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(Paul Daly/The Globe and Mail)
(Paul Daly/The Globe and Mail)

FINANCIAL FACELIFT

Is a cross-country retirement move within this couple’s grasp? Add to ...

Retired and contemplating their golden years, Sam and Sally gaze out over the chilly prospect at this time of year and shiver. They long for a warmer climate and intend to travel, but don’t see themselves as snowbirds. He is 63, a retired government worker, while she is 61, a former small business owner.

They want to sell their comfortable home in Atlantic Canada in three or four years and move to Victoria.

“We know that a house in Victoria comparable to ours would cost significantly more, maybe double,” Sam writes in an e-mail. “One of the questions we have is how much can we afford to pay without it unduly impacting our current lifestyle?” he adds. “We don’t want to be house-rich and money-poor.” They also wonder whether it would make sense to get a mortgage for part of the cost instead of paying cash.

Fortunately, Sally and Sam are well-fixed. He gets a work pension of $33,000 a year plus $7,000 a year in Canada Pension Plan benefits, which he began collecting at age 60. His pension will drop to $26,665 at age 65. They have a pile of cash in the bank and a $1.4-million investment portfolio. Nearly 55 per cent is in low-cost stock funds. Their mortgage-free home is valued at $300,000. Their retirement spending goal is $60,000 a year after tax. We asked Ross McShane, a financial planner at McLarty & Co. in Ottawa, to look at Sam and Sally’s situation. Mr. McShane holds the chartered professional accountant and certified financial planner designations.

What the expert says

Sam and Sally can easily afford to buy a house in Victoria, live comfortably for the remainder of their lives and still leave an estate, Mr. McShane says.

This affords them a wealth of options, the planner adds. They could spend more than the anticipated $600,000 on the Victoria house. They could increase their lifestyle spending. Or they could reduce investment risk by settling for a lower rate of return.

Best of all, they can sleep easier knowing they have a surplus of funds for unforeseen events. They could also consider leaving a little something to charity. (They have no children.) “They will have the equity in their home should they require an additional source of funds,” the planner says.

This would come in handy if they both were to need assisted-living or nursing home care at some point.

A larger house will come with higher maintenance costs, the planner notes.

“On the positive side, they will pay a lower rate of income tax in B.C.”

Mr. McShane assumes a 4-per-cent average rate of return on their investments (net of fees) and a 2-per-cent inflation rate. The plan has Sally taking CPP at the age of 65.

They both begin collecting Old Age Security benefits at age 65. He further assumes they include vehicle depreciation in their $60,000 a year spending budget.

Should they take out a mortgage or sell some of their investments and pay cash for a new house?

Mr. McShane suggests they draw on their cash balances first, followed by their non-registered investments rather than taking out a mortgage – even though interest rates are low.

“Their bond portfolio could be liquidated with minimal tax implications,” the planner says. “A 2.5-per-cent mortgage rate means that they would need to earn about 3.75 per cent on a pre-tax basis on their bond portfolio to be as well off,” he notes. “This is unlikely given today’s low interest-rate environment.”

The decision to sell bonds versus equities in their non-registered accounts is a balance between what makes tax sense and investment sense, Mr. McShane says.

An argument could be made that Sam and Sally should withdraw money from their registered retirement savings plans to finance the purchase of the Victoria house.

“The strategy would be to withdraw an amount from their RRSPs that, along with other sources of income – from pensions, CPP, OAS and investments – keeps their individual income below $73,756, the threshold at which OAS benefits begin to be clawed back.”

However, when the planner looks at Sam and Sally’s projected tax brackets in retirement, their marginal tax rates will remain low.

“In fact, their tax rates will be lower in B.C., suggesting they would be better off deferring tax and letting the RRSP withdrawals go their normal course, beginning at age 72 after their RRSPs have been converted to registered retirement income funds (RRIFs).

+++++++++++++++

The people: Sam, 63, and Sally, 61.

The problem: Can they afford to move from Atlantic Canada to Victoria, with its high house prices? Should they pay cash or take out a mortgage?

The plan: Make the move, buy the house and pay cash but supplement house sale proceeds with money from sale of some non-registered investments.

The payoff: An end to their hesitation and worry.

Monthly income from pension, benefits and investments: $5,705

Assets: His TFSA $56,600; her TFSA $56,600; cash and non-registered investment portfolio $1,462,170; her RRSP $102,035; his RRSP $114,430; estimated present value of his defined benefit pension plan $438,000; residence $300,000. Total: $2.5-million

Monthly disbursements: property tax $190; insurance $50; maintenance $115; utilities $580; transportation $170; grocery store $450; clothing $50; health care, grooming $300; telecom, TV, Internet $135; club memberships $45; entertainment, dining $230; donations, gifts $250; travel $1,080; miscellaneous discretionary $80. Total: $3,725. Monthly surplus: $1,980

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

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