FAMILY FINANCE

COUPLE’S FORTUNE IS TIED UP IN REAL ESTATE AS THE COST OF THEIR RETIREMENT YEARS LOOMS ON THE NEAR HORIZON

A millionaire couple is out of cash and running out of time.

Mark and Mary Walrosser* are millionaires, but they don’t have any money. Their situation is common in British Columbia, where real estate prices have zoomed far ahead of household incomes. Apart from a $750,000 house, they lead a modest lifestyle and still owe $38,000 on their truck, which will be paid off in seven years.

For the Walrossers, both 63, the problem is how to migrate from their present life, in which they have a consulting business for construction materials that generates takehome income of $3,517 per month, to a retirement supported by government pensions and what they can wrest from a little more than a quarter-million dollars of financial assets. The sad reality is that they will be hard pressed to maintain their present spending.

But money isn’t their only issue. Mark has had a stroke and cancer. Neither has recurred, but he knows that it’s better to quit his business and take it easy sooner rather than later. They already take Canada Pension Plan benefits of $13,488 per year. In two years, they can add Old Age Security, which will total $13,237 per year in 2014 dollars, to their income. Mary also already receives an indexed work pension of $3,900 per year. What will make or break their retirement plans comes down to handling their debt and drawing income from their financial assets. They figure they can work to 67, but 65 remains an option.

“We can work this out, but they will need to rethink how they generate income and make better use of their assets,” says Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C. “They might even have to extend their working lives a few more years to 70.”

The biggest problem is that their house amounts to 73% of their net worth and doesn’t produce any income. They have a basement suite they could rent out, but they prefer not to be landlords. Given their need for income, they should reconsider renting the apartment for what could be an extra $1,200 per month, Moran suggests. Or they could downsize their home and reinvest any money they liberate.

They recently paid off their $133,000 mortgage balance using a matured GIC. Their remaining RRSPs and other financial assets, $269,270, invested at 3% over the rate of inflation and growing for two years to age 65 when they want to close their business, would rise to $285,700 and could produce $15,900 for 25 years to age 90 in 2014 dollars. They also have $12,000 in cash.

They can also add their present CPP and OAS benefits and Mary’s work pension. That will give them a pre-tax annual income of $46,524. With various credits for age and qualified pension income, they will pay 10% average income tax, leaving them with a monthly household income of $3,489. That will just about pay present monthly expenses of $3,536, stripping out