Mary met Mike while she was travelling in Europe. They hit it off and he agreed to join her in Canada, where he soon got a job in information technology earning $50,000 a year. Mary is a civil servant earning $132,000 a year.
She’s 51, he’s 49 with two children from a previous marriage.
“Mike’s family has a vineyard in Europe, and he grew up pruning, crushing and imbibing,” Mary writes in an e-mail. “I have joined his family for the grape harvest for the past five years and enjoy the process of making and drinking wine as much or more than he does,” she adds.
Their retirement plan is to buy at least 10 acres of land (enough for an estate winery) in Prince Edward County or the Niagara region and make wine as a hobby to keep busy, Mary writes. To achieve this, their two properties must gain in value, she says. They bought a house in Ontario a few months ago that needs some renovation and rented out Mary’s previous home at a profit, giving her rental income of $42,000 a year.
Mary has a defined benefit pension plan, indexed to inflation, that “will likely cover all of our needs,” she writes. She will get $105,000 a year at the age of 65, as well as Old Age Security and maximum Canada Pension Plan benefits. Mike will be eligible for 45 per cent of CPP and OAS benefits at the age of 65.
They plan to retire in 14 years when she is 65 with $80,000 a year after tax to spend. In the meantime, they want to help Mike’s children with their education and buying a first home.
How much can they afford to spend on a hobby farm? Mary asks. How should they direct their surplus funds in the meantime?
We asked Paul Tyers, a financial planner and managing director at Wealth Stewards Inc. in Toronto, and Andrew Brydon, a chartered accountant, to look at Mary and Mike’s situation. Mr. Tyers is also a chartered accountant. Wealth Stewards was recognized as the overall winner of the 2018 financial planning awards by PlanPlus Canada.
What the experts say
First, Mary should direct any surplus cash flow she has to a spousal registered retirement savings plan for Mike using her unused RRSP room ($48,000), Mr. Tyers and Mr. Brydon say. Mary’s marginal tax bracket is 43 per cent and she will continue to have higher income than Mike after she retires from work, they add. Contributing to a spousal RRSP will lower her taxes now and in the future because the RRSP income will be taxed in Mike’s hands at a lower rate.
Any extra cash flow could go to tax-free savings accounts or taxable accounts for the time being to help with the higher education of Mike’s children. When Mary retires from work, she can split her pension income with Mike.
Mary should consider selling half her rental property to Mike by means of a spousal loan so half the income will be taxed at his lower marginal rate, Mr. Tyers and Mr. Brydon say in their report. “This will save her $2,000 a year in taxes.”
By the time Mary is 65, they should be well-positioned to buy a hobby farm, the planners say. They’ll have two options. They could sell the principal residence, keep the rental property and buy an existing vineyard in Prince Edward County for $990,000 in future dollars (after increases in the cost of living from inflation). That probably won’t be enough to buy the place they want. If they sold both properties, they could buy a vineyard with their dream home for $1.5-million in future dollars.
“Our research indicates that a property the size they wish to purchase will have a market value of about $1,450,000 in 14 years (in future dollars),” they say. They do not recommend Mary and Mike buy a hobby farm and plant vines in advance of retiring because a vineyard requires a lot of tending, and commuting so far to work would be stressful.
One important caveat: “We strongly advise that before purchasing a vineyard property, you perform a thorough business analysis and business plan to forecast the viability of your vineyard,” they say in their report. “All businesses require prudent planning before execution,” the planners add. “It is even more important in the vineyard industry as it is very difficult to earn a profit.”
Mary also wonders whether they should step up the payments on their two mortgages. Because of Mary’s high tax bracket, it makes more sense for her to make RRSP contributions to get the tax benefits. When the mortgage on their principal residence rises above 4 per cent, they should re-evaluate the situation and perhaps shift their focus to paying down their residence mortgage. Unlike the rental property, interest on the mortgage on their principal residence is not tax deductible.
The people: Mary, 51, Mike, 49, and his two children.
The problem: Can they achieve their dream of retiring to a hobby farm in Ontario’s Prince Edward County when they retire from work and busy themselves with a vineyard?
The plan: Mary contributes to a spousal RRSP for Mike, and considers selling him half her rental property. They sell both properties in 14 years and buy a vineyard property for about $1.5-million in future dollars. In the meantime, draw up a business plan.
The payoff: The freedom to live the lifestyle they want.
Monthly net income: $11,745
Assets: Cash $10,000; her TFSA $10,000; her RRSP $90,000; estimated present value of her pension plan $750,000; residence $600,000; her rental house $810,000. Total: $2.27-million
Monthly outlays: Mortgage $3,400; property tax $1,100; electricity $500; maintenance $50; transportation $375; groceries $400; clothing $50; charity $100; vacation, travel $400; dining, drinks, entertainment $450; personal care $100; subscriptions $30; cellphones, internet $210; pension plan contributions $1,550. Total: $8,715. Surplus of $3,030
Liabilities: Home mortgage $470,000; rental mortgage $300,000. Total: $770,000
Want a free financial facelift? E-mail firstname.lastname@example.org.
Some details may be changed to protect the privacy of the persons profiled.