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Jerry and Jen plan to retire in late fall and move from Eastern Ontario to Victoria, where houses are more expensive.

Jerry is 63, a self-employed consultant. He draws no salary, but took $47,000 in dividends from his company last year and is getting $8,400 a year in Canada Pension Plan benefits. Jen is 62 and works for the government, earning $145,860 a year including bonus. Her pension will pay $43,916 a year, including a bridge benefit of $5,640 to the age of 65. Their retirement spending goal is $90,000 a year after tax.

Once they’re retired from work, Jerry plans to take up a craft and perhaps teach it, while Jen plans to work part time and help with the grandchildren.

“Our financial strategy has been to create a pool of investments that will pay sustainable income to support us in retirement,” Jerry writes in an e-mail. Their tax-free savings accounts, registered retirement savings plans and locked-in retirement account are self-administered and hold blue-chip, dividend-bearing stocks of Canadian companies – pipelines, utilities, banks and telcos.

“Hopefully, when our days are done, most of the capital will still be in place to pass on to our three children,” he adds. Their question: “Can we afford a mortgage, and if so, what amount would be the upper limit?”

We asked Ross McShane, vice-president of financial planning at Doherty & Associates in Ottawa, an investment counselling firm, to look at Jerry and Jen’s situation.

What the expert says

In drawing up his plan, Mr. McShane has Jen and Jerry moving to Victoria in 2020 and buying a house for $800,000. They net $575,000 from the sale of their current home after real estate fees and other expenses. So they need another $225,000, plus $50,000 for moving costs. “Keep in mind they may need bridge financing in the event that Victoria closes before they sell their home in Ontario.”

He suggests Jerry draw $70,000 in dividends from his holding company this year to help with the house purchase. By year-end, they should have about $120,000 in TFSAs and non-registered assets, including the $70,000. They are anticipating an inheritance of $100,000 – proceeds from the sale of a property that closes in the fall – early in 2020, so this is added to the pot, raising it to $220,000.

The balance could be covered through an open mortgage or line of credit, Mr. McShane says. To cover their living expenses in 2020, they should draw another $70,000 from Jerry’s corporation to augment his CPP benefits and Jen’s pension. (By increasing the amount of the corporate withdrawal, he would be able to wind up the corporation sooner, thereby eliminating accounting costs and reducing administration.) That would give them a total of $120,000 before tax, leaving a small surplus after tax and living expenses.

Jen could choose to withdraw some money from her RRSP to take advantage of her lower tax bracket, Mr. McShane says. They could use the surplus cash flow to reduce the loan or lower the amount they would have to withdraw from their TFSAs to buy the house.

The following year, 2021, they would draw from both of their RRSPs to start to pay off the amount financed. “This strategy serves to smooth out their incomes and manage tax brackets, while preserving their Old Age Security benefits [from being clawed back] from age 65 on,” Mr. McShane says.

Alternatively, they could consider borrowing more and leaving their TFSA funds invested, he says. “This depends on the cost of borrowing at the time versus their expected rate of return and risk tolerance.”

Jen turns 65 at the end of December, 2021. In January of that year they are projected to have nearly $1.4-million of investments spread across several accounts. Fixed sources of income in 2021 include Jen’s work pension of $43,916, plus Jerry’s Canada Pension Plan and OAS benefits of $14,800, for a total of $58,716 before tax.

To cover the gap and pay income taxes, the planner suggests drawing a combined amount of $80,000 from their RRSPs and his locked-in retirement account. The total income will cover expenses plus leave a surplus available to apply against the mortgage or line of credit.

By splitting their pensions and RRSP/LIRA withdrawals, their net income will come in under $75,000 each, which will preserve their OAS benefits, he says.

In the meantime, funds that are set aside for the house purchase should be kept in short-term, liquid investments, such as daily interest accounts, Treasury bills or cashable guaranteed investment certificates, Mr. McShane says. Funds set aside for retirement should be in dividend-paying stocks and enough bonds to cover the annual principal draw-down on their portfolio. (Their portfolio withdrawal rate will be slightly more than 3.5 per cent a year, rising with inflation, a large portion of which will be covered by dividend income.)

A final note: A significant amount of the couple’s cash flow is going to Jerry’s term life and disability insurance. Given their substantial savings, they are “at a stage where they are self-insured, so I question the merit in keeping these policies,” Mr. McShane says.

Client situation

The people: Jerry, 63, Jen, 62, and their three children.

The problem: Can they afford to retire at year end, move to expensive Victoria and get by on Jen’s pension and dividend income?

The plan: Proceed as planned, take out a mortgage or line of credit for the balance of the purchase price and tap registered savings first to cover lifestyle expenses, income taxes and loan payments.

The payoff: Time to pursue interests and spend time with grandchildren in a warmer climate.

Monthly net income: $13,335

Assets: Cash $6,000; his TFSA $35,000; her TFSA $10,000; his RRSP $260,000; her RRSP $352,000; his LIRA $635,000; residence $600,000; current cash in holding company $117,000; estimated present value of her defined-benefit pension plan $675,000. Total: $2.69-million

Monthly outlays: Property tax $493; home insurance $160; maintenance $425; utilities $325; groceries $1,300; clothing $170; health care $330; phones, TV, internet $292; dining, drinks, entertaining $550; hobbies and activities $175; life, disability insurance $1,240; gifts, donations $600; travel $500; personal discretionary $300; miscellaneous $150; transportation $650; pension plan contributions $1,095; RRSP contributions $1,000. Total: $9,755

Surplus: $3,580

Liabilities: None

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

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