This plan will let them move somewhere warm in Central America so they can escape the winter slog
In Ontario, a civic development consultant we’ll call Harry, 62, has filled his life with good deeds, spending much time on folks who are disadvantaged. His work provides a salary of $6,500 monthly after tax. Four rentals add $3,500 after tax, pushing total monthly after-tax income to $10,000. He wants to retire at age 70.
Harry and his wife, who we’ll call Miranda, 60, have four rental properties with present estimated value of $1,395,000. There are $436,000 worth of mortgages on the properties, leaving them with net equity of $959,000. The rentals provide a $52,000 combined annual pre-tax return — that’s five per cent of their net value. Miranda, who has no outside income of her own, helps manage the properties.
Harry and Miranda appear to have well-planned lives, but there are issues. Tired of the winter slog, they want to move someplace warm in Central America. That could entail selling the four rental properties, which they might not be able to look after themselves, and rebalancing investments. They have combined RRSP assets of $370,000 and have only recently opened TFSAs with a balance of $10,000. A $25,000 balance in the family RESP will see their daughter, 20, through her final year of university. She lives at home.
“The problems are weighing the sale of assets and rebalancing their portfolio,” explains Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc.
Retirement income required
Harry and Miranda estimate that they will need $7,000 per month after tax in retirement.
Currently, they add $500 per month to their RRSPs on top of a $350 monthly contribution from Harry’s employer.
The good news is the couple has no personal debt and a net worth of $2.966 million. They could sell their $800,000 house before heading off to the palms, but investing the proceeds — 95 per cent of the estimated value with a five-per-cent allowance for selling costs — would generate only $22,800 per year with the assumption of a three per cent return on capital before tax. That’s $1,900 per month. We assume the house will be kept until the move to someplace sunny and perhaps even retained as a base in Canada. We will also assume the rentals will be kept and that their market value will pace inflation. One property in a western province has a $145,000 mortgage though the market value has slumped to $125,000. We’d suggest holding on — eventually the local market should recover.
Investing in property has been good to the couple. They have large gains on three of their four rentals, but as a result are overexposed to real estate, an asset class vulnerable to rising interest rates and other costs. Moreover, the rentals have to be maintained, with the grass cut, the snow shovelled and the rent collected. If Harry and Miranda move to the tropics, the cost of a manager would cut their return. Putting their rental income into financial assets would lower their heavy property weighting, Einarson suggests.
They currently have $370,000 in their RRSPs. With increased annual additions of $10,200, that sum would grow to $562,130 in eight years, when Harry hits 70. That capital, still generating three per cent per year after inflation, would produce $29,775 per year for 27 years to Miranda’s age 95.
The TFSA account with a present balance of $10,000 and additional contributions of an estimated $14,000 per year (they can exceed the annual allotment since they are below the lifetime exemption, would rise to $140,900 in eight years and then support annual payouts of $7,465 with the same assumptions to Miranda’s age 95.
The non-registered investment account would start with a value of $762,000 and with no further contributions, grow to a value of $965,290 in eight years with three per cent annual returns. That sum, growing at three per cent per year and annuitized to pay out all income and capital for 27 years, would generate $52,700 for the following 27 years to Miranda’s age 95.
We’ll assume rental properties continue to generate $52,000 per year in 2021 dollars before tax. Costs of operation and maintenance will rise, as may rents charged and received, but the real return should be stable.
If both Harry and Miranda delay starting CPP and OAS to Harry’s age 70 (Miranda’s age 68), they would get a bonus of 7.2 per cent for each year after 65 that OAS is delayed and 8.4 per cent for each year that CPP is delayed. That would give them respective OAS benefits of $10,042 for Harry and $9,510 for Miranda. Their CPP benefits, would rise to $19,080 and $10,877, respectively.
Adding up the components of their incomes at Harry’s age 70, the couple would have RRSP income of $29,775, TFSA cash flow of $7,465, non-registered investment income of $52,700, net rental income of $52,000 per year, OAS of $19,552 and CPP income of $29,957. That adds up to $191,449. Excluding TFSA cash flow, their taxable income would be $91,992 per person. They would lose $1,822 each to the OAS clawback which starts at a 2021 rate of $79,845. After general tax at 20 per cent, they would have $12,584 per month. That is 26 per cent more than present disposable income.
The couple benefits from a strong real estate market in Ontario. In Central America, their fuel bills would fall, though travel costs might rise. “Working eight years to Harry’s age 70 provides a substantial retirement income boost and money for donations,” Einarson concludes. “Call it a margin for charity, it’s an important reason they want to work beyond 65.”
Retirement stars: 5 ***** out of 5