SINGLE MAN NEEDS TO SELL HIS MONEY-LOSING CONDO, START SAVING, STAT, OR RISK POVERTY IN RETIREMENT
Sell the rental, invest proceeds, work to 65, save aggressively, then live well in retirement
Norman, as we’ll call him, lives in Saskatchewan. At the age of 52, he has a solid job in advertising and brings home $ 5,000 a month. He lives in a rented apartment but owns an investment property in Alberta which, leased to a friend, loses money. Norman’s goal is to retire as early as age 60. His problem: Apart from the condo, in which he has equity of $56,316, the income from his financial assets of about $100,000 plus what he may get from the Canada Pension Plan and Old Age Security won’t pay for much of a retirement. “I’d love to retire in B.C., and enjoy life,” Norman says. “Maybe go to Europe every few years.”
Family Finance asked Guil Perrault, a financial planner with the Foster Agency in Winnipeg, to work with Norman. “He has to save aggressively. If he does not, he will wind up poor,” Perrault says.
Norman’s first task has to be dealing with the cash drain of his rental condo. His monthly expenses — $835 for mortgage interest, $102 in property tax and $337 in condo fees — total $1,274. Take off the $ 850 rent he collects and his monthly loss is $424. Friendship is fine, but the loss is eight per cent of his takehome job income. He needs to raise the rent to at least cover his costs, Perrault says. Even then his investment would be dead money. His best move is to sell the condo. We’ll assume he does so to be free to move to B.C. in retirement. Moving into the Alberta condo would mean giving up his job in Saskatchewan. That’s not in his plan.
THE DILEMMA
Retirement as early as 60 with his present rental loss and modest savings would be a challenge. By taking his CPP early, Norman’s annual benefit will be reduced by 36 per cent: He will get $7,040 per year, or $587 a month, rather than the $11,000 per year estimated value he would receive at age 65. Even to get a $2,500 monthly income on top of his reduced CPP will take work, though it can be done, as we’ll see. Assuming a monthly cost of living of $ 3,000, Norman would need annual pre- tax retirement income of $ 40,040, which is $33,000 more than his current savings and CPP will provide. To generate that sum, Norman would need $660,000 in capital generating five per cent before any inflation adjustment or tax.
Norman’s financial assets, $100,000, cannot generate the income he needs. If he sells his rental condo for $250,000 and walks away with $44,000 after paying off his $193,684 mortgage, selling costs and any capital gains tax over his purchase price and improvements, he would end the $5,088 cash drain. He would have $44,000 additional capital to invest.
If Norman invests in so- called dividend aristocrat stocks, such as BCE Inc., and various regulated electric power utilities, which pay four- to five-per-cent annual dividends and provide share price growth of a few per cent a year, he would have the required five per cent pretax return. This return would be sheltered within his RRSP and in a TFSA. He could smooth the risks of stock picking by using an exchange-traded fund with such stocks. Some of these ETFs sport annual fees of as little as a quarter of one per cent per year, a 10th of the average for equity mutual funds.
MANAGING THE BUDGET
Norman can cut his cost of living and thus raise savings potential. He could reduce dining out by $ 200 a month, reduce his entertainment budget by $ 250 a month and eliminate interest charges of 19.99 per cent a year on his credit-card balance of $15,000 by using his $15,000 cash balance at his bank to pay off the debt, thereby saving $ 250 a month in interest costs. He would lose the negligible interest the bank pays on his savings. The rental condo costs would be history, saving $ 1,274 a month. These adjustments would reduce his cost of living by $ 1,974 a month to $3,056 a month.
Norman can bundle up his $ 85,000 net savings after discharging creditcard debt and the $ 44,000 he will get from selling his condo after costs and taxes, a total of $ 129,000. Then, using money harvested by cutting living costs, he can save his estimated maximum $ 1,680 a month or, $ 20,160 a year in his RRSP to make full use of his annual limit of about $15,000 to fill available space. He can put his annual tax refund of $6,200 a year into a TFSA. With a five per cent annual return in the eight years at his retirement age of 60, his total savings would grow to $455,000. If he puts $60,000 down on a $300,000 retirement condo in B.C., far from pricey areas in the Lower Mainland, he would retain $395,000 for his retirement income. That sum, annuitized for 35 year from age 60 to 95 with a five per cent annual return would generate $23,000 before tax.
CPP would provide $ 7,040 a year. His income to age 67 would thus be $ 30,040 a year or $ 2,295 a month before 10 per cent average tax. With expenses reduced to $3,056 a month and further reduced to $ 1,956 by elimination of present $1,100 monthly rent he would not pay if he lived in a retirement condo, his surplus would be $339 a month but, in reality, he would probably run deficits after paying condo fees and property taxes.
Norman would probably need parttime employment for a few years. At 67, Old Age Security at a present rate of $565 a month would push total income to $ 3,068 a month before 10 per cent average income tax and $ 2,760 after tax. Diligent saving and perhaps several years of part- time work would have kept him solvent.
TAKING A NEW COURSE
Norman could work to 65, aggressively saving to close the gap between what he needs to live in retirement and what his savings will provide. He could wait to take CPP at age 65 and thus gain more contribution years and perhaps attain the full CPP benefit of as much as $ 12,780 a year. If his base capital after sale of the condo is $ 129,000 and he can obtain a five per cent annual return on that capital plus annual savings in RRSPs and other accounts of $26,360 a year for 13 years to age 65, his capital would rise to $733,500. If annuitized for 30 years to 95, with unpaid capital grow at five per cent per year, it would generate $45,500 before tax. Add in full CPP at $ 12,780 a year and pre- tax income would be $ 58,300 a year. After 17 per cent average tax, he would have $4,035 a month to spend. At 67, he would receive Old Age Security at $6,778 a year, pushing pre- tax income to $ 65,100, or $4,450 a month after 18 per cent tax.
At 65, Norman would have no need to work part-time. His normal monthly expenses would still be $1,956 or perhaps $ 500 more for condo fees and taxes, leaving a surplus of $2,000 a month. A longer period of building savings and a shorter period of drawing them down would be the difference between living on the margin and living well.