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financial facelift

Rafal Gerszak/The Globe and Mail

When she lost her job a couple of years ago, Pat wondered whether she could afford to leave the working world behind, build a home on her Gulf Islands property in British Columbia and live off the fruits of her labours – plus her company pension plan.

After all, she has been thrifty all her life and now, at age 53, she owns a mortgage-free townhouse in Vancouver that she could sell or rent out. She has a roommate who helps with the expenses.

If she officially retires at age 55, Pat will get a modest work pension. Her goals are to travel more – "I'm still a backpacker" – then "get a dog and tend to my garden."

She figures it will cost $250,000 to build on her island property, money that could come from her savings and investments, her registered retirement savings plan or the sale of her townhouse. She wonders if it would make sense to rent out the townhouse, which would give her the use of a separate bedroom and bath in the basement when she is in town.

At some point, she plans to pick up a part-time job on her island home.

"For now, my part-time job would be working on building a home," she writes. Should she look for another job? Wait to age 65 to begin collecting her pension? Will she run out of money given her retirement spending target of $30,000 a year after tax?

We asked Ian Black, a fee-only financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Pat's situation.

What the expert says

If Pat retires at 55, her pension will be $10,800 a year. If she works to 65, that number would rise to $25,400, indexed to inflation at the discretion of the plan's trustees.

"The plan is adequately funded so it is credible to believe that Pat's employer pension will increase with inflation," Mr. Black says. In the meantime, she needs money to live, which will come from her capital.

In his calculations, the planner assumes that Pat will retire and build her new home. He further assumes she will get half of the maximum Canada Pension Plan benefit at age 60, and full Old Age Security at age 65. He pegs average return on investment at 5 per cent a year, inflation at 2.5 per cent and life expectancy at another 37 years.

The result of his analysis shows that Pat can indeed achieve pretax cash flow of $35,000 a year and perhaps as much as $48,000 a year.

If she retires now, Mr. Black suggests Pat sell her Vancouver townhouse and invest the proceeds in marketable securities, which she can draw on to build her island home. Otherwise, she will have too much of her money in a single, illiquid asset class – a full 85 per cent would be in real estate once the new home was built.

If she rented her existing townhouse, the $15,000 in net rental income would represent only a 2.5 per cent return on the $600,000 asset. As well, the number does not take into account potential vacancies or capital expenditures such as roof repairs.

Pat has two years before her employer pension begins, seven years until she collects CPP and a dozen years before she gets OAS, Mr. Black says. If she uses her savings rather than the proceeds of the townhouse sale to build her new home, she would be left with $84,700 in RRSP assets, $17,300 in her TFSA and about $74,000 of other capital to tide her over.

Selling the home would also allow her to diversify her investments among stocks and fixed income securities in Canada and internationally.

If Pat thinks she might live beyond age 90, she could consider finding another job and working to age 60, Mr. Black says. This way, she would postpone the date at which she begins spending her savings. Her work pension and CPP benefits would also be higher. Alternatively, she could transfer some of the longevity risk to an insurance company by buying an annuity with a portion of her assets, but "this could be an expensive option given her age and current interest rates," Mr. Black says.

Besides, if she runs out of money in her 90s, Pat would still have the value of her Gulf Islands home to fall back on, he adds.

Client Situation

The person

Pat, age 53

The problem

Pat would like to retire immediately with $35,000 of pre-tax income. She would like to use her current savings to build a new home on a piece of land she owns on one of the Gulf Islands. The expected construction costs are $250,000.

The plan

She can build her home with $250,000 of liquid assets, but it might be better if she sells her current home rather than renting it out. She should consider the potential length of her retirement – and the possibility of outliving her money – and decide whether to work a bit longer.

The payoff

Pat will be able to retire early, build her new home – complete with dog and garden – and still meet or even surpass her retirement income needs.

Monthly net income



Bank $100,000; GIC $100,000; stocks $124,000; TFSA $17,300; RRSP $84,700; home $600,000; Gulf Islands land $140,000. Total: $1,166,000

Monthly disbursements

Condo fees $267; property tax and insurance $194; utilities $102; maintenance $50; transportation $180; groceries $250; clothing $50; charitable $15; travel $200; grooming $30; dining out $250; hobbies $100; dentists, drugstore $55; health insurance $60; telecom $87. Total: $1,890



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