Judy and Alistair are in their mid-50s with two grown children, good jobs and pension plans. Together, they bring in nearly $245,000 a year. Their Alberta home and lakeside cottage are both mortgage-free.
Now they want a place down south, preferably Arizona, where they and their dogs could spend the winter. They don't have much ready cash apart from their registered retirement savings plans, so they would have to borrow.
"Is it crazy for us to retire and go into $250,000 debt to spend time in the sun?" they ask in an e-mail. Alistair hopes to retire at year-end, when he will be 57. Judy, who likes her job, plans to work until she is 60.
"Our goal upon my retirement is to have $2,000 a week ($104,000 a year) after tax, both while Judy is working and after she retires in 2020," Alistair writes. He figures the Arizona property would cost about $18,000 a year to carry. "Come the day we no longer want to live in Arizona, the plan would be to sell the home and get a good portion of our original investment back," Alistair adds.
We asked Ron Graham, president of Ron Graham and Associates Ltd. of Edmonton, to look at Judy and Alistair's situation. Mr. Graham is a fee-only financial planner and a chartered accountant.
What the expert says
Alistair plans to retire at year-end with a pension of about $25,000 a year. That, plus Judy's $143,000-a-year salary, will cover their target spending of $104,000 a year until Judy retires, Mr. Graham says.
Alistair should start withdrawing funds from his RRSP after he retires to take advantage of his low tax bracket, the planner says. He could use the money to fund their tax-free savings accounts.
Both Judy and Alistair will be eligible for the maximum Canada Pension Plan benefit. They might want to consider taking CPP early even though the benefit would be lower, Mr. Graham says. This way, they would not have to draw down their savings so much to cover the cost of the Arizona property.
Mr. Graham looks at two possibilities: One, the Arizona property costs $18,000 a year based on an interest rate of 2.75 per cent; and two, interest rates go up so much that it costs them $24,000 a year.
When Judy retires at the age of 60, she will get a pension of $80,000 a year, giving them a total pension income of $105,000 a year before tax or $84,000 after tax – short of their spending target. Both pensions are partly indexed to inflation. The U.S. property would add an additional $18,000 after tax. The shortfall would come from their RRSPs, augmented, if they so choose, by early CPP benefits.
The RRSP withdrawals will trigger a clawback of their Old Age Security Pension benefits when they begin receiving them at the age of 65, Mr. Graham notes. To avoid it, they could instead begin withdrawing about $12,000 a year from their TFSAs. At the age of 72, they will begin taking mandatory withdrawals from their registered retirement income funds. The withdrawals will be enough to cover any shortfall.
If interest rates rise and/or the Canadian dollar falls further, the cost of carrying the third property would be higher, the planner notes. "This would require greater RRSP withdrawals in the future." If the cost of carrying the Arizona property were to rise by $6,000 a year, for example, Judy and Alistair could run out of savings between the age of 80 and 90, depending on their investment returns.
"Once their RRSPs/RRIFs run out, they may have to sell the property and pay off the loan," Mr. Graham says. They could use some of the sale proceeds to replenish their TFSAs "and live comfortably on $104,000 a year for the rest of their lives," he says. "They would still leave their principal residence and lake property for their children."
Alistair and Judy's RRSPs, TFSAs and non-registered accounts are all invested in Canadian dividend-paying stocks, either individually or through exchange-traded funds, the planner notes. The dividends and growth should more than offset inflation "to cover future higher withdrawals." While having so much stock may seem risky, their pensions – with a combined present value of more than $1.75-million – serve as the fixed-income part of their portfolio. Looked at this way, Alistair and Judy would have an asset mix of 30 per cent stocks and 70 per cent fixed income, Mr. Graham says.
The people: Alistair, 56, and Judy, 55.
The problem: Figuring out if they can afford to buy a vacation property down south.
The plan: Go ahead and buy the Arizona property. They have good pensions and they can always sell the property if they run out of savings in their old age.
The payoff: Winters in the sun with their dogs.
Monthly net income: $14,330
Assets: Stocks $45,000; TFSAs $25,000; his RRSP $525,000; her RRSP $130,000; commuted value of his pension plan $370,000; commuted value of her pension plan $1,200,000; residence $550,000; vacation property $350,000. Total: $3.2-million
Monthly disbursements: Property tax $265; water, sewer, garbage $200; home insurance $150; heat, hydro $230; maintenance $300; garden $50; transportation $995; grocery store $750; clothing, dry cleaning $450; line of credit $1,330; gifts, charity $400; vacation, travel $600; other discretionary $300; dining, drinks, entertainment $750; grooming $250; pets $250; sports, hobbies $50; subscriptions $50; other personal $150; dentists $50; drugs $20; vitamins and supplements $350; health and dental insurance $225; life insurance $215; disability insurance $330; telecom, TV, Internet $285; RRSPs $650; non-registered savings $500; TFSAs $2,200 (catch-up); pension plan contributions $1,985. Total: $14,330
Liabilities: Line of credit $14,000
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