Off-load­ing rental and pay­ing debt will se­cure B.C. woman’s re­tire­ment

Vancouver Sun - - FI­NAN­CIAL POST - AN­DREW ALLENTUCK Fi­nan­cial Post E-mail an­drew.allentuck@ for a free Fam­ily Fi­nance anal­y­sis.

Awoman we’ll call Lena, 46, lives in B.C. with her 10-year-old daugh­ter, Kim. Lena takes home $5,120 per month from her job in data-based pack­age man­age­ment sys­tems for a ship­ping com­pany and adds $1,200 in child sup­port, $283 for the Canada Child Ben­e­fit and $190 in rental in­come for to­tal af­ter-tax in­come of about $6,793 per month.

Lena’s chief prob­lem is debt. She has a mort­gage bal­ance of $304,000 for a rental condo with a three per cent float­ing in­ter­est rate; an un­se­cured credit line with a $26,000 bal­ance at an in­ter­est rate of 8.44 per cent; and a car lease, es­sen­tially a loan, that costs her $400 per month but that ex­pires in just a few months.

Lena would like to re­tire at 65 with $3,000 in monthly af­ter-tax in­come af­ter pay­ing off her debts and build­ing up her RRSP, TFSA and other as­sets. A rel­a­tively new Cana­dian, she will have only 24 of the 40 years re­quired to have full Old Age Se­cu­rity ben­e­fits at age 65. As well, her lim­ited par­tic­i­pa­tion in the Canada Pen­sion Plan will cap her ben­e­fits be­low the max­i­mum.

Fam­ily Fi­nance asked Derek Moran, head of Smarter Fi­nan­cial Plan­ning Ltd. of Kelowna, B.C., to work with Lena.


Lena’s largest in­vest­ment is her rental condo, which cost her $325,000 and has a present es­ti­mated value of $345,000. Af­ter an­nual costs $13,920 for in­ter­est, prop­erty taxes, in­sur­ance and fees, it leaves her with an an­nual re­turn of just $2,280. The net in­come is less than one per cent per year on her orig­i­nal cost. It is a poor in­vest­ment from a cash-flow per­spec­tive.

If Lena were to sell the rental and get $327,750 af­ter five per cent sell­ing costs, she could pay off her $304,000 mort­gage and then have $23,750 to re­duce her costly line of credit to a small and man­age­able sum of $2,250. With present pay­ments of $350 per month, the line of credit would be his­tory in six months.

With the mort­gage and line of credit paid, she would lib­er­ate $1,100 per month that can be used more pro­duc­tively.

Lena has $6,400 in Kim’s RESP and adds $100 per month. That’s $1,200 per year, about half the $2,500 con­tri­bu­tion needed to at­tract max­i­mum Canada Ed­u­ca­tion Sav­ings Grant of the lesser of $500 or 20 per cent of an­nual con­tri­bu­tions. If she can bump up her con­tri­bu­tions to $208 per month, per­haps us­ing some of the $400 monthly car lease pay­ments which will end soon, then the fund would grow to $31,550 by the time Kim is ready for post-sec­ondary ed­u­ca­tion at age 18. Kim would have $7,887 per year for four years for tu­ition and books if, as planned, she lives at home.


Lena has a monthly salary of $6,540. That’s $78,480 per year. She also gets an an­nual bonus of $4,200 so her pre-tax an­nual pay is $82,680. Her RRSP con­tri­bu­tion room is 18 per cent of that sum or $14,880 per year.

If Lena uses that limit, she could add $1,240 per month to her RRSP. She al­ready con­trib­utes $100 per month, so the net monthly in­crease would be $1,140.

Lena’s RRSP has a present bal­ance of $2,470 af­ter a 35 per cent mark­down due to the on­go­ing con­trac­tion. If she adds a to­tal of $1,240 per month, then with three per cent an­nual growth af­ter in­fla­tion, the ac­count would have a bal­ance of $389,300 in 19 years at her age 65. That sum could then sup­port pay­ments of $19,270 per year for the 30 years to her age 90.


The $14,880 an­nual RRSP con­tri­bu­tions would pro­duce tax re­funds of about $4,000 per year. Those re­funds could go to Lena’s Tax-free Sav­ings Ac­count, boost­ing con­tri­bu­tions of $1,200 per year now to $5,200 per year. It has a pal­try $400 present bal­ance. As­sum­ing that Lena main­tains the con­tri­bu­tions with year-end top-ups from tax re­duc­tions from RRSP con­tri­bu­tions for 19 years to her age 65, the TFSAS bal­ance still grow­ing at three per cent af­ter in­fla­tion would rise to $135,227 and then sup­port pay­outs of $6,700 in 2020 dol­lars for 30 years.

Lena’s re­tire­ment in­come will be composed of her pri­vate sav­ings in RRSPS, TFSAS, CPP and OAS.

Lena en­tered the Cana­dian work­force in 2015 at age 41. If she works to 65 and con­trib­utes to the Canada Pen­sion Plan for 24 years and gets cred­its for child-rear­ing years, then she would have 68 per cent of the present $13,855 max­i­mum ben­e­fit. She would re­ceive $9,421 per year in 2020 dol­lars.

Lena’s OAS cal­cu­la­tion will be based on ar­rival in Canada at age 41. She needs 40 years res­i­dence in Canada by age 65 for full OAS ben­e­fits and will thus only re­ceive 24/40 times the present max­i­mum ben­e­fit of $7,362 per year, or $4,417 per year.

As­sum­ing that Lena works to 65 and then retires, she will have in­come of $19,270 from RRSPS, $6,700 from her TFSA, $9,421 from CPP and $4,417 from OAS. That adds up to $39,800 per year.

Af­ter 10 per cent av­er­age tax but no tax on TFSA dis­tri­bu­tions, she would have about $36,500. That’s $3,040 per month, a lit­tle over her $3,000 af­ter-tax monthly in­come tar­get. She would still be a renter and rent in­creases could im­peril her stan­dard of liv­ing. How­ever, she would be debt free.

A sin­gle per­son, Lena would have no spouse with whom to split el­i­gi­ble in­come. “Even with a late start and a re­cent mar­ket melt­down, this long run plan should work,” Moran con­cludes.


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