Situation:66-year old woman wants to retire next year, worries income won’t be sufficient
Solution:Keep the house, rent out the basement suite and enjoy a comfortable retirement
In Ontario, a woman we’ll call Eliza, 66, wants to transition from her career in high tech to a comfortable retirement in which she will have at least $45,000 per year after tax, including Canada Pension Plan and Old Age Security benefits. She brings home $75,000 per year and has $1,495,000 of assets and modest liabilities of $35,362. Her net worth, $1,459,638, is substantial. But there is a problem — half of her assets are tied up in her $750,000 home.
Eliza’s concern is that the sum of her income from her savings, OAS and CPP will not get her to her pre-tax income goal. Her concern is understandable, but she has several sources of retirement income and a fully paid house. Her debts are relatively small. The question: “Will I be able to live on my pension and investment income much as I do now?”
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Family Finance asked Owen Winkelmolen, a fee-for-service financial planner who heads PlanEasy.ca in London, Ont., to work with Eliza, partly to calculate her retirement income and partly to determine if she will be able to retire with financial security.
The foundation of Eliza’s retirement plan is secure. Her personal RRSPs, with a present value of $402,000 plus a one-time contribution of $6,000 in 2019 and growth at 6 per cent per year less 3 per cent for inflation, will be worth $420,240 next year. If that sum is paid out over the next 28 years to her age 95, it would generate $21,745 per year.
Her job-based defined-contribution pension plan, currently valued at $300,000, rising with employer contributions to $309,000 next year, would pay $15,990 per year with the same assumptions.
Eliza’s tax-free savings account, with a present value of $28,000 and a $6,000 contribution next year and 3 per cent growth, would have a value on the eve of her retirement of $34,840 and with the same return after inflation pay $1,800 per year.
Based on work history and an 8.4 per cent boost per year for starting CPP at the end of her 67th year, Eliza would get $15,830 per year and, for waiting two years to take OAS with a 7.2 per cent boost for each year, she would get $8,256 per year before tax.
The sum of these income flows is $63,620 per year. After 19 per cent average income tax but no tax on TFSA cash flow, she would have about $4,323 per month or $51,875 per year to spend. That’s more than her $45,000 after-tax target. If, as she plans, she rents out a basement suite now occupied rent-free by her daughter, she can add $800 per month or $9,600 per year to pre-tax income. That would put her far over her target. Moreover, some costs, such as the monthly $1,800 she is paying to her daughter while in university, would disappear. Her costs of living would drop dramatically and reduce financial pressure as she plans the next stage of her life.
Eliza has a couple of outstanding loans — a car loan with a $16,222 balance and a home equity line of credit of $19,140. She is paying down the HELOC at $7,200 per year, so it will be history soon after retirement. Her car loan, paid down at a present rate of $6,240 per year, will be paid a few years into her retirement. Eliza can just pay down the loans as she is doing now and need not dip into savings, as she has considered.
Sell the house?
Eliza has considered selling her $750,000 house. By not having this money invested and generating income, she theoretically gives up the $22,500 a year in income this sum would generate at three per cent per year. Add in property taxes at $4,800 per year, and her theoretical cost of occupancy is $27,300 a year before tax.
The money she might get from selling the house, after five per cent selling costs, would be $712,500. If put into an investment fund to return three per cent after inflation, she would have a $21,375 per year or $1,780 per month income in 2019 dollars. But that would be taxed at, say 15 per cent average in her bracket, so that she would have $18,169 for rent. Added to $4,800 annual savings on property tax she would not pay, it works out to $1,914 per month. That would cover a decent rental in her town, but she would have given up a solid asset capable of long-term appreciation. Best move — she can afford to keep the house until and if she needs care and can no longer stay there. It is a valuable reserve asset. Its theoretical cost, $27,300 a year less $9,600 for potential future basement apartment rent. That works out to $17,700 per year before tax on rental income received. It’s a modest cost given the benefit of staying in her familiar home.
If Eliza does need care one day, she could sell the house and use that capital with an assumed three per cent return, $22,500 (we’ll forget maintenance and taxes — they would be the buyer’s cost), added to other income to make total income about $86,120 before tax. Again, with no tax on TFSA cash flow and after 20 per cent average tax, she would have about $5,800 to spend each month. That money would pay for mid-level care at present rates in Ontario long-term care homes.
Eliza could be financing her own care. Alternatively, she could buy care plans from insurance companies, but with waiting periods before benefits are paid, payout limits, and high costs when one buys the plans late in life, they would not be attractively priced, the planner notes. By keeping the insurance premiums she might have to pay on such a policy she maintains choices of other things to do with that money.
Eliza has a solid retirement plan and needn’t worry about meeting her spending goals, Winkelmolen says.
“She will have a surplus for travel or gifts to her daughter. Her preparations for a secure retirement are well in hand.”
Retirement stars: Four **** out of five
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