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financial facelift

Emma is a widow who wants to sell her suburban home and move back to Toronto -- the city she loves.Marcus Oleniuk

Amid a tide of city dwellers selling their high-priced houses and moving to less-expensive places, Emma aims to go the other way. She wants to sell her suburban house and move back to the city.

Before she moved to the suburbs, Emma lived downtown. "I love Toronto," she writes in an e-mail. After her husband died, she resolved to move back. She is 66. "I am entering the final phase of my life," she adds. "I would rather skimp on other things to be in an environment that makes me happy." She'd also be closer to work.

The big question when she moves is whether to rent or buy a condo. Emma makes about $66,300 a year. She also gets a Canada Pension Plan (CPP) survivor's pension.

Although Emma has no work pension, she does have some savings. She plans to retire at the age of 70 and aims to have $40,000 a year after tax.

"If I rent, I would purchase annuities with much of the capital from the house," Emma writes. "Is it best done gradually or should I do it all at once?" Her suburban house is valued at about $500,000.

We asked Ian Calvert, a financial planner and portfolio manager at HighView Financial Group in Toronto, to look at Emma's situation.

What the expert says

"The decision to rent or buy has many layers and requires careful consideration," Mr. Calvert says. "Although Emma would be downsizing in terms of space, the decision to move in to, not out of, Toronto makes it difficult to create a typical downsizing event."

If Emma decides to buy a condo, she will not have anything extra to save because the average condo price in Toronto is about $550,000.

"With her current investable assets totalling $350,000 and no pension, Emma will need to ensure she sticks to her budget of $40,000 annually throughout retirement," the planner says.

She could put off collecting Canada Pension Plan benefits until she retires at the age of 70. By doing so, her benefit would increase by 0.7 per cent for each month after the age of 65. This means her CPP retirement benefit would be 42 per cent higher than if she had taken it at the age of 65.

With CPP and Old Age Security providing the two stable pillars of her retirement cash flow, Emma should also consider the timing and amount of withdrawals from her RRSP, Mr. Calvert says. She should consider withdrawing money from her RRSP in the first year that she has no employment income.

"In her case, this would be in the same calendar year in which she turns 71," the planner says. If she elected to convert her RRSP to a RRIF (registered retirement income fund) and took only the minimum withdrawal from age 71, combined with her government benefits, she would find herself with an annual shortfall of about $3,000 to $3,500, Mr. Calvert says.

This is how Emma's income is estimated to break down in her first full year of retirement, 2022: Estimated CPP (adjusted for inflation) $19,248; Old Age Security (adjusted for inflation) $7,924; and RRIF withdrawal $17,000 (about $3,500 more than the minimum); for total income before tax of $44,172.

Emma's goal should be to keep her taxable income below $46,605 and thereby stay in the combined marginal tax rate bracket of 24.15 per cent.

If Emma chooses instead to rent, her monthly outlay will be substantially higher. She will have to draw on the proceeds of the house sale, which will place a greater emphasis on the management of her investable assets, Mr. Calvert says.

"In this scenario, Emma would want to plan for an increase in expenses (for rent) of about $2,200 per month," the planner says. The rent could be more or less, depending on the neighbourhood and the size of the apartment.

To fund the additional cost, Emma would require an annual rate of return of about 5 per cent on her investable assets, Mr. Calvert says. To achieve this, she would "have to be comfortable with having some equity risk within her investment portfolio."

He suggests a balanced portfolio of stocks and bonds with an emphasis on yield. The stock component should have both international and domestic equity exposure because the Canadian market represents a relatively small investment universe, the planner says.

"It will provide more certainty for her retirement plan if the majority of her 5-per-cent target can be funded by yield or cash flow from the portfolio, rather than being heavily reliant on uncertain capital appreciation." (This assumes the underlying capital is intact.)

If Emma decides to take a more cautious approach, with a goal of achieving a rate of return of 2.5-per-cent annually, she will have to draw down her capital, Mr. Calvert says. "With a 2-per-cent inflation assumption, her portfolio would last until 2043, when she would be 92 years old."

Rather than investing, Emma is thinking of buying an annuity (or series of annuities) to provide a guaranteed stream of retirement income. "Annuities remove the risk of outliving your retirement funds because the insurance company will guarantee a monthly income as long as you live," the planner says.

It would eliminate market risk and the need to build and monitor an investment portfolio. "However, annuities come with their own set of unique disadvantages," he adds. "They might have higher costs because you are paying for the guarantee. Your income payments cannot be adjusted to reflect changing needs in retirement. And lastly, there are disadvantages of locking yourself into a fixed annuity when interest rates are at historical lows."


The Person: Emma, age 66.

The Problem: Should she rent or buy a condo when she moves to Toronto? If she rents, should she buy life annuities?

The Plan: Take stock of spending needs because she'll have little wiggle room if she buys. If she rents, she should rejig her investment portfolio to generate higher returns. If at some point she decides to buy annuities, she needs to be aware of their limitations.

The Payoff: Goal of moving to the city achieved.

Monthly net income: $4,485.

Assets: Bank savings $41,500; TFSA $65,770; RRSP $242,025; residence $500,000. Total: $849,295.

Monthly disbursements: $3,840. Property tax $375; property insurance $90; utilities $270; maintenance, garden $300; transportation $560; grocery store $400; clothing $100; gifts, charitable $275; vacation, travel $100; dining, drinks, entertainment $650; club membership $100; pets $200; subscriptions $75; health care $85; phones, TV, internet $260.

Liabilities: None.

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Some details may be changed to protect the privacy of the persons profiled.

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