Ontario couple needs to plug leak in their finances before retirement

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In Ontario, a couple we’ll call Robert and Elly, both 50, are raising three children ages 16, 18 and 20. The parents are civil servants with combined take-home incomes of $12,000 per month, which they top up with $1,420 in investment income. Each will have a defined-benefit pension at retirement, but until then they are in the peculiar position of using $10,269 per month in after-tax income to subsidize two rental properties. Their 16-year-old has a neurological disability and may never be self-supporting, so special arrangements will need to be made to support her. They would like to retire in five years at 55.

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“We want to find out if we can live in retirement on two pensions, dividends and rental properties income,” they say.

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Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based firm Exponent Investment Management Inc., to work with Robert and Elly.

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The good news in this case is that they have a $33,000 RDSP for their disabled child to which they add $1,000 per year. Their home has a $900,000 market price and each rental is worth $1 million. There is $286,000 in RRSPs, $190,000 in TFSAs, non-registered investments of $362,000. Add in $96,000 in RESPs and $25,000 for two cars and they have $3,892,000 total assets. Offsetting their assets are mortgages that add up to $1,345,780. Their net worth is $2,456,220.

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Present and future spending

Currently, the couple spends as little as $3,611 per month excluding savings and mortgage payments and taxes for the rentals. In retirement, they want to be sure of having basic income plus $2,000 for travel and $1,000 to add to TFSAs. That brings their minimum monthly retirement target income to $6,611, excluding anything needed to support the rentals.

At age 55, defined benefit pensions will generate $5,807 for Robert and $4,330 for Elly. That’s a total of $10,137 per month or $121,644 per year. After average tax at 18 per cent, they can retain $8,312 per month. That income will satisfy their retirement income goal. If they have a shortfall in the first ten years before they are eligible for early Canada Pension Plan benefits at 60, they can supplement pension income with income from their non-registered account and preserve their RRSPs until they are in their 70s and must make minimum withdrawals. The pensions have $1,068 combined bridge benefits that will end at 65 but will be replaced by Old Age Security benefits, currently $7,707 per year.

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Their two rental properties valued at $1 million each are the largest part of their capital. If they sell one property running at a loss that was originally purchased for $585,000, then after selling costs and capital gains taxes, they would walk away with a $320,000 net profit which they can add to $362,000 non-registered investments, lifting the total to $682,000.

The other property generates rent sufficient to cover costs. It can be retained until its $678,885 mortgage is paid in full in 28 years when the partners are 78 and then sold, with proceeds to benefit their youngest child who, they believe, will be dependent for life. At that time, the RDSP with a present value of $33,000 growing at $996 per year for 28 years at three per cent after inflation will have a value of $119,543. It could be added to realization of value of their $1 million other rental when sold. Those funds could be the basis for a discretionary trust for his benefit.

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The family RESP has a balance of $96,000. The two older children no longer qualify for the Canada Education Savings Grant, which stops at 17. The RESP appears to be adequate for family needs.

Robert and Elly should ensure that they have their own life insurance, preferably term to keep costs down and independent of their job-linked life insurance. A joint and first-to-die policy tailored to their needs with Kim as beneficiary would ensure income independent of any other income sources. A $1 million policy for a 15-year period until the parents’ pensions begin would be about $300 per month and could fund a discretionary trust for the child and add to other benefits available as well as proceeds of a Registered Disability Savings Plan already in place.

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Retirement income

If Robert and Elly retire in five years at 55, Robert’s pension will provide $5,807 gross per month including a $668 monthly bridge to 65. Elly’s pension will provide $4,330 per month including a $400 monthly bridge to 65. That’s $10,137 per month or $121,644 per year. Their RRSPs with a present value of $286,000 and $12,000 annual contributions combined will grow to a value of $397,175 over the next five years and then pay taxable annual income of $16,682 to age 95. Their TFSAs with $190,000 total assets plus $6,000 per year each will rise to $285,883 in five years and then support $12,000 of annual tax-free payouts.

At retirement, assuming sale of one rental, total non-registered assets of $682,000 growing at three per cent per year after inflation will rise to $790,625. That sum would support an income of $33,210 for 40 years to their age 95. That sale would boost pre-tax income to $183,536.

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With splits of eligible income, and 19 per cent average tax on everything but TFSA incomes, they would have $150,944 to take home. That’s $12,580 per month.

At age 65, the couple could add two OAS cheques totaling $15,414 per year, combined CPP income of an estimated combined annual value of $20,000, and lose their combined $12,816 annual pension bridges for combined income of $206,134. With splits, no tax on TFSA cash flow and 24 per cent average tax, with TFSA cash flow restored, they would have $159,541 per year before the OAS clawback which currently starts at $79,845 per person and takes 15 per cent of income not including TFSA cash flow over that threshold. The clawback would take $2,583 each. They would have $154,375 post-clawback to spend. That’s $12,865 per month. A good deal could go to Kim’s trust.

Retirement stars:  Five retirement stars ***** out of Five

email andrew.allentuck@gmail.com for a free Family Finance analysis

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