Down­siz­ing in dec­i­mated Al­berta mar­ket key to se­nior se­cur­ing re­tire­ment

Calgary Herald - - FINANCIAL POST - ANDREW ALLENTUCK Fam­ily Fi­nance

In Al­berta, a woman we’ll call Sarah, 66, is a health-care ad­min­is­tra­tor work­ing in a pri­vate fa­cil­ity. She earns $5,500 per month from her job and adds $614 from Old Age Se­cu­rity and $1,058 from the Canada Pen­sion Plan for to­tal in­come of $7,172 per month be­fore tax. Af­ter 20 per cent av­er­age-in­come tax and a $900 bite from the OAS claw­back that starts at $79,054 per year, she takes home $5,200 per month.

Sarah wants to re­tire in two years, but that plan is com­pli­cated by an out­stand­ing mort­gage of $142,000 and a $19,000 line of credit for which she pays a to­tal of $1,043 per month. She es­ti­mates the mar­ket price of her house at $575,000. Her as­sets, in ad­di­tion to her house, in­clude her $15,000 car, $520,100 in RRSPS (af­ter a 20 per cent hit due to the mar­ket de­cline) and $6,300 in her TFSA. She has a de­fined-ben­e­fit pen­sion plan that will pay her $175 per month if she re­tires in 18 months or $259 per month if she re­tires in 36 months. Her start­ing point for re­tire­ment is a net worth of $955,400, not in­clud­ing the present value of her work pen­sion.

When Sarah quits her job, the largest part of her in­come will end and she will be left with about $50,000 of pre-tax in­come. She will still have to make pay­ments on her house mort­gage and line of credit. She would cover present ex­penses with­out a mar­gin for un­ex­pected costs. It would be tight.

AS­SET MAN­AGE­MENT

Her re­tire­ment plans are com­pli­cated by the down­turn in the Al­berta prop­erty mar­ket. She had planned to sell her house this year when her mort­gage would be ready for re­newal and buy a smaller house with no mort­gage. But down­siz­ing when prices have tum­bled is not at­trac­tive. “Am I bet­ter to keep work­ing as long as I can?” she asks.

Fam­ily Fi­nance asked Eliott Ei­nar­son, a fi­nan­cial plan­ner who heads the Win­nipeg of­fice of Ot­tawa-based Ex­po­nent In­vest­ment Man­age­ment Inc., to work with Sarah. Ei­nar­son ex­plains the core of the dilemma: Sink­ing money into a new house or condo will re­duce cap­i­tal avail­able for gen­er­at­ing re­tire­ment in­come.

Sarah’s prob­lem comes down to try­ing to time hous­ing mar­ket re­cov­ery, which won’t likely oc­cur un­til en­ergy prices re­bound. But tim­ing that re­cov­ery is not a pro­duc­tive ex­er­cise, Ei­nar­son says. The bet­ter bet is to sell the house, buy a small condo and bank the dif­fer­ence. Were she to sell her present home for $575,000 less five per cent costs, net $546,250 and use the pro­ceeds to pay down all debts, she would be left with $385,250. With­out a mort­gage or line of credit, she would be more se­cure than she is now.

RE­TIRE­MENT BUDGETING

Sarah adds $500 per month to her RRSPS. She would not have to do that in re­tire­ment. She has a term life pol­icy with a $150 per month pre­mium that is not nec­es­sary given that she has no de­pen­dents. With a down­sized res­i­dence, she would have no need to pay $1,050 as she does now for her mort­gage and line of credit. The sav­ings would add up to $1,700 per month and re­duce her present al­lo­ca­tions from $5,200 per month to $3,500 per month.

If Sarah works an­other two years, her $520,100 RRSP with $6,000 from her an­nual con­tri­bu­tions would grow to a bal­ance of $564,320 as­sum­ing a re­turn of three per cent per year af­ter three per cent an­nual in­fla­tion. That sum would gen­er­ate $29,900 per year for 27 years to her age 95 at which time all cap­i­tal and growth would be paid out.

The work pen­sion for which Sarah qual­i­fies will pay $2,100 per year if she re­tires in one year or $3,100 per year if she re­tires in two years. Her CPP and OAS are al­ready pay­ing her $12,695 and $7,262 per year, re­spec­tively.

Thus with two more years of work, Sarah would have an­nual pre-tax in­come con­sist­ing of $29,900 from her RRSP, $3,100 an­nu­ally from her work pen­sion, $12,695 from CPP and $7,362 from OAS. The sum, $53,057 per year be­fore es­ti­mated 16 per cent av­er­age in­come tax would leave her with $3,715 per month. That com­pares to es­ti­mated re­tire­ment spend­ing of $3,500 per month af­ter house down­siz­ing. She would have a mar­gin for un­ex­pected ex­penses.

We have not in­cluded Sarah’s $6,300 TFSA port­fo­lio. We’ll as­sume that she keeps this for emer­gency ex­penses or a ba­sis for fu­ture re­tire­ment sav­ings.

ADDING TO IN­COME

Given the ac­count bal­ances and small pen­sion for which Sarah qual­i­fies, there is lit­tle chance for re­tire­ment in­come to ex­ceed the sums we have es­ti­mated. How­ever, if she does part-time work in re­tire­ment to gen­er­ate, say, $1,000 per month be­fore tax or $840 per month af­ter 15 per cent av­er­age tax, she would have many more choices in­clud­ing a trip of a few weeks ev­ery cou­ple of years. If she works to earn $2,000 per month and pays about the same tax, she would be able to af­ford a new or newer car in five or six years.

Should Sarah out­live her RRSP sav­ings, she would still have her work pen­sion, CPP and OAS, and the down­sized home that might be sold. The pro­ceeds could be used for day-to-day ex­penses in­clud­ing rent or care. She might also in­ves­ti­gate a re­verse mort­gage that would use a part of the eq­uity of her home as a base for a loan that would have no in­ter­est payable. Re­verse mort­gages have higher in­ter­est rates than con­ven­tional mort­gages and limit loans to a frac­tion of as­sessed value. If the prop­erty ap­pre­ci­ates dur­ing the term of the loan, it could be paid off. Re­verse mort­gages must be dis­cussed with an ad­viser fa­mil­iar with them. They are so­lu­tions to cash short­ages but they can be per­ilous.

In re­tire­ment, Sarah will be alone, and part-time work would pro­vide a mar­gin of fi­nan­cial safety. But she can get by with­out it, too.

“She will have suf­fi­cient money to live on her own to age 95 and be­yond,” Ei­nar­son con­cludes.

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