Married couple need roadmap to ensure their comfortable lifestyle continues in retirement

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Longtime married couple Bill, 66, and Clarissa*, 65, are winding down their successful Ottawa-based consulting business and operating company, with a plan to shift to a two- or three-day workweek and take summers off.

Self-described foodies who enjoy time at the cottage and vacationing down south, they are wondering “where to park their money in order to preserve the principal and earn decent interest for our retirement,” Bill said.

In addition to their work as consultants, which last year paid them $250,000 in dividend income, Bill and Clarissa also have a holding company for real estate investments, including four single-family detached rental houses with a combined value of almost $3 million, two of which are mortgage free and two with a loan-to-value ratio of less than 50 per cent.

The holding company has borrowed about $1 million from the operating company to finance real estate purchases and renovations. Two of the homes generate $48,000 a year in rental income. The couple plan to sell two houses, valued at $735,000 and $810,000, respectively. The less expensive home is going on the market this spring.

“We have been paying ourselves dividends through the company each year and have enough in the company to continue that for a number of years,” Bill said. “The repayment of loans from the holding company will carry us further.”

The couple is debt free, pay their credit-card balance in full each month and have expenses of $15,414 a month.

Separate from their operating and holding companies, the couple has a personal investment portfolio worth approximately $2.1 million. This includes $250,300 in tax-free savings accounts (TFSAs), $505,000 in registered retirement savings plans (RRSPs), $277,500 in a locked-in retirement account and $163,600 in a locked-in retirement savings plan.

Bill is much more comfortable with risk than Clarissa and has invested in a range of stocks as well as second mortgages inside his registered investments. Clarissa’s investments include guaranteed investment certificates and dividend-paying stocks inside her registered accounts.

The couple has RRSP room, but stopped contributing because they believe their current holdings are sufficient. They also have $230,000 invested in a development property, which should be realized either this year or in 2025.

In addition to their mortgage-free principal residence, which they plan to stay in for the next five to 10 years and is conservatively valued at $1.1 million, Bill and Clarissa also own another home valued at $580,000 that they are renting to their daughter and husband on a rent-to-own basis. However, the family has outgrown the house and is looking for another.

Bill and Clarissa have set aside a large amount of money to help the young family finance their next home when they find it, something that is proving hard to do in today’s hot real estate market.

“When should we transfer ownership?” he wondered.

Bill started claiming Canada Pension Plan payments ($14,000 a year) when he turned 65, a decision he regrets because they don’t need that money at this point. Clarissa plans to wait until 2028 when she turns 70 to apply for CPP.

“Ideally, we’d like a financial roadmap,” Bill said.

What the experts say

Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, said the couple will need $250,000 a year before tax to continue affording their comfortable lifestyle. This will require their investments to return six per cent per year or more.

“Bill is much more comfortable with risk than Clarissa, but they will have to decide together what risk and return level they want for these investments,” he said. “The stock market overall is reliable long term, but individual stocks Bill chooses might be much riskier, and second mortgages can be essentially unsecured loans to people with poor credit.”

Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, said Bill and Clarissa can have different risk profiles and still be successful investors.

“Bill’s assets can be more growth-oriented and take advantage of capital gains tax breaks whereas Clarissa’s assets can be more diversified and focus on a mix of guaranteed investments, fixed income and high-quality, dividend-paying stocks,” he said. “A good portfolio can play both offence and defence at the same time.”

Einarson recommends the couple work with a certified financial planner to map out their cash flow and a professional portfolio manager to construct a portfolio that meets their needs and ensures each is comfortable and aware of their investment options.

Rempel believes Bill was right to start CPP at 65 and that Clarissa is right to delay it to age 70.

“The formula for delaying CPP from age 65 to 70 is essentially an implied rate of return of 6.8 per cent,” he said. “Therefore, conservative investors like Clarissa are better off withdrawing some of their investments and delaying CPP. More aggressive investors like Bill are likely to make a higher return from their investments, so they should keep them and draw on CPP first.”

Rempel said selling both investment homes sooner is likely the best option, particularly if those homes are not generating rental income.

“They can invest the proceeds from selling at a far higher return than the 2.1 per cent they are generating from net rent income,” he said.

The properties are inside their holding corporation, which means the corporation pays the tax. To avoid moving into higher personal tax brackets, Rempel recommends they each take dividends of no more than $100,000 per year.

“To get the $250,000/year pre-tax income they need, they should withdraw the remaining $50,000 from their non-registered investments,” he said.

As for transferring ownership of their daughter’s current house, Rempel suggests it might be best to give it to her now for tax reasons, but the math must make sense.

“They would have to pay capital gains tax now instead of in the future when it is sold, but any future growth would be tax free as their daughter’s personal residence,” he said.

To ensure a comfortable retirement and defer tax, Rempel said the couple should contribute the maximum to both their RRSPs and TFSAs from their $900,000 non-registered investments and leave their registered investments alone until they’ve depleted their non-registered investments.

Given their ages and asset levels, Einarson does not think Bill and Clarissa need to add to the registered accounts, especially since they can control much of their taxable income through their corporation.

“The bigger question here will be how to organize their portfolios considering all the various accounts, income needs and their different risk tolerances,” he said. “The starting point is a retirement plan, which will also help them determine the best options for how and when to distribute their estate to their children.”

* Names have been changed to protect privacy.

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