Sixty-eight and single again, Iris is tiring of her part time public-sector job and yearning to hang up her hat.
Fifteen years ago, she left a federal government job to start her own business, which she folded three years later. “Maybe the reason it failed was I burned myself out doing every task myself,” Iris muses in an e-mail.
Since then, she has been working part-time, but the job changed along the way and now she finds it “crushingly boring and soul-sucking,” she adds. Without the $20,000 or so in employment income, though, she fears she will have to sell her Toronto area house, which she values at $750,000. She has a mortgage of roughly $160,000.
The house has a separate apartment that will bring in $925 a month when she raises the rent this summer. Occasionally, she also takes in foreign students.
“I see four possibilities, none of which is great,” she writes. “Keep my lovely little home and just continue working at an undesirable job until I keel over, move into my apartment and rent the main house, sell my home and find a rental outside of Toronto (where rent is cheaper), or sell everything and move to an ex-pat community in Ecuador or Mexico.”
We asked Heather Franklin, an independent Toronto financial planner, to look at Iris’s situation.
What the expert says
Iris is not as badly off as she thinks, Ms. Franklin says.
When Iris retires this fall, her income will drop, but she will still have her defined benefit pension plan of $1,500 a month, $467 a month in Canada Pension Plan benefits, $551 in Old Age Security and $206 a month of U.S. Social Security. Adding the $240 municipal pension from her current job brings the total to $2,964 a month – $35,568 a year – of guaranteed income indexed for inflation.
Rental income would add another $925 a month, or $11,100 a year, raising her before-tax income to $46,668. When she retires, she could convert her registered retirement savings plan to a registered retirement income fund and begin drawing on it to the tune of $10,000 a year, lifting her total to $56,668, Ms. Franklin says.
This would amount to roughly $45,000 after tax, the planner estimates. She is spending $4,290 a month (including $2,105 of housing costs), so she would be faced with a cash-flow shortfall of $6,480 a year or $540 a month.
If she wants to stay in her home for a few more years, she could pick up $200 a month by extending her mortgage amortization from 15 years to 20 years when it comes up for renewal next year, and another $300 a month by taking in a student.
If Iris decides to sell and rent, she would not necessarily have to leave Toronto – and certainly not Canada – to find a place she can afford, Ms. Franklin says. A single woman moving to an unfamiliar place with no friends or family might feel a bit isolated. Iris should be able to find a two-bedroom apartment north of the downtown core for $1,600 a month including utilities, less than she is paying now.
Iris is considering buying annuities to give her a secure source of income for as long as she lives even though she knows the current low-interest rate environment is not the best time to do so.
If Iris sells her home, she could buy annuities with part of the proceeds and invest the remainder in dividend-paying blue-chip stocks, Ms. Franklin says. Annuities can be added gradually rather than all at once.
Suppose Iris nets $575,000 from the sale of her home and buys $300,000 worth of annuities over three years. This would give her about $1,740 a month – enough to cover her rent, the planner notes. “At age 70, an investment of $100,000 in annuities would net about $580 a month, ballpark,” Ms. Franklin says.
The remaining $275,000 could be invested in dividend-paying blue-chip stocks. This would give her the potential growth needed to offset inflation and generate roughly $10,000 a year in “tax-preferred” income (assuming a 3.5 per cent yield) thanks to the dividend tax credit, the planner says.
Iris could shift the money she has in cash and short-term investments to her tax-free savings account “allowing these investments to grow free of tax,” she adds.
The person: Iris, 68
The problem: How to get by financially after she retires this fall.
The plan: Consider selling the house in a couple of years and renting. In the meantime, extend the mortgage amortization and/or take in foreign students again.
The payoff: The comfort of knowing she need not make any drastic moves.
Monthly net income: $5,000 (estimated, variable)
Assets: Home $750,000; est. value of federal pension $360,000; est. value of municipal pension $57,000; RRSP $140,000; cash, short-term investments $10,000; TFSA $2,500; other $16,000. Total: $1.3-million
Mortgage $1,295; property tax $290; insurance $105; utilities $260; maintenance, garden $155; transportation $385; groceries, clothing $310; gifts $50; charitable $150; vacation, travel $350; other discretionary $35; pets $135; dining, drinks, entertainment $140; clubs, sports $70; grooming $65; subscriptions, other personal $80; dentist, drugstore $75; health insurance $40; telecom, TV, Internet $115; pension plan contribution $150; professional association $35. Total: $4,290.
Liabilities: Mortgage $158,000 at 4 per cent
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