By DIANNE MALEY
Special to The Globe and Mail
Saturday, February 24, 2018
Aaron and Adele have good jobs, she in education, he for a government agency.
Together, they bring in about $195,000 a year. Like many people with defined-benefit pension plans, they hope to retire early, mainly because they can.
They are both 50 with two children, 11 and 16.
"Will we be retirement-ready in five to eight years?" Adele asks in an e-mail. "Should we sell our home, rent and invest the profit of the sale to support our retirement?" Their goal is to retire at the age of 55 with $72,000 a year after tax and perhaps do some consulting.
Their Toronto house is valued at around $1.5-million with a mortgage of $300,000 remaining.
They also have a small cottage north of the city valued at $260,000 that they are planning to renovate.
For Adele and Aaron, the allure of selling into a hot housing market is enhanced by the amount of work they would have to do on their existing house if they keep it - rebuilding the sunroom, replacing the windows and waterproofing the basement, among other things.
Should they sell now or wait until they retire? Adele asks. "We would still want to live in the same neighbourhood to allow our children to finish their schooling and would be willing to rent," she adds. Houses in the neighbourhood are renting anywhere from $3,500 to $4,000 a month.
We asked Trevor Van Nest, a certified financial planner (CFP) and owner of Niagara Region Money Coaches in St. Catharines, Ont., to look at Adele and Aaron's situation.
WHAT THE EXPERT SAYS
Like many, Aaron and Adele want to know if they can retire earlier than the standard age of 65, Mr. Van Nest says. "In fact, thanks to two generous defined-benefit pensions and significant equity built up in their home, they can indeed retire at age 55 without compromising their lifestyle at all," he says, adding they can sell their house now - if they so wish.
"While they may want to enjoy some semi-retirement work, perhaps some consulting, there is no financial need to do so."
Both pensions can be split to minimize taxes, and once Canada Pension Plan (CPP) and Old Age Security (OAS) benefits begin the same year (because they are both the same age), they will actually be in a surplus position, which they should take advantage of by contributing to tax-free savings accounts, Mr. Van Next says. That assumes lifestyle spending of $6,847 a month ($82,164 a year) in today's dollars, growing by the rate of inflation.
At 55, Adele will get a pension of $80,886 a year, including a bridge benefit to 65. At that point her pension will drop to $71,950 a year, or about $60,000 after tax.
Aaron will begin collecting his pension of $20,197 a year, or $17,639 after tax, at 60. So from 55 to 60, they will have to withdraw a small amount from their savings to make up for the shortfall.
"It works out to just the interest on the home sale proceeds, so capital is protected," the planner says.
Adele and Aaron are keen to sell their home for a big profit and are comfortable with the prospect of renting something comparable in the same neighbourhood for $4,000 a month. "Given they want to take on a $300,000 cottage renovation, proceeds from the house sale could be used for this purpose," the planner says.
Alternatively, Aaron and Adele can afford to stay in their home for the next five years, at which point their youngest child will be finished high school. "Both scenarios (selling now or later) result in similar estate values at 100 - meaning this decision is actually not a financial one as much as it is a lifestyle one," Mr. Van Nest says.
As well, the couple would like to cover all costs related to their children's postsecondary schooling. With the $105,000 they have already saved and the $415 a month that they continue to put into their registered education savings plan, they will be able to fully fund the children's schooling, the planner says. That assumes a 4-per-cent return on their RESP funds. The full cost will be $189,000, assuming a 5-percent annual increase in the full cost of tuition, room and board and books, "and they are nicely on track to hit this number."
Regardless of whether they choose to sell their home sooner or later, "they will have some serious capital to invest," Mr. Van Nest says. They're wondering how to invest it.
"With at least $1.2-million coming to them (depending on the size of their mortgage when they sell), they would be wise to learn what they should do with the money before they need to do it."
He recommends they take advantage of low-cost exchangetraded funds "in order to minimize fees, maximize diversification and enjoy the benefits of a passive investing strategy." Given they are both relatively conservative investors (according to their risk profile scores), a mix of 40per-cent equities and 60-per-cent bonds is appropriate for money that is not needed for at least five years, the planner says.
All contribution room available in RRSPs and TFSAs should be topped up with the house-sale proceeds in order to take advantage of the tax-deferred and taxfree growth from these vehicles.
The rest should be invested in a joint, non-registered fund. "And thanks to the value of the pensions, CPP and OAS, Aaron and Adele will not need to dip into the home proceeds at all (beyond the cottage renovation), so they can invest it with confidence with no need to change the strategy or holdings over at least the next 10 years," Mr. Van Nest says.
As for the cottage renovation, they may want to wait until they have retired so they can monitor the work closely, he adds. The $300,000 marked for renovations should be held in short-term deposits or GICs so no risk is taken on this capital." Want a free financial facelift?
E-mail firstname.lastname@example.org Some details may be changed to protect the privacy of the persons profiled.
The people: Aaron and Adele, 50, and their two children.
The problem: Can they retire at 55, sell their Toronto home for a profit, and maintain their current standard of living in retirement? How should they invest the proceeds of their home when they sell it?
The plan: Retire in five years at 55; rent for $4,000 a month, renovate the cottage and enjoy a flexible lifestyle with no fear of running out of money.
The payoff: A comfortable retirement Monthly net income: $10,245 Assets: House $1.5-million; cottage $260,000; RRSPs $28,300; RESP: $105,000; TFSA $0; nonregistered investments $0; estimated present value of her DB pension plan $1.6-million; estimated present value of his DB pension plan $258,000. Total: $3.75-million Monthly distributions: Mortgage $2,465; property taxes $460; property insurance, utilities and repairs $380; transportation, gas, car insurance, maintenance, parking $545; groceries $1,000; clothing/dry cleaning $200; charitable $25; phone, internet, cable $210; vacation $500; gifts $20; entertainment, dining out, alcohol $275; personal care $25; children's activities $800; subscriptions $45; health-care expenses $50; RESP contributions $415; pension-plan contributions $1,940. Total: $9,355 Liabilities: Home mortgage $300,000
MARK BLINCH/GLOBE AND MAIL