Situation: Couple who invested shrewdly in real estate concerned about retirement income
Solution: With modest income target and a significant safety net, they can put their worries aside
A couple we’ll call Henry, 57, and his wife, Millie, 54, live in Ontario. They have two children in their thirties. A building management supervisor, Henry brings home $6,000 per month from his job. Millie, retired from a career in office work, has no income. They add $1,200 in net monthly rental income.
Diligent saving and canny investing have helped the couple build a portfolio that includes a $1.5 million home, a $400,000 cottage, four Florida rental properties with a value of just over $1 million and $924,000 in fibioreportscial assets. There’s $334,000 in liabilities, mostly for the rentals. Altogether, 80 per cent of their net worth is in real estate.
Henry expects to retire at 65. He wonders if they will be able to achieve a retirement income of $50,000 after tax.
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Family Fibioreportsce asked Derek Moran, head of Smarter Fibioreportscial Planning Ltd. in Kelowna, B.C., to work with Henry and Millie.
There is risk in their high allocation to property, Moran explains. Moreover, they have a $60,000 liability. That is part of down payments on two condos that Henry and Millie are buying for their children.
There is a story behind the couple’s real estate holdings. They bought their Florida properties shortly after the housing market crash of 2008-2009 for very advantageous prices. Their present value is the result of post-crisis appreciation.
As investments, the U.S. condos generate $14,400 of net annual rental income on a full-cost basis including fibioreportsce costs, maintebioreportsce and depreciation. That is a 1.9 per cent return on $766,000 of equity. It’s not a great deal for leveraged investments, Moran notes. They could do better with less risk in Canadian utility and bank stocks that currently yield an average of four per cent. Canadian stock investments have simple accounting, no requirements to file U.S. income tax returns, and no risk of damage from hurricanes.
Henry and Millie want to have $45,000 to $50,000 per year after tax when they retire. That’s $3,750 to $4,170 per month. Their present allocations of $7,200 per month include $2,597 directed to savings in TFSA and RRSP accounts and cash savings. Take that out and they would require $4,600 per month, but could find some other small monthly savings if needed. Their investment loan could be cleared by selling investments.
Home and cottage property taxes are $1,420 per month or $17,040 per year. Those are fixed costs as long as they have their house and cottage. A 10-year level premium term life insurance policy costs $1,200 per year. It renews at a much higher level in three years. Henry and Millie could end the policy now. They don’t need the $100,000 death benefit anymore. The kids are grown and gone and the real estate debt could be covered by a sale, if needed, Moran explains.
Savings and pensions
When to take Canada Pension Plan benefits is a problem for healthy people like Henry and Millie. When each is 65, they should take the standard benefit, which will be the maximum $13,855 for Henry and 40 per cent of the maximum, or $5,542 per year, for Millie. That’s a sum of $19,397. They need not take it before Henry is 65, for the 36 per cent discount for each at 60 would be a permanent reduction of income and exposure of at least Henry’s income to high marginal rates while working. Starting CPP at 70 with a 42 per cent boost of the age 65 amount is a gamble on health.
Henry and Millie will both qualify for full Old Age Security at 65, currently $7,290. If Henry starts before he retires at 65, his OAS could be subject to the clawback. It would be better to wait until Henry is 65. Moran advises. Postponement adds 7.2 per cent per year to benefits, but, OAS, too, is a life annuity. Start when retirement begins, Moran advises.
The couple’s combined RRSP balance, $555,000 is growing with additions of $700 per month at three per cent after inflation. The RRSPs will become $780,000 in eight years when Henry is 65. That capital, still growing at three per cent after inflation, will support payouts of $38,636 for 25 years to Henry’s age 90.
Their TFSAs, with a combined present balance of $157,000 growing at $12,000 per year with contributions increased using cash reserve from the present $7,200 per year for eight years at 3 per cent after inflation will have a value of $308,800 in 2019 dollars. If that money continues to grow at the same rate for 25 years to Henry’s age 90, it would support tax-free income of $17,217 per year.
The $122,000 investment account with no further additions for eight years to retirement at Henry’s age 65, then growing for 25 years at 3 per cent after inflation would become $323,640 by the end of Henry’s assumed 25-year retirement. At any time, the couple could dip into the account to buy a new car, assist their children or donate to charity. After death of the first partner, the account could replace loss of one OAS benefit and most of a CPP payment and income splitting.
There are two stages for retirement income — first, when Henry is 65 and second, when Millie is 65. At 65, income will include Henry’s $13,855 CPP, his $7,290 OAS, $38,636 RRSP income, $17,217 TFSA payouts, and $14,400 rental income. The sum, $91,398, split and with everything but the TFSA payout taxed at an average rate of 15 per cent, would provide $80,270 after-tax annual income. That exceeds the couple’s $50,000 annual target. Three years later, family income will rise with addition of Millie’s $5,542 CPP and her $7,290 OAS for a total of $104,230, taxed at average 16 per cent and with TFSA payments restored would provide $90,300 yearly.
Retirement stars: five retirement stars ***** out of five
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