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This B.C. couple should cash out of their rental property and retire easy

With the mortgage and other costs, the rental has an annual bill of $52,788. That amounts to about 40 per cent of their total monthly spending. They could refinance the rental, cut costs or try to raise rents, but the economics are not favourable.

It has come down to a question of living for the rental or selling it.

Family Finance asked Eliott Einarson, a financial planner in the Winnipeg office of Exponent Investment Management, to work with Chris and Crystal. He notes that the rental, which generates income before expenses of $28,800 per year, provides the couple $8,759 per year nominal cash flow. That’s a three per cent return on $280,000 equity, not much for a leveraged investment. It is at best an investment in hoped-for capital appreciation. They could reset mortgage costs, but that would only postpone the reality that the rental’s poor return endangers their retirement plans.

Retirement plans

The couple would like to retire in four years and travel. They would also like to put $100,000 of repairs into their home.

Their financial assets add up to $972,314. As well, Crystal has a defined benefit pension that will pay her $36,228 per year to age 65 and, after elimination of a $8,628 annual bridge, $27,600 per year for the rest of her life.

If there is a cash shortfall between their travel plans and other retirement costs, they are willing to downsize their home to perhaps $600,000, pay off the $280,000 outstanding rental mortgage debt, then add the remaining funds, approximately $190,000, to non-registered cash. The money invested in income stocks with five per cent dividends before inflation could generate $9,438 per year. But selling their house to keep a not-profitable rental seems like putting the cart before the horse, Einarson said.

Paying for retirement

When to retire and what income to generate are related issues. At present, Crystal brings home $53,460 per year. Chris brings home $80,400 per year. The sum, $133,860, not including rental income, covers annual expenses including finance and operating costs for their rental.

Crystal has $97,000 in her RRSP and adds $7,500 per year. Assuming the account grows at three per cent per year after inflation for four years to $141,500, it will generate $6,963 per year of taxable income (assuming the same three per cent growth) for 35 years to her age 95.

Chris’ RRSP present value, $199,314, is growing with annual contributions of $7,500. Assuming a three per cent inflation-adjusted return, it will have a balance of $256,648 in four years and generate $11,600 per year over 35 years to his age 95.

He also has a defined contribution pension — essentially an RRSP — with a $235,000 balance growing with $13,200 annual contributions, including his employer’s matching contributions. In four years at age 60, the plan will have a balance of $321,375, and then generate $14,520 per year for the following 35 years.

The Canada Pension Plan will pay Chris $5,100 per year at 60. His TFSA with a present balance of $95,000 and $6,000 annual contributions will grow to a value of $132,778 at age 60, and pay out $6,000 per year for the following 35 years to his age 95.

Crystal has an identical TFSA balance and payments. Her income at the beginning of her 60 th year will shift to retirement income consisting of $36,228 pension, $6,000 from her TFSA, $6,720 from CPP and $6,963 from her RRSP, for total income of $55,911 per year.

Chris’ income when he retires at age 60 will consist of $11,600 from his RRSP, $14,520 from his defined contribution pension, $5,100 from CPP and $6,000 TFSA cash flow, for total income of $37,220 per year.

The couple’s combined income at age 60 will be $93,131. After taxes at an average rate of 12 per cent, they would have disposable income of $83,395 per year or $6,950 per month.

At 65, Crystal will lose her $8,628 annual bridge for her pension, but she can add Old Age Security at $7,380 per year for total income before tax of $54,663 per year.

Chris at 65 will be able to add $5,538 from OAS  for total income of $42,758. Their combined annual income would be $97,421. After taxes, they would have $87,170 annual combined income or $7,264 per month.

If they sell the rental property they can realize $560,000 less five per cent selling costs, so $532,000 net. That would cover their original $467,000 cost and improvements. Their gain would be $65,000. They might get a higher price in a bullish property market, but that’s speculative. We’ll stick to present value. They could pay off the remaining balance of $280,000 on their mortgage and have $252,000 left. Capital gains tax on half the gain would cost them $14,000. Their net cash position would then be $238,000.

That sum, invested at three per cent returns after inflation for the next 35 years would generate $10,753 per year. On top of other income, they would then have $108,174 annually before taxes and no cost to maintain the rental. They could keep their home, have ample money for the reno, and be at peace with their retirement plans.

Retirement stars: 3 *** out of 5

Financial Post

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This couple's income has plunged a now their spending has to follow suit

Not only has income shrivelled, but they are drawing down cash in various accounts to cover their spending. If their income does not rise, they may retire with little but relatively modest CPP payments and OAS to sustain them. Their goal is permanent annual retirement income of $54,000 after tax to Terri’s age 90. It will take planning and discipline to achieve it. Without parental gifts, Terri’s return to full-time work and government relief, things look bleak.

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Currently, they spend $4,825 per month not counting costs for their rental condo. Clothing and grooming consume $600 per month, travel $1,500 per month and allocations for various hobbies $600 per month. Their goal is full retirement in 12 years at ages 53 and 65, respectively, with finances planned for 37 years to Terri’s age 90.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Terri and Louis. He notes that they plan to move to Calgary, buy a house for $700,000 before prices recover, then live on investments, CPP and OAS.

How to make retirement affordable

It’s possible to pull it off, Moran says, using capital generated in better times. They have $1.2 million adjusted net worth including $515,000 in a taxable securities portfolio, a $150,000 parental gift coming soon, plus present home equity of $329,500 after five per cent selling costs for their present digs.

Their best investment is a rental condo in Calgary. It has an estimated market value of $165,000 with a $121,000 mortgage. Their present equity without selling costs is $44,000. They get net rent of $14,100 per year and pay $2,178 mortgage interest not including principal repayment, $4,128 in condo fees, $1,200 for property tax and $300 in miscellaneous costs, leaving net income of $6,294. That is a 14 per cent return on equity, but since most of the income is consumed by principal repayment, actual spendable income is low, Moran notes. Their cash income will rise as the remaining 25 years of the mortgage is paid down.

The couple’s expenses register as $5,580 per month with nothing allocated to savings. $485 per month is for debt service. There are many ways to examine their cost of living. However, it would be easy for them to economize and thus generate a flow of income to savings. Among the budget items which could be trimmed are clothing and hobbies.

Future income components

In retirement, the couple will have slightly reduced Old Age Security benefits. Louis worked for nine years outside of Canada and thus will be entitled to less than the present maximum of $7,380 per year. If he stays in Canada 12 more years to age 65, he will be eligible for 38/40 of the full amount or $7,010 per year. Terri will get full OAS at 65.

Their TFSAs with no ongoing savings have a value of $162,000. If they return three per cent per year after inflation, they could produce cash flow of $6,100 per year to Terri’s age 95. Their RRSPs combined have a value of $18,000. If this capital grows with the same assumptions to Terri’s age 60, it will become $31,600. If that sum is paid out over the following 35 years, it would generate $1,500 per year. Their $515,000 in taxable investments growing at three per cent per year after inflation and paid out over 54 years to Terri’s age 95 would generate $18,813 per year in 2021 dollars.

Louis organized his business as a corporation paying him dividends rather than income. He expects just $1,000 annual Canada Pension Plan benefits. Terri’s CPP benefits will be about $6,000 per year at 65, subject to increase if she continues to work and contribute.

Estimating retirement income

Based on these numbers, we can estimate the couple’s retirement income in four stages: 1) The 12 years to Louis’ age 65; 2) From Louis’ age 65 until Terri stops working; and 3) When Terri is drawing OAS and CPP.

Stage 1 income would consist of estimated recovered annual earnings of $30,000 per year for Terri, combined TFSA income of $6,100 per year for the couple, annual RRSP income of $1,500, taxable income of $18,813 per year, and net annual rent of $6,294 for total annual income of $62,707.

In Stage 2, when Louis is 65 and receiving OAS and CPP and Terri is 53 and still working, they would have all of stage 1 income plus Louis’ reduced $7,010 OAS, and his $1,000 CPP for a total of $70,717 per year.

In Stage 3 with both partners 65 over and Terri receiving CPP and OAS they lose $30,000 job income but gain her $6,000 CPP and $7,380 OAS income for total income of $54,097.

With income split and no tax on TFSA cash flow, assuming tax rates of 10 per cent, 11 per cent, four per cent, and eight per cent, respectively, they would have annual disposable incomes of $52,297 in Stage 1, $62,480 in Stage 2, $50,257 in Stage 3. Monthly expenses could decline from today’s $5,580 per month or $66,960 per year by perhaps $21,600 per year if they cut two-thirds of spending on clothing, travel and recreation.

“Budget balancing is going to be their financial life jacket,” Moran concludes.

Retirement stars: 2 ** out of 5

F inancial Post

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Buying a home is better than renting for this Saskatchewan woman and her dog, Fred

In British Columbia, a woman we’ll call Teresa, 54, lives with her 11-year-old daughter, Kim. A freelance advertising consultant, she brings home $5,027 per month and receives an untaxable subsidy of $378 per month from the Canada Child Benefit for total monthly disposable income of $5,405.

Teresa has a home worth an estimated $600,000 with a $249,000 mortgage that costs $1,200 per month, but no other debts. After mortgage and property tax, $275 per month, she has $3,930 per month for costs including contributions of $400 to her RRSP, $200 to Kim’s RESP and $500 to her TFSA. Teresa is concerned that her income, which has been slashed by half due to the COVID-19 virus, won’t allow her to save enough to support her target income of $6,000 per month after tax in retirement, which is 11 years away.

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Family Finance asked Graeme Egan, head of CastleBay Wealth Management Inc. in Vancouver, to work with Teresa. He has done the math and predicts that, all things staying the same, her income at age 65 would be $5,104 from all sources after 15 per cent average tax with no CCB and no tax on TFSA cash flow. That’s $896 per month short of her goal. To close the gap, Egan suggests she make several changes to her assets, some of which will cut her monthly costs.

Downsizing debt

Teresa is already thinking that in 11 years when Kim is 22, she will no longer need her present home. She can downsize from the $600,000 house to a $450,000 condo. Her mortgage, for which she pays $1,200 per month with a 24-year amortization, is her baggage. The outstanding mortgage balance in 11 years would be about $100,000, depending on renewal rates in the interim.

Selling her house when she retires would likely net her at least its current value less five per cent costs and fees, about $570,000. Subtract the balance owing and she would have $470,000 available for her $450,000 condo. The $20,000 surplus could cover legal fees, moving costs, etc.

Being mortgage free in retirement will eliminate a big chunk of her monthly costs.

Calculating income

Teresa’s present assets are $90,000 in her TFSA, $440,000 in RRSPs, $94,000 in taxable accounts, and $57,000 in Kim’s RESP — enough for tuition and books for a first degree.

From today until age 65, when we assume she will sell her house and move to a condo, her $90,000 TFSA with $6,000 annual contributions growing at three per cent per year after inflation, would rise to $203,737. Her $440,000 RRSP with $4,800 annual additions would rise to $672,384. Her investment account, $62,000, with no further additions but growing with the same assumptions would rise to $85,835. $32,000 cash growing at one per cent per year but no further additions would rise to $35,713.

Thus at the beginning of her retirement at 65 with a new dwelling, she would have $793,932 in taxable assets and $203,737 in her TFSA — total $997,669 — all invested to generate three per cent after inflation, would yield $50,922 per year for the 30 years to her age 95. $40,528 would be taxable and the TFSA income, $10,394 would not be taxed.

She could add $7,384 from Old Age Security at present rates and $11,916 from her Canada Pension Plan account using present data. The total, $70,222 less $10,463 TFSA income, after 15 per cent average tax and TFSA income put back in would be $61,853 per year or $5,104 per month.

While that falls short of her $6,000 monthly retirement income target, eliminating her mortgage, savings and other cost reductions can reduce her expenses significantly.

Property tax, say $300 per month on her condo, could be deferred via a B.C. program for seniors that lends the annual amount of realty tax, puts a lien on property, and charges a variable but average one to two per cent per year.

The lien is removed when the property is sold.

Kim’s RESP, with a present balance of $57,000 will have $85,650 if present contributions of $2,400 per year plus 20 per cent from the Canada Education Savings Grant, sufficient for a first degree at any institution in B.C., continue to age 17.

Then Teresa can stop adding $200 per month to the RESP. Child care costs of $200 per month will have ended. $900 in TFSA and RRSP savings will have ended too, dropping her total allocations by as much as $2,775. She could have as much as $2,400 per month in excess income.

Returns on assets

We have estimated a three per cent return after inflation. That could be raised by perhaps one or two per cent by reducing investment fees. Some bargaining with advisors or shopping for funds or managers could easily cut costs. On her $624,000 of RRSPs, TFSA and taxable investment accounts, cost cuts of just one per cent would save her $6,240 per year.

Teresa deals with a large bank-owned investment dealer. She has mutual funds that are traded for the needs of all investors in the funds. If fund investors are frightened in a collapsing market or need cash for any reason, managers have to liquidate assets. In a down market, the portfolio value may fall even as the tax bill from dividends or accumulated capital gains is rising. This is tax inefficiency. It can happen on occasion in many widely held mutual funds. Vigilance may suggest swapping some large funds for tax-efficient low fee exchange traded funds or having an investment manager set up a portfolio for her alone. Fees for this bespoke portfolio management typically range from 1.0 to 1.5 per cent per year, about what she pays now.

The unmeasurable variable in the case is how COVID-19 will go and, for that matter, any other medical threats. We can’t predict the outcome of the present pandemic, but the best financial remedy is always more saving. Teresa is an instinctive saver.

“Close attention to her finances, to B.C. tax breaks for seniors, and finding a few economies should ensure a secure retirement,” Egan concludes.

Retirement stars: 3 *** out of 5

Financial Post

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Putting their $580,000 in cash to work is key to this Alberta couple's retirement

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Mel and Mary. His view — they can accumulate more savings because they have no debts to pay. Those savings can bloom as productive investments.

Present finances

The couple’s balance sheet shows net worth of about $1.73 million of which $582,000 is non-registered cash. If they were to sell their present house less five per cent for commissions and primping, they would have $522,500. If they were to add another $177,500, they would have the price of their $700,000 move-up house. The cost in reduced income would be perhaps three per cent of the capital or $5,325 before tax each year, assuming a three-per-cent annual return after inflation. They can cover that by using their abundant cash for RRSP deposits. The tax savings would more than cover the lost income.

Mel earns $95,000 a year before tax. That income generates RRSP space of about $17,000 per year. He should use some of his cash to invest in a spousal RRSP for Mary. For tax purposes to bring his tax and bracket down, he could invest $47,000. His refunds would be between 36 per cent at the top and 30.5 per cent as his tax bracket declines, Moran estimates. Taking the average, 33.25 per cent, the $47,000 saving would produce an initial tax reduction or income retention of $15,628 per year. That would more than cover the income loss generated by diverting capital to a bigger house, Moran explains.

The family RESP is underfunded. The parents have put $7,500 into the RESP. Potential contributions for total child years to date at $2,500 per child per year, $70,000 total, plus potential Canada Education Savings Grants of the lesser of 20 per cent of annual contributions or $500 per child per year, $14,000 total, leave space of $76,500. This is a large space and ought to be filled. After all, a $2,500 annual contribution for each child or $7,500 total generates a $1,500 instant “profit” just for the paperwork, Moran notes.

For three kids, $625 per month would provide the maximum $2,500 per child base for the CESG, but they can double up to $1,250 per month and get two years worth of RESP bonuses, total $15,000 per year plus the $3,000 CESG. The CESG maximum is $7,200 per beneficiary.

Child one can get $38,300 by age 17, child two can get $44,460 by 17 and the youngest child can get $48,500 by age 15 when he will hit the CESG beneficiary limit. The three ongoing contributions, if averaged by the parents, will give each child about $43,750 for post-secondary studies.

Raising savings

The couple’s TFSAs should be topped up. Their totals are now $121,717 based on contributions to date plus growth. Mary has $12,000 of room and Mel $15,800 of room. Topped up, they would have $149,517. If they continue to add $12,000 per year and if the accounts grow at three per cent after inflation and fees, the total will rise to $256,150 in six years at Mel’s age 60. If it continues to grow and is spent over the following 36 years to Mary’s age 90, it would support tax-free annual income of $11,390 in 2021 dollars.

Mary’s present RRSP balance is $117,000. Mel will have $332,664. He has $49,697 room to fill. If this is done via a spousal plan, Mel, with the higher income, gets the deduction.

Then his RRSP with a total of $332,664, plus $49,697 put into Mary’s spousal RRSP and her existing $86,370 after the buyback, will rise to $468,731. Mel generates $19,000 annual RRSP space. If they add that sum to his RRSP for six years to his age 60 and if the account grows at three per cent per year after inflation, it will become $682,589 in 2021 dollars. If annuitized for the 36 years to Mary’s age 90, it would pay $30,354 per year.

Adding up retirement income

Once RESPs, TFSAs and RRSPs are topped up, and assuming the couple does not buy a more expensive house, they will have $464,700 left. If this money is invested in dividend growth stocks for the dividend tax credit for 42 years, they could easily generate payouts of $19,606 per year to Mary’s age 90 with the assumption of three per cent growth. (If they do buy the house, they will only have $ 287,200 in cash left, enough to generate about $11,700 per year with similar growth assumptions. For the ensuing calculations then, they would have to make due with about $670 less per month).

Assuming Mary retires in six years when Mel retires at his age 60, they will have her $24,255 work pension, RRSP income of $30,354, and taxable income of $19,606 for total annual income of $74,215. After splits of eligible income and average 12 per cent income tax, they would have $65,309. Adding TFSA cash flow, $11,390, they would have $76,700 per year to spend. That’s about $6,390 per month, $350 per month less than what they spend now. But it would go further with the elimination of RRSP, TFSA and two thirds of their RESP savings.

At 65, Mel could add his $12,470 Canada Pension Plan benefit and his $7,380 Old Age Security benefit to bring totals to $94,065. After splits of eligible income and 17 per cent average tax on all but TFSA cash flow, then addition of TFSA cash flow to the tally, they would have $7,455 to spend each month. When she is 65, Mary’s $11,084 CPP and $7,380 OAS would push total income to $112,530. After 18 per cent average tax and added $11,400 TFSA income, they would have $103,663 per year to spend or $8,638 per month, far more than present $6,740 monthly allocations including $3,194 retirement saving.

“With our adjustments, they will have more income with no more risk,” Moran explains “It’s a conservative estimation and more than Mel and Mary expected.”

Retirement stars: Four **** out of five

Financial Post

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This Alberta couple wants to spend on some big ticket items a can they retire now or should they wait?

A couple we’ll call Adele, 57, and Chris, 63, live in Ontario with their two children, ages 19 and 22, both of whom are pursuing post-secondary degrees.

The family is dealing with the financial fallout from COVID-19.

Chris was forced to take early retirement due to the pandemic, but is due a $61,000 payment as part of a termination package on top of a $60,000 bonus covering his last year of work. He has already started drawing his pension, which pays $3,300 per month after tax and is topping that off with savings.

Adele, meanwhile, has recently seen her income slashed, but plans to stick with her publishing industry job until she turns 60, then work part-time until age 65.

For the time being, they are bringing in $7,200 per month after tax, including the use of savings.

The couple would like to have $85,000 before tax in three years when Adele expects to retire, but that income will have to stretch a long way: they face a cumulative total of $80,000 in university costs through 2025 and would also like to buy a $300,000 condo in Portugal, if they can.

That’s a tall order for a family with shrinking income.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Adele and Chris.

“The financial base is secure with the pension and savings,” Moran explains. “But there is an issue with a $150,000 investment in idle land that produces little income, though good growth potential.”

Making assets work

Looking ahead, the couple can raise income by selling the land for as much as $150,000 (they initially paid $90,000.)

If they sell for $150,000 and cover $10,000 of expenses for legal fees, they would have $140,000. That would be a $50,000 capital gain. Each partner would have $25,000, half taxable.

Tax might be $5,000 for each partner, so they would be able to direct about $130,000 to top up TFSAs, pay off debt and cover education costs.

Retirement income

Chris has a $3,300 defined benefit pension with no reduction at 65 and with a 60 per cent survivor benefit for Adele. The work pension has no inflation indexation, but CPP and OAS are indexed and stock returns are indexed.

Chris will have an estimated $12,700 annual Canada Pension Plan benefit and Adele can expect $8,466 per year from CPP. Each will qualify for full OAS benefits of $7,384 per year at age 65.

Their TFSAs with a present balance of $90,500 growing eight years at three per cent per year after inflation to her age 65 to $114,650 would generate tax-free income of $5,678 per year for the 30 years from Adele’s age 65 to her age 95. That’s $475 per month, starting when Adele turns 65.

The couple’s RRSP’s, $625,000, can be enhanced. Chris, already retired, has $18,000 of room and he could fill that space from his his bonus. Adding $18,000 will boost total RRSP value to $643,000, which will grow modestly until Chris retires. If it then generates three per cent per year for the 30 years from Chris’s age 65 to his age 95, it would pay $32,800 per year to exhaustion of principal.

For the next year and a half until Chris turns 65, the couple will have to survive on Chris’s pension and Adele’s reduced $19,000 annual pre-tax salary, using the soon to be paid retirement package and bonus to cover any shortfalls.

When Chris is 65, family income will be his $39,600 pension, his $12,700 CPP, $7,384 OAS, and the couple’s $32,800 RRSP income for total pre-tax income of $92,484 — plus whatever Adele is still bringing in. Split and taxed at an average 15 per cent rate, they would have at least $6,550 to spend and could rebuild some of their savings.

When Adele is 65, the couple’s income will be Chris’s $39,600 job pension, his CPP of $12,700 and her CPP of $8,466, two OAS benefits of $7,384 each, RRSP income of $32,800 for combined total before tax of $108,334. Split and taxed at an average 16 per cent rate, they would have $7,583 per month. Adding $475 in newly triggered TFSA cash flow would bring the total to $8,050.

Cushions

When their mortgage is paid off in a few years and they are no longer saving for their RRSPs, the couple’s spending will have fallen to at most about $5,635 per month.

Surplus based on these figures will be about $1,000 per month after Chris is 65 and $2,400 per month after Adele is 65.

That could cover some or all of $948 monthly payments on a 30-year, three per cent, $225,000 mortgage on a $300,000 property. A $75,000 down payment could come from remaining cash from the land sale or savings.

Retirement stars: Four **** out of five

Financial Post

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B.C. couple has done everything right financially, but these tweaks will make retirement even more comfortable

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.

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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.

Income estimates

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.

Retirement income

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

Financial Post

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Paying off the mortgage has unlocked serious cash flow for this Ontario couple, putting their retirement on solid ground