nets $1,380 per year. That’s a trifle for the capital tied up in it. It should be sold, Egan suggests.
If she sells the property and pays off the $291,100 mortgage, she could free up $122,150 after five per cent selling costs. She would also have a $50,000 capital loss. Half of that would be taxable, so it could be used to offset other capital gains or carried forward indefinitely.
RETIREMENT INCOME
By getting rid of one underperforming asset, Holly can switch $122,150 to her non-registered assets. That will boost the total of those assets to $1,720,086. If that sum is invested at three per cent after inflation for 33 years to age 95, it would generate $80,420 in 2020 dollars before tax.
Holly’s RRSP totals $327,000 and if invested to generate a three per cent return after inflation for 33 years to her age 95, would provide an income of $15,747 per year before tax.
Her TFSA has a present value of $71,411 and if invested with the same assumptions, it would generate $3,440 per year.
The sum of pre-tax income from these assets, $80,420 from non-registered assets, $15,747 from RRSPS, and $3,440 from her TFSA, totals $99,607 before tax. Her retained rentals would generate $40,296 per year. That is a pre-tax total of $139,903.
With no tax on TFSA cash flow and 27 per cent average tax on the balance, she would have $103,058 to spend per year. That far exceeds present allocations of $5,175 per month or $62,100 per year.
At 65, she could add $6,264 from the Canada Pension Plan and $7,362 from Old Age Security for
IT’S A CRITICAL DECISION BALANCING TEMPERATURE AND AFTER-TAX INCOME.
total pre-tax income of $153,629. OAS would be fully clawed back, leaving adjusted annual income at $146,267. With TFSA cash flow eliminated and tax at a rate of 28 per cent on the balance, she would have $106,203 to spend each year. That works out to $8,850 per month She would have a surplus of $3,675 per month based on current allocations.
SURPLUS OR DEFICIT
This budget would work for her present way of life of six months in Canada and six months in Mexico. But if she were to move to coastal B.C, with its higher house costs, her monthly surplus could decrease or disappear, depending on where she settles.
Her Canadian rentals, if kept, would require a yearround property manager for the two remaining properties. Those charges would cut her net rents. She could sell the rentals and her present home and use proceeds for a house or condo in B.C., but that would eliminate her $40,296 investment income from the remaining rental properties.
Holly has the resources to live as she wishes to her mid90s and beyond if fortune favours her. Present spending leaves substantial savings and thus choices of how and where to live.
Our projections show a substantial surplus for her present way of life. However, if she increases her Canadian spending on a B.C. house, transferring equity from depressed prices in her prairie town to soaring prices in parts of B.C., she will lose some of her margin, see reduced monthly and yearly savings, and perhaps have to choose sooner rather than later where she will live when international commuting is no longer convenient.
“This woman’s cost of living and her entire way of life work because her Mexican costs are very low,” Egan explains. “If she swaps her present town for high-cost parts of B.C., she will lose her present cost advantage. It’s a critical decision balancing temperature and after-tax income.”