Wi­dow must har­vest funds from her money-los­ing farm for her re­tire­ment

Calgary Herald - - FINANCIAL POST - AN­DREW ALLENTUCK Fam­ily Fi­nance Email an­drew.allentuck@gmail.com for a free Fam­ily Fi­nance anal­y­sis

In south­ern On­tario, a woman we’ll call Abby, 60, has a small farm and a loom­ing prob­lem. Her hus­band of two decades died sud­denly, leav­ing her with mod­est in­come, a big mort­gage and a ques­tion of how she will ad­just to life alone. Fi­nan­cially, her dilemma is how to cope with less in­come and no help on the farm, which is los­ing money and leav­ing her to slowly go broke.

The farm never made much money, but Abby sat­is­fied the Canada Rev­enue Agency that the busi­ness was not just a money los­ing hobby. “My goal is to keep my farm and to have an ad­e­quate in­come to sus­tain my prop­erty,” she ex­plains. Sadly, with present as­sets and mod­est farm in­come, that goal is un­re­al­is­tic.


Be­fore her hus­band, Al­fred, died, Abby did ad­min­is­tra­tive work. Af­ter Al­fred passed away, Abby quit her ad­min­is­tra­tive job to run the farm, which gen­er­ates $24,000 an­nu­ally in tax­able in­come, on her own. She wants to stay on her small farm for five to 10 years, then sell it for money for a re­tire­ment home.

She is her only re­source for she has no RRSPS, no pen­sion, no TFSA and no other in­vest­ments. Cash in the bank is $94,000 earn­ing vir­tu­ally noth­ing. She uses it to cover ex­penses in ex­cess of in­come. Her mort­gage costs her $2,148 per month with a 3.59 per cent in­ter­est rate and about 18 years to ma­tu­rity. Her dis­cre­tionary in­come is $2,000 from the farm per month plus cur­rent CPP ben­e­fits, $438 per month, to­tal $2,438 be­fore 10 per cent av­er­age tax, net $2,194 per month. She draws on cash hold­ings to cover the $4,314 monthly deficit. At this rate, the cash will be gone in 22 months.

Fam­ily Fi­nance asked Eliott Ei­nar­son, a fi­nan­cial planner in the Win­nipeg of­fice of Ot­tawa-based Ex­po­nent In­vest­ment Man­age­ment Inc., to work with Abby.

Abby’s largest fi­nan­cial as­set is her 40-acre farm. Its ap­prox­i­mate value in­clud­ing equip­ment and in­ven­tory, is $1.1 mil­lion. Her three adult chil­dren are fi­nan­cially in­de­pen­dent with fam­i­lies of their own. Her main li­a­bil­ity is her $339,000 mort­gage and its $2,148 monthly pay­ment plus $186 for mort­gage life in­sur­ance. That adds up to $2,334. And that amounts to 35 per cent of to­tal ex­penses, cur­rently $6,508 per month

When she winds down her farm op­er­a­tion, Abby can cut costs. $400 per month for an­i­mal feed and $80 per month for trac­tor fuel can be elim­i­nated. That would cut her bills in­clud­ing the mort­gage, cur­rently $6,508 per month, to $6,028 per month. That is still too much.


Abby does not have a lot of choices. Her farm eq­uity, its es­ti­mated $1.1 mil­lion sale price less the $339,000 mort­gage, is $761,000 or $723,000 af­ter five per cent sell­ing costs. That sum in­vested at three per cent af­ter in­fla­tion in a rel­a­tively low-volatil­ity port­fo­lio or ex­change-traded fund would gen­er­ate $21,688 per year. Added to CPP, $5,256 per year, her in­come would be $26,944 be­fore tax. With no abil­ity to split in­come with a part­ner, she would pay 10 per cent av­er­age tax and have $2,020 per month.

With the farm sold and mort­gage elim­i­nated, Abby’s ex­penses would de­cline to $3,910 per month. With no other in­come, she would have a deficit of $1,890 per month and have no place to live. If she were to spend $2,000 per month on rent, her deficit would be $3,890 per month. She has to get a job to pro­vide at least five years of in­come and gen­er­ate sav­ings be­fore she can re­ceive Old Age Se­cu­rity at age 65, cur­rently $7,362 per year.


Abby needs a sur­vival strat­egy. For now, she needs a job or her sav­ings will be quickly eroded. If she can bring home $3,500 per month or $42,000 per year, she can keep her small farm and house, put gas in her car and pay her util­i­ties. This is a bare sur­vival plan.

If Abby can get a job to main­tain her present lifestyle costs and mort­gage pay­ments for five years to age 65, and then re­tire, she can ex­pect that her farm and house would have grown at three per cent per year to $1,275,000.

If she then sells the farm for 95 per cent of value to cover costs, she could pay off her es­ti­mated re­main­ing mort­gage bal­ance of $210,000. The re­main­ing $1,001,250 could be in­vested at three per cent per year af­ter in­fla­tion to gen­er­ate $49,595 per year for the next 30 years at which time all cap­i­tal and in­come would have been paid out. She could add $7,362 Old Age Se­cu­rity at present rates to her present CPP ben­e­fits, $5,256 per year to boost in­come to $62,213 be­fore tax. Af­ter 18 per cent av­er­age tax, she would have $4,250 per month to spend. That would cover her re­duced monthly ex­penses.

Abby is in good health. If she can get a job that gives her $3,500 per month af­ter tax, this plan will work. If her in­come from the job is half that, her first five years be­fore she can re­ceive Old Age Se­cu­rity would be dif­fi­cult. She could re­duce monthly mort­gage ex­pense by re­mort­gag­ing her prop­erty. That could re­duce ex­penses now but add costs later on.

“Abby has a se­ri­ous cash­flow prob­lem now,” Ei­nar­son says, “but it can be solved if she gets a job for five years. As­sum­ing she re­turns to her for­mer work in ad­min­is­tra­tion and makes $42,000 per year, she can have se­cu­rity in a post­poned re­tire­ment.”

Canada’s re­tire­ment ben­e­fit sys­tem is sup­ple­men­tal. CPP ben­e­fits de­pend on con­tri­bu­tions. OAS is an in­come-tested top up of re­tire­ment cash flow sub­ject to the claw­back that lim­its what the plan pays. Abby is for­tu­nate to have a large as­set, her farm, she can sell for cap­i­tal to gen­er­ate the money she needs.




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