Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Couple need debt reduction plan (ARNOLD LIM/ARNOLD LIM/THE GLOBE AND MAIL)
Couple need debt reduction plan (ARNOLD LIM/ARNOLD LIM/THE GLOBE AND MAIL)

Financial Facelift

Couple need debt reduction plan Add to ...

In British Columbia, a businessman we'll call Jack, who is 42, and Rita, a health care professional who is 35, live with two cats. Jack wants to retire when he is 60. Rita would like to work part time when she is 45 and then to retire fully when she is 50.

Their income after tax, $82,512 a year, is not a great deal in the expensive B.C. housing market. They are carrying $1,082,000 of property-related debt that supports $1,350,000 of property-related assets, including their residence.

Jack has no company pension and Rita has a defined benefit pension plan with her employer. Their plans include endowing an animal shelter after they have passed away. For now, they are juggling their retirement and charitable causes with the risks of the volatile property market.

"We want to be prudent and perhaps to set up a trust fund for family members, as well as the animal shelter," Jack explains. "Can we accumulate enough assets to do it?"

What our expert says

Facelift asked Caroline Nalbantoglu, a financial planner with PWL Advisors Inc. in Montreal, to work with Jack and Rita.

"They really don't have a plan," she explains. "For example, he bought real estate to reduce exposure to stocks, but then mortgaged a property to buy more stocks."

Jack and Rita have most of their assets tied up in their home and two rental properties, one of which is not yet operational. Their debts for the rental properties total $751,000. They are carrying the debt at current interest rates as low as 1.5 per cent. When interest rates rise, they may find that they do not have positive cash flow from the properties.

For now, Jack has $363 a month of retained cash from his rental units. He also retains $500 that goes to an investment account held jointly with Rita and $1,000 that goes to other savings. Best plan - use the cash available to reduce his own $331,000 of home mortgages and line of credit debt.

Jack and Rita have a total of $135,000 in RRSPs. That's a modest amount, the result of Jack's dislike of paying taxes when registered money is withdrawn.

The largest obstacle to Jack and Rita's retirement plans is their debt. If they can eliminate it, then each can retire at their respective ages of 60 and 50, the planner says. At age 55, Rita, whose pension plan is based on her best five years of service, will generate an annual benefit of $18,064 plus a $7,754 annual bridge payable to age 65 for a total of $25,818.

At age 60, they can apply for their Canada Pension Plan (CPP) benefits. Currently, the early application penalty would cost them 30 per cent of the age 65 maximum benefit of $10,905, but proposed changes would raise the penalty to 36 per cent. The changes are due to take effect in 2011 and 2012. They would each receive Old Age Security (OAS) benefits that currently pay $6,204 a year.

When Jack is 65, their retirement income in 2009 dollars would therefore be $49,933, composed of $6,204 in total OAS benefits, her $25,818 pension including the bridge supplement, one reduced CPP payment of $6,979 and a 3-per-cent annual real return of $10,932 on non-registered assets of $364,400.

When Rita is 65, she will gain $6,979 in CPP benefits and lose her $7,754 annual bridge for a net loss of $775 in pension income. She will gain OAS benefits of $6,204 a year in present dollars. Returns from investment assets will add to total income. If those assets have grown at a real rate of 3 per cent a year, then non-registered assets will be worth $547,528 and will add $16,426 to income. Registered assets will be worth $822,910.

At age 72, Jack will be making withdrawals from his RRIF. The minimum withdrawal based on Rita's age - an option permitted by regulations - would be $18,783. At this point, their total annual income will be $90,571 in 2009 dollars, Ms. Nalbantoglu estimates.

Creating a trust structure to give money to beneficiaries that would include an animal shelter is not the best choice, the planner says. A better plan would capture tax advantages by establishing an endowment fund for the shelter, which would be considered a charitable donation and provide a tax deduction on the contributions.

Client situation:

The People: B.C. couple aged 42 and 35

The Problem: High debts and variable income make planning difficult

The Plan: Reduce debts and exposure to interest rate increases

The Payoff: The foundation for a comfortable retirement and bequests

Net monthly income: $6,876

Assets: Residence, $420,000; Rental property #1, $430,000; Rental property #2, $500,000; RRSPs, $135,000; Taxable stocks, $90,000; Total, $1,575,000

Monthly disbursements: Mortgage on residence, $1,506; Property tax, $96; Strata fees, $100; Mortgage on rental #1, $1,441; Property tax #1, $177; Utilities, $100; Food & restaurant, $600; Entertainment, $200; Clothing, $100; Pet care, $50; RRSP $0; Taxable investments, $500; Car repair and fuel, $175; Travel, $500; Car and home insurance, $196; Charity and gifts, $100; Life insurance, $35; Savings, $1,000; Total, $6,876

Liabilities: Mortgages: Residence with two mortgages: $182,000 at 3.65-per-cent interest and $64,000 at 1.45 per cent; Line of credit: $85,000 at 2.25 per cent; Rental property #1 with three mortgages: $207,800 at 1.5 per cent; $90,900 at 1.5 per cent; $21,300 at 1.5 per cent; Rental property #2: $431,000 at 3.89 per cent; Total: $1,082,000

Special to The Globe and Mail Interested in a free Financial Facelift? Contact


Report Typo/Error

Next story




Most popular videos »

More from The Globe and Mail

Most popular