Our client, "Betty" from Edmonton, has been a great saver her whole life. She has conquered adversity and raised three children on her own, who are now grown. She is close to retirement and wonders if she can step confidently into the next phase of her life and whether moving to a more suitable home can be achieved.
"The new home comes with a higher price tag, but I think it is more liveable and a
better fit for the long-term, Betty says.
"I don't feel confident to make a change like this, or whether I can make my retirement income needs a reality."
She feels her retirement income needs will be around $75,000 annually. Betty's net worth is $2,200,000.
On top of the new home, she feels life planning is a top priority, along with finding happiness, and deciding what to do with the three rental properties she owns. She is only 67 and has a planning horizon well into her 90s.
Her principle residence currently accounts for
23 per cent of her net worth, so at this percentage, she is not dependent on selling her home to raise capital in the event of a cash crunch.
Betty bought three rental properties during her working years and says lately she is feeling burdened by them. The yields on equity are between 2.68 per cent and 5.40 per cent.
Recently, she has had to put money into the properties for repairs and upkeep and, while one of the yields appears to be reasonable, the upkeep and general duties of being a landlord are giving her reason to consider changing tactics.
With solid unrealized capital gains, Betty will net close to $800,000 after tax, factoring in her marginal tax rate on
capital gain income of 19.5 per cent.
If she were to add to her Canadian dividend-paying securities, she would also benefit from a competitive marginal tax rate on dividend income of 19.29 per cent, compared to rental income at 39 per cent.
To diversify her dividend-paying securities, Betty could investigate good-quality mortgage investment corporations, or annuity products. Tax savings alone shouldn't be the only factor when constructing an investment portfolio.
At this point, Betty whould have a look at her investment risk profile.
Betty has saved diligently in her RRSP, TFSA, and non-registered portfolios. She has kept costs as low as possible by utilizing a discount broker and, early on, she learned the benefits of investing directly in securities, especially securities that pay regular and growing dividends. This has been a
winning strategy for Betty and one I recommend for most
investors, and not just for the tax benefits.
Currently, her RRSP is worth $720,000 and she will defer taking any income from this source until she reaches the age of 72. Her TFSA is worth $41,000 and her non-registered account is valued at $550,000.
Her income sources are:
- An indexed defined-benefit pension of $6,600 annually; CPP and OAS of $21,350; net rental income of $42,200; and dividend
income of $20,000, for a total of $90,150.
Betty's OAS will be completely clawed back once her RRSPs are factored into the equation.
In four years, if her RRSP can earn three per cent after inflation, it will grow to $810,000 in 2013 dollars. The RRIF factor at age 72 is 7.48 per cent and her withdrawal at that time could be close to $60,500. This brings her net income for OAS calculations to around $150,700, well above the $114,640 net income limit which would eliminate OAS payments.
Betty wants to know if her plan can accommodate moving to a more suitable, yet costlier residence. According to Betty, this would be her last home.
The one she is considering is worth $950,000 and the funds to purchase it would come from selling her current residence (valued at $500,000) and a rental property (also worth $500,000). This would, however, reduce her income over the next four years by $15,000 pre-tax to $75,150.
After her capital gain is factored in from the rental, she would be left with about $965,000 in cash and depending on negotiations and transaction costs, she may not have any major out-of-pocket expenses to change residences.
From what I can see, she should feel confident to move forward with this plan. If Betty decides to follow through with this move, by the time she reaches age 72, when her RRIF commences, her income would be approximately $135,000
annually. (At this level, her OAS will still be clawed back).
My advice to Betty is to sell her principle residence and
duplex and move into her dream retirement home.
Her prudence in managing her finances during her working years has given her some flexibility to make a decision like this with confidence.
If you would like the Smarter team to review your
finances, email This e-mail address is being protected from spambots. You need JavaScript enabled to view it or give us a call at 250-300-0996. Chris D. Cooksey, CFP, CIM, is a financial planner with Smarter Financial Planning Ltd., a fee-for-service company.