-Mark Blinch/The Globe and Mail
At 57, Gregory is thinking ahead to semi-retirement. His dream is to work and travel abroad for six months of the year, mainly in Britain. As an artist, his income is variable, averaging $35,000 a year. He also earns rental income.
Gregory owns a house in Toronto, which he shares with tenants, and a small rental property. He has "a decent amount of equity between the two, but precious little in the way of RRSPs and no pension," Gregory writes in an e-mail. His children are grown and out on their own.
He wonders whether he should sell his principal residence to finance his overseas sojourns or sublet it, hoping his equity would continue to grow. If he sells, he could move into his rental property. "I don't envisage fully retiring until age 70," Gregory writes, "but at 62, I would like to semi-retire."
Future income from his artistic ventures is impossible to predict. "Can I afford to live and work part of the year in Europe?" Gregory asks.
We asked Marc Henein, an investment adviser with ScotiaMcLeod in Mississauga, to look at Gregory's situation.
What the expert says
While Gregory is generating good rental income – $68,700 a year – he also has a lot of debt. His two mortgages and his line of credit add up to $930,500.
Currently, Gregory's living expenses total $4,972 a month and his expenses for his income property total $2,767 (not included in table below), making his monthly expenses $7,739.
Combining his rental income with his earnings, after tax, Gregory earns about $7,000 a month. He is dipping into his line of credit to fund the monthly shortfall.
Gregory's short-term goal is to work in Britain for six months of the year for the next couple years. Subsequently, he would like to travel for a similar time period outside of Canada, the adviser says. Gregory estimates he'll need about $3,000 a month. He says he might be able to sublet his current living space for about $1,200 a month.
Income during his travels would be uncertain. "In order to achieve these goals, Gregory must cut his expenses so he is not living off his line of credit," Mr. Henein says.
One option to consider is for Gregory to sell his principal residence, which would be tax-free, and to move into a unit in his rental property. If he does this, he will cut about $3,000 a month from his expenses thanks to eliminating the overhead cost of the home plus the mortgage and line of credit expenses.
Once he does this, Gregory's expenses will go down to about $4,700 a month from $7,700.
Gregory estimates he will continue to generate rental income of $21,600 annually if he lives in a portion of the rental property. This income, plus his art sales of $35,000 a year, puts him almost in a cash flow neutral position, Mr. Henein says. The difference in this situation is he has lowered his debt load from $930,500 to $453,500 and he has no line of credit debt ($25,000). In addition, he would have a non-registered investment account of about $293,000, the net equity from the sale of his home.
With the $293,000, he could park six months' worth of expenses, $30,000, in a high- interest savings account, the adviser says. This will help cover any emergency expenses, especially while Gregory is travelling. The balance of $263,000 should be invested in a conservative, diversified income portfolio that can pay out monthly income to Gregory.
A typical good-quality corporate-class conservative income fund can generate 4 per cent a year net of fees and payable monthly, Mr. Henein says. This works out to $876 a month. This will be a return-of-capital payout, so very little of this amount will be taxable, he says. This will help supplement Gregory's travel and living expenses once he retires.
Arguably, the Toronto housing market is at or near a peak, so selling and taking the profits off the table from his principal residence makes sense at this time, Mr. Henein says. "Given Gregory's desire to travel for a good portion of the year, minimizing his liabilities and simplifying his life is key."
If he has a tenant occupying another portion of his rental property, they will be there to help manage any home issues while Gregory is out of the country.
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The person: Gregory, 57
The problem: With limited savings and income, can he afford to spend half the year travelling and working in Britain and Europe? Should he sell his Toronto home and live off the net proceeds?
The plan: Sell the principal residence, pay off the mortgage and line of credit, and invest in a monthly-pay income fund that returns capital and doesn't attract much tax.
The payoff: An open door to untold adventures abroad.
Monthly net rental and art income, after tax and expenses (estimated, variable): $4,205
Assets: TFSA $300; RRSP $70,000; residence $770,000; rental property $650,000. Total: $1.5-million
Monthly expenditures: Mortgage $1,952; property tax $240; utilities $275; insurance $75; maintenance $250; transportation $490; groceries $200; clothing $95; line of credit $200; charitable $75; vacation $300; other $50; entertainment $420; grooming $10; hobbies, clubs $70; dentist, drugstore $40; telecom $230. Total: $4,972
Liabilities: Residence mortgage $452,000; rental mortgage $453,500; line of credit $25,000. Total: $930,500
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