-The Globe and Mail
Stan and Cheryl want to retire early, sell their Vancouver house if they have to and move to their cottage to be closer to their children. The cottage, which is in another province, needs about $350,000 worth of renovations.
In doing so, they'll be giving up about $24,000 a year in net rental income from their Vancouver house. Cheryl is 54, Stan 56. They have two children in their early 20s, one of whom is still studying. They are helping the younger with rent to the tune of $1,200 a month.
Stan, an executive with a non-profit organization, earns $135,000 a year. Cheryl, who was laid off from her job last fall, is earning about $36,000 a year consulting.
Their retirement spending goal is $135,000 a year after tax.
"Although we both want to officially retire, we both would like to continue to consult," Cheryl writes in an e-mail. "This is realistic for Stan, probably less so for me."
Their cottage is more than an hour's drive from the nearest city.
"Now that we've made the big investment in the cottage, we want the flexibility to spend time there," Cheryl writes. "This is where we spend time with our children and hope to as they have family of their own," she adds. As well, they like taking cycling trips "and hope to do more of that."
The cottage purchase last year left them with $500,000 in debt against their Vancouver house.
"Are our goals realistic?" Cheryl asks. "Will we need to downsize?"
We asked Linda Stalker, a financial planner with Henderson Partners LLP in Oakville, Ont., to look at Stan and Cheryl's situation. Ms. Stalker holds the certified financial planner (CFP) designation.
What the expert says
Stan and Cheryl would like to retire in four years, when she is 58 and he is 60. They have significant net worth thanks to their $3-million Vancouver residence and their $700,000 cottage. "However, they will have difficulty achieving all of their goals if Cheryl is not working and they continue to hold all of their real estate," Ms. Stalker says.
They wonder if downsizing is the best option even though they would be giving up the rental income their house generates.
Ms. Stalker looks at the numbers. To achieve their retirement spending goal of $135,000 a year after tax – and make it last 30 years or more – they would have to have saved about $3.3-million in before-tax dollars, Ms. Stalker says. They don't have anywhere near that now unless they sell the house and invest the proceeds.
"Assuming a 4.7-per-cent nominal rate of return, the $3.3-million should generate about $190,000 in income per year, or $95,000 each, assuming they are able to income split and wish to draw down their assets to zero," the planner says.
Their goal is to retire debt-free. They have a secured line of credit of $500,000 at 3.2 per cent and are making payments of $2,500 a month, Ms. Stalker notes. "At this rate, their debt will be paid off in 23 years and eight months." Clearly, they will have to make larger monthly payments if they wish to pay off all their debt by the time they retire. "If they don't have the free cash flow to do so, it will have to come from somewhere, likely the sale of the house," Ms. Stalker says.
Looking at their overall financial picture, 75 per cent to 80 per cent of their assets are tied up in real estate, with the majority (64 per cent) in their principal residence, the planner says. "This is a common occurrence for most Canadians, particularly in the Toronto and Vancouver housing markets."
Because house prices have skyrocketed in these areas, a larger portion of their wealth is now tied up in their home, she adds. "A (potential) downturn in the real estate market poses a significant risk to their financial well being," Ms. Stalker says. Selling the house would free up cash to invest in a diversified portfolio tailored to their specific financial goals and objectives. The investments would generate income needed to meet their retirement cash flow needs.
(When they sell the house, they likely will have to pay capital gains tax on the portion that was rented.)
Stan and Cheryl have enough wealth (net worth of about $4.2-million, plus Stan's pension) to achieve their retirement goals and objectives as long as their expenses remain relatively constant throughout retirement, the planner says. Stan has a hybrid pension at work. The defined-benefit portion will pay him $1,470 a month starting at age 60.
Throughout the plan, Ms. Stalker assumed that all investments would be in a balanced asset allocation (60 per cent equities, 40 per cent fixed income) earning a nominal weighted average rate of return of about 4.7 per cent. She assumed their real estate would appreciate by 2 per cent a year, in line with her estimate of inflation.
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The people: Cheryl, 54, and Stan, 56
The problem: Is their goal of retiring early with $135,000 a year realistic?
The plan: Retire in four years, sell the Vancouver house and move to the cottage. Pay off home equity line of credit (HELOC) and renovate at a cost of $350,000.
The payoff: A secure and comfortable retirement close to their children.
Monthly net income: $13,500 (including rental income)
Assets: House $3,000,000; cottage $700,000; RRSPs $845,500; his RPP $69,500; TFSA $78,400; non-registered $18,600; estimated present value of Stan's DB pension plan, $448,000. Total: $5.2-million.
Monthly distributions: HELOC $2,500; property taxes, property insurance, utilities and repairs $2,606; transportation, gas, car insurance, maintenance, parking $325; groceries $800; clothing/dry cleaning $125; charitable $100; phone, Internet, cable $502; vacation $500; gifts $200; entertainment, dining out, alcohol, hobbies, personal care, club memberships, pet expenses $835; health care expenses and insurance $135; student's rent $1,200; RRSP and TFSA contributions $1,100; pension plan contributions $500. Total: $11,428. Monthly surplus: $2,072
Liabilities: HELOC $500,000 at 3.2 per cent.
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