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CHAD HIPOLITO/The Globe and Mail

Bill and Ava say they’re a 39-year-old couple with retirement on their mind. “I expect that we actively engage in retirement planning conversations more than most people our age,” Bill writes in an e-mail.

He earns about $96,600 a year in education, while Ava makes $69,700 working for a government agency. They also have rental income from their basement apartment. Both have defined benefit pension plans.

They have two children, ages 3 and 7, a house in British Columbia with a mortgage, and a condo they bought recently to rent out on AirBnB, which is operating at a loss. “This obviously hasn’t been a great year for AirBnb-ing, but we hope 2022 will be better,” Bill writes.

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Their retirement goals are understandably sketchy. They want to have more disposable income than they have now for travel and leisure, and think perhaps $120,000 a year before tax might be a reasonable spending goal. They plan to retire at age 60.

But they have several other concerns. “We’ve been as aggressive as possible with paying down the mortgage on our home, in hope of being mortgage-free by age 50 or 55 to free up more disposable income as our children enter their teenage years,” Bill writes. They’d like to pay for the children’s postsecondary books and tuition. They also want to help both children with down payments on their first homes when the time comes, “possibly from the sale of the rental condo down the road or from an equity access line of credit,” he adds. They also want to buy a used electric car, and install a heat pump. “Are we on track to achieve these goals?”

We asked Janet Gray, a fee-only and advice-only financial planner at Money Coaches Canada in Ottawa, to look at Bill and Ava’s situation.

What the expert says

Ava and Bill expect their rental condo to break even next year once short-term rentals pick up, Ms. Gray says. They should ensure that they charge enough rent to cover all of the costs, including mortgage interest, condo fees, utilities, insurance, continuing maintenance and upkeep, the planner says. “No rush to pay off the condo mortgage – let the rental pay for it because the mortgage interest is a deductible expense against the rental income.”

They plan eventually to sell the rental unit because they may want to free up funds to pay for other goals, she says. In her forecast, she assumed they sell the year after employment income ends when their income – and hence their tax rate – will be lower and they will pay less in capital gains tax. Assuming an inflation rate of 2 per cent, their condo value could rise from $450,000 now to $669,000 when they retire at age 60, Ms. Gray says. The remaining mortgage, based on their current payment schedule, would be $123,000. “Based on their original cost price (assuming no capital improvements) of $390,000 and profit of $279,000, half of that, or $139,500, would be subject to capital gains tax in the year of sale,” the planner says. “As it’s a joint asset, the capital gains owing would be 50 per cent by each of them.”

In the meantime, once they are making a profit on the condo, and after setting aside emergency funds for contingencies, they could use the additional funds for their other goals, the planner says. “Be sure to set aside funds for the additional taxes on the rental income.”

As for their home mortgage, on which they are making additional payments to principal, they will likely have it paid off by 2035. If they wanted to free up some cash after the mortgage is paid off, perhaps to help the children with education or a down payment, they could do so using a home equity line of credit, the planner says.

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Bill and Ava are contributing $200 monthly to a registered education savings plan for their children. The current value is $22,620. They should ensure they are contributing the maximum annual amount of $2,500 to each child’s RESP so they receive the maximum federal education savings grant, the planner says. They could check with their RESP issuer to see whether they can increase their contributions to catch up on prior years. “Aim for $208 monthly minimum per child and set this amount on auto contributions,” Ms. Gray says. “Start early and be consistent so the RESP has time to grow because tuition prices have been growing more than inflation recently,” she says.

The couple’s short-term goals include an electric vehicle and installing a heat pump, which together would cost about $25,000. To pay for them, they could use their emergency savings ($27,450 in the bank) or cut back on the additional payments to their mortgage, the planner says. If they wanted to pay cash without depleting their emergency fund, they would need to save $694 a month for 36 months to accumulate $25,000. “Or they could pay for the outlays monthly as part of their household spending, which would impact their savings and mortgage prepayments,” she says. For example, a $25,000 loan at 5 per cent with $1,000 payment a month would take 27 months to repay – and delay their other savings by that same time period.

Bill and Ava’s retirement spending goal of $120,000 pretax is about $90,000 after tax in British Columbia, the planner says. They are on track to have after-tax cash flow of $90,225 a year from age 60 to 95. Her forecast assumes they retire at age 60, and that they sell the condo the year after retirement. She assumes a rate of return of 4.25 per cent on their tax-free savings accounts and 5.13 per cent on their RRSPs.

If they continue with the same employer, Bill will be entitled to a lifetime pension (100 per cent joint life) of $54,530 a year before tax and Ava $35,665, indexed to inflation. Because they both have a bridge benefit with their pensions, the planner suggests they wait at least until age 65 to receive Canada Pension Plan and Old Age Security benefits. Their pension estimates are based on current income and may increase with salary increases.

While both Bill and Ava have unused RRSP contribution room, Ms. Gray suggests they focus on their TFSAs instead, contributing the maximum both now and after they have retired from the work force.

“Because their retirement incomes will be relatively high due to their pensions, CPP and OAS, I suggest they add any surplus funds to their TFSAs instead,” she says. This will keep their taxable retirement income lower, and the TFSAs will give them tax-free income if needed in retirement or in their final estate.

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One of their goals is to help their children with their down payments on a first home. “Assuming they give the children $100,000 each when the rental condo is sold (the year after they retire), it will impact their savings and reduce their after-tax spending power to $85,207 per year,” below their target.

In conclusion, Bill and Ava are on track to realize their goals, but at some juncture, they may have to choose between one goal and another, Ms. Gray says.


Client situation

The people: Bill and Ava, both 39, and their children, 3 and 7

The problem: Are they on track to achieve their life goals?

The plan: Run the rental condo like a business, keep paying down the home mortgage, take full advantage of RESPs, prepare to trade off one goal against another.

The payoff: A better idea of how to get where they want to go

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Monthly net income: $11,975

Assets: Joint bank account $27,450; his bank account $2,455; her bank account $6,000; his TFSA $35,980; her TFSA $9,305; her RRSP $33,335; estimated present value of pension plans (n/a); his pension contributions to date $115,300; her pension contributions $44,180; RESP $22,620; residence $1.1-million; rental condo $450,000. Total assets: $1.8-million

Monthly outlays: Mortgage $3,300; property tax $320; water, sewer, garbage $170; home insurance $230; heat, electricity $330; maintenance, garden $125; transportation $385; groceries $1,200; child care $810; clothing $125; gifts, charity $285; vacation, travel $350; other discretionary $150; dining, drinks, entertainment $560; personal care $50; golf $250; pets $100; sports, hobbies $100; subscriptions $30; drugstore $25; health, life insurance $140; communication $300; RESP $200; TFSA $200; pension plan contributions $2,240. Total: $11,975

Liabilities: Residence mortgage $492,400; rental mortgage $305,280. Total: $797,680

Want a free financial facelift? E-mail finfacelift@gmail.com.

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

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