Five years ago, when they first wrote to Financial Facelift, Liam and Arlene were thinking ahead to the day he would quit his job as lighthouse keeper on the B.C. coast. He was 53 at the time, while Arlene, an artist, was 59.
They owned a century duplex, mortgage-free, in British Columbia. They were hoping to buy a place on the West Coast that they could rent out until they retired and moved there. Their retirement spending goal was $50,000 a year after tax – a challenge given Liam's modest pension. Their combined income was $7,065 a month, including rental income. But their housing was subsidized, giving them room to save for retirement.
Brinsley Saleken, a financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, prepared the couple's financial plan. Looking over the numbers, Mr. Saleken estimated Liam and Arlene would get about $43,900 a year in pension, government benefits and rental income if they retired when Liam was 65. That assumed their duplex was fully rented.
Because most of their income would be coming from pensions, they could take advantage of income-splitting so Mr. Saleken assumed they would need gross income of $56,000 a year. Their savings would have to make up the difference. How much they needed to save would depend on their rate of return, the planner said. He estimated their savings capacity at $24,000 a year.
As for the West Coast home, they would be better off deferring the purchase because they didn't have much of a down payment, the planner said.
Today, Liam is 58 and Arlene 64. Their financial situation has improved and Liam is hoping to hang up his hat a bit earlier than originally planned.
They still have the century duplex, Liam says in an e-mail, and they've added a condo that they also rent out. Neither property will necessarily serve as their retirement home. Their focus shifted from looking for a place they might live in eventually "to a condo that would give us the best return [rental income]," Liam says. They bought the new condo in the heart of downtown Victoria in 2014 with a minimum down payment.
"We honestly haven't made a firm decision as to where we'll live when we retire," Liam writes. "We know we might have to sell at least one property in order to fund our retirement, or perhaps the rental income will suffice."
They had hoped to have the new condo paid off by the time Liam retires "but that will be quite a challenge," he adds. Originally, Liam had planned to retire in 2024, but he's hoping to move that date up by a year or so, or roughly five years from now.
Mind you, they've cut the mortgage principal by $60,000 in the 30 months since they bought the unit. The condo rental income is high enough to net them about $1,100 a month after paying strata fees and the property manager. The net rental income goes toward their accelerated mortgage payments of a little more than $2,000 a month.
At the time of the original facelift, Liam and Arlene had about $116,000 in cash and RRSPs plus the $300,000 value of the duplex, for a net worth of about $416,000. Mr. Saleken figured their savings would grow to $540,000 by the time Liam was 65. He suggested they shift their focus from RRSPs to tax-free savings accounts because of their relatively low income.
Their balance sheet looks much better now, Liam says, although they do have a $206,800 mortgage. They have $259,400 in savings, about $80,000 of which came from new contributions. Their real estate equity is $383,200, for a net worth of $642,600.
For the original facelift, Liam figures he overestimated his pension. Instead of being $14,400 a year, it will be closer to $10,600, he says. "If we can increase our net worth at the same rate over the next five years as we did over the last five years, we could have sufficiently more set aside to make up for that shortfall."
Was the facelift useful?
"I have to confess that we had not used the original facelift as a benchmark, or used Brinsley's figures to judge our progress to date," Liam writes. "Having now done so, I'd say we're pleasantly surprised that we've done this well.
"I know he wouldn't approve of the lack of balance in our portfolio, but the facelift did force us to face the truth that we needed to seriously grow our savings."
Their first step was to switch out of costly mutual funds to individual stocks bought through a brokerage firm, Liam says. Like many relatively new investors, the process was not without its pitfalls. Liam got much more involved in the investments that were being made, "particularly when returns were less than stellar in 2012 and 2013," he says. So concerned were they about their investment portfolio that they shifted their savings focus to the condo in early 2014.
"Ironically, perhaps, those investments have done better since we stopped contributing to the portfolio."