Wesley is 54, single with no dependants, and seriously thinking about hanging up his hat. He makes about $43,200 a year plus income from two rental properties.
"I plan on living until I'm 100 years old," Wesley writes in an e-mail. This presents him with some challenges. Fortunately, he has defined benefit pension plans from his current and previous employer.
"As of this writing, taking the commuted value of these pensions is off the table," Wesley writes. "I'm much more comfortable with two defined benefit pensions." When he retires, which he hopes will be soon, Wesley – who is good at fixing things – figures he can easily bring in some extra money doing part-time work.
"Can I retire soon and fund a healthy, active and rewarding lifestyle?" he asks. "How should I structure the sale of the rental properties and the drawdown of my pensions and other investments?" he wonders. His retirement spending goal is $43,000 a year after tax.
"My thoughts are that I still have the capacity and ability to deal with tenants and maintain my buildings for some time, so I should probably hold onto them as long as possible," Wesley writes. His residence and two rental properties are all on Vancouver Island. All three properties have mortgages.
We asked Warren MacKenzie, a principal at HighView Financial Group of Toronto, an independent investment counsellor, to look at Wesley's situation.
What the expert says
Wesley would like to retire at age 55, the earliest date at which he can begin to draw a pension, Mr. MacKenzie says. "He wonders if this is feasible."
While Wesley doesn't have much in the way of savings, he is financially secure because even after he retires, the amount of income he will be earning from his rental properties, his indexed pensions and his investments will be more than what he needs to maintain his lifestyle," Mr. MacKenzie says.
Besides his indexed pensions, "his main advantage is the fact that he can live a full and satisfying life while spending no more than $43,000 per year."
At age 55, Wesley's pension income, including bridge benefit to age 65, will be $28,000 a year. The net cash flow from his rental properties is about $10,000 a year, which will increase as he pays down the mortgages. As well, he expects to earn about $12,000 a year from part-time employment.
When Wesley turns 65 and his bridge benefit ends, his work pensions will be about $26,800 a year, but Canada Pension Plan and Old Age Security benefits will add $21,000, net rental income $18,000 and part-time employment $15,000, for a total before-tax income of about $81,000 a year, the planner says. Wesley is confident that because of his background he can continue to earn at least $12,000 a year until he is 70.
"With inflation, his cash flow requirement for spending and income tax is expected to be about $75,000."
In the early years of retirement, Wesley will need gross income of about $50,000 a year to support spending of $43,000 a year. In the future, as the rental mortgages are paid down and when he is collecting CPP and OAS benefits and making withdrawals from his RRSP/registered retirement income fund, he will be in a higher income tax bracket.
So if he needs extra cash between ages 55 and 65, it makes sense for him to draw money out of his RRSP and pay tax at a lower rate than he would if he left it in the RRSP/RRIF until he is forced to begin making mandatory minimum withdrawals at age 72, the planner says.
Wesley wonders if he should sell his rental properties, "and the answer is no," Mr. MacKenzie says. "These are his best investments." Some maintenance work is required, but he has the time and the income they are generating is nearly 10 per cent a year (based on the net investment), plus, over time, the rental income – and property values – can be expected to go up at the rate of inflation.
Still, there are three things Wesley might want to consider, Mr. MacKenzie says.
First, he should take his investments out of the high-fee mutual funds he is in (fees range from 2.1 per cent to 2.45 per cent) and move them to a robo-adviser, a Web-based portfolio manager. "With a robo-adviser, the fees will be lower, the funds will be rebalanced in a disciplined manner and he will be dealing with a firm that is held to the fiduciary standard," Mr. MacKenzie says. That means the firm has a duty of trust to act in its clients' best interests.
Second, Wesley will be generating surplus cash, which should be used first to pay down the mortgage on his personal residence and then to start contributing to a tax-free savings account.
Third, he might want to consider getting a quote from an insurance company for long-term care because he has no family to look after him.
If Wesley retires at age 55 and his investments grow at an average annual rate of 4 per cent a year, "his net worth will be increasing each year for as long as he lives," Mr. MacKenzie says.
The person: Wesley, 54
The problem: Can he retire as soon as possible?
The plan: Go ahead and do it. Hang onto the rental properties because their cash flow – and asset value – is likely to improve over time. Lower his investment costs and then focus on paying off his residence mortgage.
The payoff: The time and money to pursue his interests for another 45 years or more.
Monthly net income: $4,160
Assets: Cash in bank $5,000; short-term deposits $25,000; stock funds in RRSP $100,000; residence $330,000; two rental properties $750,000; estimated present value of his two defined benefit pension plans $600,000. Total: $1.8-million
Monthly outlays: Mortgage $1,500; condo fee $250; property tax $100; home insurance $20; hydro $40; maintenance $100; transportation $320; grocery store $300; clothing $50; charitable $50; vacation, travel $200; club $20; dining, entertainment $250; sports, hobbies $300; cellphone $80; Total: $3,580
Liabilities: Home mortgage $80,000; rental mortgages $520,000. Total: $600,000
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