Quebec man can’t afford second home and $120K after-tax retirement income

In Quebec, a man we’ll call Louis, 52, used to be a manager at a metal manufacturing company. He has two teenage children living with his former spouse. He pays child support of $2,000 per month. Louis has no present job income, but he does have assets that add up to about $2.98 million. His goal is to have $120,000 yearly after tax to his age 95, to buy a fine house in Florida and a couple of new cars. Should he do it in a period of volatile asset prices and potentially difficult border crossings if COVID-19 is not tamed? A binational life with houses in two countries is expensive.

Family Finance asked Caroline Nalbantoglu, head of Cnal Financial Planning Inc. in Montreal, to work with Louis. She notes that before tax he receives $47,000 per year in dividends and another $7,500 in annual interest income. However, his allocations, $11,150 per month, far exceed his after-tax income of about $3,600 per month. He dips into savings to support his spending. With the market rout of 10 to 20 per cent — it changes every day, of course — Louis may have trouble selling sufficient assets to support his retirement.

Louis’ goal is to buy a home in Florida with a $600,000 price tag — all sums are in Canadian dollars — and to spend perhaps half the year there. He will need a car for Florida. He estimates the cost at $40,000. He also needs a new car for Quebec. He figures $70,000 for that one. That’s a total cost of $110,000, but Nalbantoglu suggests he pumps the brakes on that plan. Cut the budget to $35,000 for two cars, maybe a couple of good used models, she suggests.

The baseline for Louis’ plans is his present wealth. His financial assets were $3.6 million before the COVID-19 crisis. We’ll use a recent value of $2,984,800. Strip out his $600,000 house, the $104,000 RESP for the kids and his $4,000 car and Louis has $2,276,800 in personal financial assets.

Assuming that Louis lives to 95, that money, invested at three per cent after inflation, can generate $92,150 per year for 43 years, before tax. That alone will not meet his goal.

THE ALTERNATIVES

Louis has four choices when it comes to a Florida house:

1. Take $600,000 from $852,000 in non-registered Canadian assets and buy the house. That would cut his income by $24,300 per year with the same three per cent for 43 years assumptions.

2. Sell his $600,000 Quebec house and use the proceeds to buy a $600,000 house in Florida. He would then rent a house or other dwelling in Quebec at what he estimates would be $2,500 per month. If he does that, he would have to reduce other discretionary expenses by a similar amount to keep his spending steady. If he does not, he would slash his capital quickly.

3. Make a down payment on a Florida house and borrow the rest. That would keep capital relatively intact. A 2.75 per cent loan after a 20 per cent down payment would cost approximately $1,800 per month. Add average $5,880 annual taxes and $2,500 for home insurance.

4. Rent in Florida. A house with a cost of $2,500 per month for seasonal rent including utilities would take $30,000 per year. All that would require about $43,000 of income taxed at a 30 per cent average tax rate.

The conservative path is not to buy another property unless Louis sells his Quebec home. Louis’ expenses won’t change until $2,000 monthly child support stops in four years. Expenses with the present baseline of $11,650 would decline to $9,650 per month. Then renting in Florida would be affordable.

PLANNING INCOME

Louis’ financial assets, if annuitized to pay out $92,150 per year, can pay for one house and the taxes and utilities that come with it, but not two. He will also have additional sources of income.

Louis expects a Quebec Pension Plan benefit of $8,867 at 65. He can also expect about $10,600 per year from his TFSA, if it is allowed to grow with $6,000 annual contributions until his age 65, and is then annuitized for 30 years.

He would receive Old Age Security at a present rate of $7,362 per year. That only adds up to about $118,000, before tax.

He could take additional funds from his financial assets to reach his goal of $120,000 after tax, but that would both erode his capital and add to the OAS clawback. Louis would be trapped by his income for he has no spouse with whom to split it.

Louis could get lucky and see a 30 per cent rise in the value of his financial assets or perhaps get a higher price for his Quebec house, should he choose to sell, and might be able to reduce the income gap that way, but as it stands he will be short of his goal.

HOME BASE

Louis will have to decide where he will make his permanent home. He cannot afford two homes financed on savings, QPP benefits and OAS, some of which he will to lose to the clawback. He could rent out the Florida house in summer — the low season from a snowbird’s point of view — or the Quebec house in winter.

Demand works the other way, but it could be worth a try. There are other potential complications as well: Were Louis to die owning the U.S. house directly, his estate could face U.S. succession duties, among others. He will have to consider all of them before making his choice.