Robert and Timothy are in their 40s, government workers with those rare pension plans that allow them to imagine retiring early and living fuller, more satisfying lives in some quiet part of the country. Robert is 45 and earns $150,000 a year, Timothy is 41 and earns $63,000 a year.
So far, their dreams are still hazy, with a whiff of middle-aged longing. “As we age toward 50, we have been thinking about making some big changes in our lives to prioritize choices that we have not been able to accomplish, like becoming parents through surrogacy and retiring early, or slowly winding down our hectic work life to focus on the next phase of our lives,” Robert writes in an e-mail.
“We are tired of the rat race where the cost of housing and living is keeping us focused on jobs we are no longer inspired by."
When Robert is 55 and has worked long enough to be entitled to a full pension, they plan to move to Victoria. They would pick up some part-time work, inching gradually to full retirement.
“The ideal scenario is that we will prepare to have the child leave home for higher education when we start to fully retire,” Robert writes in an e-mail. “Will the introduction of a child impact our retirement plans?”
Their retirement spending target is $90,000 a year after tax.
We asked Ian Calvert, financial planner and portfolio manager at of HighView Financial Group in Toronto, to look at Robert and Timothy’s situation.
What the expert says
“Having two defined benefit pensions in one household is extremely valuable and shifts a significant amount of retirement risk out of their hands,” Mr. Calvert says. With that in mind, Robert should continue working until 2029, when he will be 55 and entitled to an unreduced pension, the planner says.
“Robert’s indexed pension income of about $87,000 a year (including a bridge benefit of $12,757 to the age of 65) will be the cornerstone of their retirement cash flow,” Mr. Calvert says. “Keeping this pension intact and unreduced should be a top priority." If Timothy stays with his current employer, he will be entitled to a pension of $29,100 a year, starting at the age of 55, including a bridge benefit of $11,500 to the age of 65.
Apart from their real estate, Robert and Timothy have very little in investable assets, Mr. Calvert says. That will change once they sell the Toronto properties and pay off the mortgages, buy a Victoria home and invest the net proceeds, which could amount to $2-million.
“The management of these funds will be paramount,” the planner says. If they construct a diversified investment portfolio that yields 3 per cent a year (dividend and interest income), this could add an additional $60,000 a year to their retirement income. Combined with their pensions, this should enable them to meet their spending goal, he says.
The planner assumes that by the time Robert and Timothy move to Victoria, they will have sold all three of their Toronto properties and bought a condo townhouse for $800,000. They have not yet decided when and in what order they will sell.
Robert is concerned about the potential capital gains tax liability, Mr. Calvert says. The timing of the sales will be critical, he added.
Robert and Timothy will not pay capital gains tax on their principal residence, but the Canada Revenue Agency will treat the rental properties, which are in Robert’s name, differently. “Robert shouldn’t view this as a major drawback for a couple of reasons,” Mr. Calvert says. “Firstly, if you owe taxes it means you’ve made a positive return on the investment property, and secondly, only half of the gain is taxable.”
Ideally, Robert would wait until he has retired and is in a much lower marginal tax bracket to sell. He should also consider selling one property a year to avoid reporting two large capital gains in the same year. He would begin collecting Canada Pension Plan and Old Age Security benefits at the age of 65, although he will likely face some clawback of his OAS.
“Triggering a capital gain during this time would minimize taxes payable on the sale of the properties,” the planner says.
Once they have fully retired, Robert and Timothy ask whether they can maintain after-tax spending of $90,000 a year. By the time Robert is 65, with inflation, the $90,000 a year in spending will have risen to $128,500. Given the two inflation-indexed pensions, CPP benefits at half the maximum amount and Old Age Security, they should be able to meet this target, Mr. Calvert says. To do so, they will require income from their new investment portfolio – the result of their property sales.
Once they are both receiving their pension income, they will need to draw about $45,000 to $50,000 a year from their portfolio, the planner says. A portfolio of $2-million with dividend and interest income of 3 per cent a year would generate income of $60,000 a year before tax.
The investment income will likely put both Robert and Timothy at a level of taxable income where part of their OAS benefits are clawed back, the planner says. Once they sell their properties, they should contribute as much as possible to their TFSAs, where the investments can grow free of tax. As for their investment portfolio, they should limit the amount of interest income they earn and instead invest mainly in stocks with a steady history of dividend increases and the potential for capital gains. Canadian dividend income and capital gains are taxed more favourably than interest income.
“Because Robert’s pension is considerably higher than Timothy’s, they should ensure they split all eligible pension income to equalize their incomes, lower the family taxes payable and receive more of their OAS,” Mr. Calvert says.
Naturally, adding a child to the forecast will affect the family finances, the planner says. How much is debatable, but they should plan for an additional $20,000 a year, plus loss of income while one is off work caring for the baby. Given their income, this should be an achievable goal.
The people: Robert, 45, and Timothy, 41
The problem: Can they afford to retire early, have a child and move to Victoria, and still achieve a retirement spending goal of $90,000 a year?
The plan: Robert works until the age of 55, when he will be entitled to a full pension. They sell their Toronto real estate, pay off the mortgages and move to Victoria. Robert might want to sell his rental properties when his income is lowest.
The payoff: Financial security.
Monthly net employment income: $8,835 (excludes rental cash flow).
Assets: Cash $5,000; Robert’s TFSA $16,800; Timothy’s TFSA $24,860; Robert’s RRSP $10,360; Timothy’s RRSP $31,000; estimated present value of Robert’s DB pension $330,000; estimated PV of Timothy’s DB pension $103,000; residence $1.4-million; Robert’s rental properties $3.7-million. Total: $5.6-million
Monthly outlays: Mortgage $3,505; property tax $430; home insurance $120; water, sewer, garbage $70; electricity $285; heating $265; maintenance $100; transportation $585; grocery store $1,200; clothing $200; line of credit $600; gifts, charity $150; vacation, travel $500; dining, drinks, entertainment $520; personal care $55; pets $30; sports, hobbies $100; drugstore, vitamins $60; life insurance $160; phones, internet $245; RRSP contributions $100; Robert’s pension plan contribution $1,530; Timothy’s pension plan contribution $340. Total: $11,150. Deficit is offset by income from suite in their home ($1,550 a month) plus net rental income from investment properties ($1,755).
Liabilities: Residence mortgage $753,245; first rental mortgage $321,450; second rental mortgage $569,150; renovation line of credit $125,000. Total liabilities: $1.77-million
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