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Justin Tang/The Globe and Mail

At age 69, Edna is on her own again and looking forward to retiring at year-end 2021. She has grown children and earns $47,000 a year before tax.

Edna’s No. 1 goal is to buy a place of her own – a condo – in the Ontario town where she lives. The unit she has her eye on would cost about $225,000. Most of her savings are tied up in her registered retirement savings plan, so she would put 20-per-cent down and finance the balance with a mortgage at 2.2 per cent. To raise the down payment, she would sell her non-registered investments and take the balance from her bank account.

When Edna retires from work, she will be living on her Canada Pension Plan and Old Age Security benefits, drawing the balance from her tax-free savings account and RRSP, which she will convert to a registered retirement income fund, or RRIF. Her lifestyle spending needs are about $40,000 a year.

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“Can I afford to retire on Dec. 31, 2021?” Edna asks in an e-mail. “What should be my target rate of return in order to maintain my standard of living to age 95?” She is also concerned about possible nursing home costs in her old age.

We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Edna’s situation.

What the expert says

Mr. MacKenzie prepared two forecasts, one where Edna buys the condo, taking on a mortgage of about $180,000, and one where she continues to rent for $1,160 a month, including utilities.

“Using reasonable assumptions, Edna’s money will last until she is 98, even if she requires eight years of nursing-home care,” the planner says. “She will be okay regardless of whether she rents or buys, so she can take the financial question off the table and focus on the emotional and lifestyle aspects of the decision,” he adds. “How important is it for her to own rather than to rent?”

The key to her being able to achieve her goals is the fact that living outside of Toronto, her housing costs and other lifestyle expenses are quite low, Mr. MacKenzie says.

In the first scenario, where Edna continues to rent, her lifestyle expenses remain the same, rising in line with the inflation rate, which Mr. MacKenzie estimates at 2 per cent. She retires at year-end 2021 and begins collecting CPP and OAS benefits.

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“Edna was wise to delay taking CPP and OAS to age 70,” the planner says. Her CPP benefits will be 42-per-cent higher than they would have been if she had taken them at the age of 65, while her OAS benefits will be 36-per-cent higher. While Edna will not get maximum CPP benefits, the total of CPP and OAS will be about $19,000 a year, covering almost half of her total cash flow requirements. She will need another $27,000 to cover the rest of her expenses, including income tax, and this will come from her RRSP/RRIF.

Assuming a 4 per cent net return on her $444,000 RRSP portfolio and a 2 per cent inflation rate, Edna’s savings would last to the age of 98, Mr. MacKenzie says. That assumes basic lifestyle needs of about $40,000 a year in today’s dollars and eventually the cost of a nursing home, which could be $70,000 a year in today’s dollars.

If she buys the condo, Edna’s housing costs will rise. She expects condo fees, property tax and mortgage payments will total about $20,000 a year. She will also forgo the income that she might have earned on her $45,000 down payment. She’d have to draw the additional funds from her TFSA and RRIF.

“However, this should not negatively impact her net worth because the [potential] tax-free appreciation in the value of the condo and the reduction in mortgage principal over time will offset the added costs,” the planner says. A possible rise in interest rates could mean higher mortgage rates, but if they are accompanied by a rise in inflation, the higher carrying costs could be offset by a more rapid rise in real estate prices, he adds.

When she sells her condo in 2039 at the age of 88, she will have about $250,000 in her non-registered account, about $160,000 in her TFSA and $270,000 in her RRIF, for a total of $680,000. (That compares with total investments of $740,000 in 2039 if she does not buy the condo.)

A note of caution. In either scenario, Edna might run out of money sooner if her investments fall in value soon after she retires, or if her average rate of return falls short. While her rate of return may average 4 per cent, some years she will make more and some years she will lose money, Mr. MacKenzie says.

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To rest assured that she won’t run out of money even if she lives to be 100, Edna might want to explore the pros and cons of buying an advanced life deferred annuity (ALDA), Mr. MacKenzie says. Starting in 2019, ALDAs allow a retiree to transfer up to 25 per cent of their RRIF account value (up to a limit of $150,000, indexed to inflation) to a deferred life annuity where annuity payments can be deferred until the age of 85. The ALDA’s purpose is to reduce the risk of running out of income late in life.

A final note. If Edna needs more than the minimum withdrawals from her RRIF at any point, she should take the money from her TFSA instead, Mr. MacKenzie says. RRIF withdrawals are taxable while TFSA withdrawals are not. “If in her 70s she draws more than the minimum from her RRIF, she will be incurring income taxes unnecessarily,” the planner says.

Edna does not have a surplus, or more than she needs, but she has enough, Mr. MacKenzie says. “As the Chinese philosopher Lau Tzu has said, “He who knows when he has enough is wealthy.”


The person: Edna, age 69

The problem: Can she retire from work in one year and buy a condo too?

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The plan: Weigh the odds on buying or continuing to rent. Either way, she’d be okay financially because she could sell the condo in her later years to pay for nursing home costs if necessary.

The payoff: An easier time making the decision.

Monthly net income: $3,050

Assets: Bank account $15,000; non-registered $43,615; TFSA $76,500; RRSP $444,245. Total: $579,360

Monthly outlays: Rent $1,000; utilities $115; tenant insurance $30; maintenance, garden $15; transportation $220; groceries $400; clothing $200; gifts, charity $40; vacation, travel $250; dining, drinks, entertainment $175; personal care $40; club membership $40; pets $40; health care, dentist $55; phone, TV, internet $170. Total: $2,790

Liabilities: None

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

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