Alice and Arlin have suffered a drop in income, mainly because they are B.C. realtors caught in a market downdraft.
She is 52, he is 66. With commission income sagging, they are revisiting their retirement plan, which is to pay off their real estate loans and sell their two rental properties when the market recovers. The rentals are operating at a loss.
Apart from their real estate, they have slightly less than $160,000 in Alice’s registered retirement savings plan against $188,360 in liabilities.
“I would like the planner to address our current cash flow problem,” Alice writes in an e-mail. They are spending more than they are taking in each month.
“Is our plan to sell off the rentals in the next real estate boom to finance our retirement advisable?” she wonders. She asks, too, whether it would make sense to add a rental suite to their principal residence, which would require more borrowing, and how to best invest her RRSP, which is in a combination of mutual funds and guaranteed investment certificates.
We asked Jason Heath, a fee-only financial planner at Objective Financial Partners Inc., in Toronto, to look at Alice and Arlin’s situation.
What the expert says
Alice’s goal is first to pay off her line of credit. That makes sense, the planner says, but she might consider setting up a separate line of credit in the interim to pay her rental property expenses. This would make the interest on the new line of credit tax deductible.
“It’s not much, but it will generate a few hundred dollars a year in tax savings by increasing the tax deductions,” the planner says.Alice and Arlin should next focus on paying down the mortgage on their home, although they don’t have any money for extra payments at the moment.
As for building a rental suite, Mr. Heath is not so keen.
“Given their desire to pay down debt and their high exposure to real estate already, I’d think twice about whether incurring more debt to have more real estate assets is a good choice.”
While the plan to sell the rental properties once the market rebounds makes sense, “who knows when that higher market will come?” the planner says. They may find they need to sell at some point to finance their retirement, although they could always borrow against the substantial equity in the properties while they wait for the right time to sell.
Looking ahead, Mr. Heath says Alice’s RRSP savings and their rental real estate equity will be enough to sustain them until Alice is in her mid-70s. “At that point, her savings will be extinguished,” the planner says.
In his projections, Mr. Heath had the couple’s investment assets (RRSP and net proceeds of real estate sales) reaching slightly more than $300,000 by the time Alice retires at age 62. That assumes a 5 per cent annual return on investments, real estate assets rising in value by 3 per cent a year and a 2 per cent annual inflation rate. Their investments would likely be exhausted within about 10 years, at which point their government benefits alone would not quite meet their needs.
Based on their retirement spending goal of $60,000 in today’s dollars, or $74,000 at retirement due to inflation, they would face a substantial shortfall by the time Alice was in her 70s, which would have to come either from borrowing against their principal residence or from its sale. Even then, that would only tide them over for another 10 years or so.
“Given how tight things look, I’d be inclined to look for ways to reduce costs now and plan for a leaner retirement budget,” Mr. Heath says. Selling their home and downsizing sooner rather than later could also make a difference, he adds.
“There’s not much of a cushion if spending is much higher than their budget,” the planner says. “So it’s going to be important to have a budget and stick to it.”
He questions the $1,025 Arlin is spending each month for a whole life insurance policy.
“The pure need for insurance on Arlin’s life is fairly low at this point given his plan to retire in five years,” Mr. Heath says. If he were to die, the lost income would likely be roughly the same as the drop in expenses for the rest of Alice’s life.
“In other words, there may not be a huge financial cost.” Instead, they should re-evaluate how much insurance they need and whether they have the right kind of coverage.
Alice asks whether she should shift her RRSP investments from mutual funds with 2 per cent annual management expense ratios into blue-chip stocks. While there is some merit to this, the planner says, it is important to build a diversified portfolio.
“Low-fee index mutual funds or exchange-traded funds might be better way of achieving a diversified portfolio of investments than individual stocks.”
Alice, 52, and Arlin, 66
Has the weak B.C. real estate market ruined their retirement plans?
Draw up a budget and stick to it. Focus on paying off the home equity line of credit first. Think twice about adding a rental suite and be flexible about the future.
A clear-eyed look at the challenges that lie ahead.
Monthly net income:
Alice’s RRSP $159,240; principal residence $525,000; rental real estate $425,000. Total: $1.1-million.
Mortgage $640; property tax $200; utilities $345; insurance $35; maintenance; gardening $125; transportation $740; groceries $435; clothing $200; line of credit $200; gifts charitable $120; vacation, travel $410; entertainment, dining out $450; grooming $25; pets, hobbies, subscriptions $100; other discretionary $140; dentists, drugs $100; life insurance $1,025; telecom, Internet, cable $265. Total: $5,555. Shortfall: $1,405.
Residence mortgage $63,360; rental mortgage $28,000; line of credit $93,500; credit cards $3,500. Total: $188,360.
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