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(Laura Leyshon for The Globe and Mail/Laura Leyshon for The Globe and Mail)
(Laura Leyshon for The Globe and Mail/Laura Leyshon for The Globe and Mail)

Financial Facelift

A survivor's tough choices Add to ...

When his spouse, Gary, died last year, Zeke was left with two mortgaged houses and some big decisions.

He is living in his weekend home on B.C.’s Sunshine Coast but would like to move back to Vancouver. His city home is pulling in high rent, so Zeke wonders whether he can really afford to live there on his modest publishing-industry salary.

Should he sell the coast home, or can he keep both properties, Zeke wonders. He is uncomfortable with his $535,000 debt load and is striving to pay it off as soon as possible, making extra payments to his mortgages.

“Is this wise financially or would it make more sense to put more into RRSPs?” 46-year-old Zeke asks in an e-mail.

Then there is the question of the survivor’s municipal pension from Gary’s employer. The employer has offered Zeke the choice between a lump sum payment of $464,810, which would be transferred to a locked-in retirement account, or $1,845 a month, partly indexed to inflation, for the rest of his life. Zeke wonders which is better.

We asked Gina Macdonald, a fee-only financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Zeke’s situation.

What the expert says

The pension question is a common one for people in Zeke’s position, Ms. Macdonald says. To compare the two options, she did a present-value calculation of the monthly pension based on a life expectancy for Zeke of another 35 years. The pension provides a guaranteed return of 3.24 per cent, plus indexing, so the lump sum would have to generate a return of at least that much, plus inflation, to break even.

“If you include a 1-per-cent to 2.5-per-cent management fee for the lump sum transferred assets, one would need to earn at least 4.24 per cent to 5.74 per cent, plus inflation, consistently on their investment assets” to match the monthly pension, she calculates. At an inflation rate of 2 per cent, one would need to earn anywhere from 6.24 per cent to 7.74 per cent. And at 4-per-cent inflation – not an impossibility by any means – Zeke would have to earn 8.24 per cent to 9.74 per cent on the lump sum to match the monthly pension.

“Is this a realistic outcome, year after year, for 35 years at a level of risk that Zeke would be comfortable with?” she asks.

While lump-sum payments may appeal to people who wish to pass on some assets to their beneficiaries, the guaranteed income stream from a pension seems well suited to someone like Zeke, since he has no dependants.

As well, pension income could be split with a future spouse if Zeke were to marry again, she notes. The pension plan also offers the opportunity to buy extended medical and dental coverage, which Zeke does not have. Most of all, perhaps, it “could provide great peace of mind” to someone who does not have much investment experience.

There is one important qualification: Zeke must not spend the monthly pension money but rather use it to fill up his $92,030 of unused RRSP contribution room, she cautions. He could then use his income tax refund to help pay down one or both mortgages more quickly.

“He currently does not have a level of income to have both mortgages paid off before age 65,” Ms. Macdonald notes. “The key is not to consume this income stream with discretionary spending.”

She suggests Zeke use the money he has in the bank and in guaranteed income certificates to contribute to his RRSP, again using his tax refund to pay down his debt. His line of credit could serve as an emergency fund.

As for Zeke’s real estate question, if he wants to keep both houses, he should continue to rent out the Vancouver property because of the attractive rent it is bringing in. He could focus his mortgage repayment efforts on the coast property where the interest payments are higher and not tax deductible because it is his principal residence.

He could spend the occasional weekend in the city to get a “Vancouver fix.”

Zeke has to decide whether trying to keep both properties is a “strong, long-term goal,” she says. If he sold the weekend property and moved back to the city, he would alleviate his cash flow crunch and have more to tuck away for retirement, Ms. Macdonald says. If he sold the Vancouver property and continued to live in the coast home, he could retire sooner with even more money.



CLIENT SITUATION



The person







Zeke, 46.





The problem







How to rearrange his financial life after the loss of his spouse a year ago. Should he keep both properties or sell one? Pay down the mortgages or save for retirement? And his survivor's pension: Lump sum or monthly payments?





The plan







For peace of mind and secure returns, choose the monthly pension payment. Carefully consider whether keeping both residences is worth the financial burden, and whether being in Vancouver is more important than having the freedom to retire sooner and with more money by keeping the Sunshine Coast home only.





The payoff







Relief from the debt burden, more income and, eventually, financial security.





Monthly net income





(including rent)







$7,770.





Assets







Bank account $75,000; GICs $39,000; RRSP $101,000; Sunshine Coast home $300,000; Vancouver house $750,000. Total $1,265,000.





Monthly disbursements







Mortgages $3,570; condo fees, including water, sewer $665; property tax $475; home insurance $75; heat, hydro $150; maintenance $165; auto insurance, fuel, maintenance $390; groceries $640; clothing, dry cleaning $135; gifts $20; charity $20; vacations and travel $210; personal $90; dining out $70; pet expenses $145; entertainment, subscriptions $45; sports, hobbies $85; dentists, drugstore, vitamins, health, life insurance $105; telecom, cable, Internet $310; RRSP $100; other savings $250. Total: $7,715





Liabilities







Sunshine Coast mortgage $251,000; Vancouver mortgage $284,000. Total $535,000.







Special to The Globe and Mail

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