With her 60th birthday approaching, Jill wonders if she can “retire responsibly” soon or if she needs to work longer.
Jill is single again, with three adult children, a salary of $81,000 a year, and a $1.2-million house in a Toronto bedroom community. She earns another $4,800 a year teaching yoga.
“My dream is to live in Nova Scotia, where I can purchase a home for $400,000 easily, but would worry about not being able to afford to come back if I needed or wanted to,” Jill writes in an e-mail. Ideally, she could keep the family home as well. It has a mortgage outstanding of about $225,000.
Looking for ways to achieve her goals, Jill is thinking of building a basement apartment to generate some income – “not my favourite idea.” She could use the extra money to “spend lots of time in Nova Scotia in summers if I don’t move there,” Jill writes, or to help carry her Ontario home if she does move away. She is also thinking of taking a home equity line of credit “and letting my principal help me pay bills,” she adds. She figures she can live on $45,000 a year.
Jill has a fully indexed defined benefit pension plan of $934 per month with a bridging benefit of $273 per month from age 60 until age 65, when CPP kicks in. The total at age 60 will be $1,207 per month.
Her liquid investments include $35,000 cash in a savings account and $101,000 in an RRSP.
“I know many single women my age who are all wondering the same thing: Can we do it on our own?” Jill writes.
We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Jill’s situation. Mr. MacKenzie holds the chartered professional accountant (CPA) and certified financial planner (CFP) designations.
Jill is in good health, and if she makes the right decisions now, the next 20 to 25 years might be the most enjoyable of her life, Mr. MacKenzie says. “Jill would like to retire from her full-time job at age 60,
keep her house in Ontario, buy a second home in Nova Scotia, and spend more time teaching yoga, which is both her hobby and small business,” the planner says.
“For the past 25 years, Jill has worked hard to raise her family and build up a net worth of over $1.4-million,” he says. “She helped her three children get a secondary education and they are now doing well, so she feels no obligation to leave a large estate.” But she does not want to run out of money or be a burden on her children.
The planner’s financial forecast shows that Jill could afford to retire at age 60. “But she does not have the financial resources to retire at age 60, buy a place in Nova Scotia and also continue to own her home in Ontario,” he says. “So she has to decide to give up the idea of retiring at age 60 or of keeping her home and also buying a second property.”
Jill has some flexibility in that her job can be performed from home in Ontario or in Nova Scotia. For a cost estimated at $20,000, she can renovate her Ontario home to include a basement apartment. With a renovation, she will have additional taxable income of about $21,000 per year.
When her home ceases to be entirely a personal residence, there is a deemed disposition of the property. After that date a portion of the future increase in value of the home will become taxable as a capital gain when the property is eventually sold.
These are the options Jill is considering:
She could retire at age 60, sell her Ontario home, and move to Nova Scotia. After paying off the mortgage she would net about $1,000,000. After paying $400,000 for the Nova Scotia place, she would have about $600,000 to invest. Jill could use the income on her $600,000 investment portfolio to supplement her cash flow. “The problem with this option is that she will not have the Ontario property as a home base close to her children,” Mr. MacKenzie says.
Another option is for Jill to retire at age 60 and supplement her income by converting the basement of her Ontario house to an apartment that she could rent out for $1,750 per month. “This option allows her to retire at age 60, but she’ll not be able to buy the place that she wants in Nova Scotia.”
A third alternative would be to defer retirement, keep her Ontario home, renovate and rent out the basement apartment, buy the property in Nova Scotia and work from there until age 65. “In this scenario she gets to enjoy her two properties, although she can’t retire until age 65.”
Finally, Jill could retire at age 60, keep her home in Ontario and also buy a place in Nova Scotia. She could supplement her income with a line of credit or a reverse mortgage. “Borrowing against the equity in her home might make sense if she wants to spend only a few more years in her home,” Mr. MacKenzie says. But Jill may want to keep her home for another 20 years. In that case, this strategy would wipe out all of her home equity and limit her future options.
After considering the alternatives, Jill is leaning toward the third option – which is to rent out the basement of her Ontario property, buy a place in Nova Scotia and spend most of her time there. She would work from her Nova Scotia home until age 65. She has already been approved for a five-year mortgage at 5.3 per cent a year if she chooses this option, the planner says.
“Financially, this option works,” Mr. MacKenzie says. “However, having grown up in Nova Scotia, I can confirm that living there in the winter is not as enjoyable as the summer,” he says. “Jill should consider renting for a year before she purchases a home there.”
Jill’s annual income is about $86,000 a year, including the part-time yoga classes. The rent from the basement apartment would lift her income to about $107,000 a year.
Her annual spending, including the mortgage on her Ontario property, is about $50,000. She estimates the cash flow required to pay the mortgage and expenses of the Nova Scotia property will be an additional $30,000 per year, and as a resident of Nova Scotia her income tax will be about $30,000, for a total cash outflow estimated at $110,000.
“Things rarely work out as expected,” Mr. MacKenzie cautions. Over the next five years, Jill’s annual cash flow shortfall could be higher than projected, although she could cover shortfalls with withdrawals from her registered retirement savings plan.
After retiring at age 65, Jill’s estimated income (ignoring adjustments for inflation) will consist of Canada Pension Plan benefits of $12,000 a year, Old Age Security of $9,000, defined-benefit pension income of $11,000 and rent from the basement apartment of $21,000, for a total income of about $53,000 a year before tax.
In retirement, with lower taxable income, her annual outflow for cost of living, income tax and maintaining the two properties would be about $90,000 a year.
“To address the $37,000 cash-flow shortfall, Jill will have to either sell the Nova Scotia property and move back to Ontario, or sell her Ontario home. “Then, to be close to her children, she could rent or buy a condo in Ontario for about half of the home sale proceeds.”
CLIENT SITUATION
The Person: Jill, age 59.
The Problem: Can she afford to retire soon and buy a home in Nova Scotia, while keeping her family home in Ontario?
The Plan: Set priorities. She probably can’t afford to do it all. Weigh the alternatives carefully. Consider renting in Nova Scotia at first to see if it’s really what she wants to do.
The Payoff: A cautious path forward to financial security and achieving her most important goals.
Current monthly net income: $7,150.
Assets: Bank accounts $35,000; RRSP $101,000; commuted value DB pension plan $250,000, residence $1,250,000. Total: $1.6- million.
Monthly outlays: Mortgage $1,465; property tax $330; home insurance $35; electricity $190; heating $100; maintenance, garden $215; car lease $325; other transportation $430; groceries $250; clothing $20; gifts, charity $135; vacation, travel $100; dining, drinks, entertainment $180; pets $20; sports, hobbies $20; subscriptions $20; health care $50; life insurance $100; communications $185. Total: $4,170.
Liabilities: Mortgage $225,000.