When they first hit the financial front, Peggy and Howard were just getting started, “first house, first child, first professional jobs,” Peggy wrote in an e-mail. A quarter of a century has passed since then. They moved from the Prairies to a bedroom community in Ontario. Howard is now 62 years old, Peggy is 60. Both have government jobs that pay $250,000 a year with benefits. They also have a condo where their son lives with his roommate.
Now, nearing the end of their careers, they want to help their two children financially. “We never expected to have this ability,” Peggy wrote.
Howard plans to retire in 2024, at age 64, and Peggy in 2025, at 63. When they do, they plan to sell the rental condo and give part of the proceeds to their children. They were selling the family home and moving to another city.
Their questions: When is the best time to sell the condo to minimize capital gains? Should they contribute as much as possible to their registered retirement savings plan while working, then live off it for a few years before they start collecting Canada Pension Plan and Old Age Security benefits at age 70? Should they buy their retirement home now in a nearby town or wait until they retire?
Their retirement spending goal is $100,000 a year, which includes a comfortable travel budget.
We asked Denny Onar, president of McDonald Shimko & Co., a fee-only financial planning firm in Vancouver, to weigh in on Peggy and Howard’s situation. Mr. Onar holds the Certified Financial Planner (CFP), Advanced Registered Financial Planner (RFP) and Chartered Investment Manager (CIM) designations.
What does the expert say?
Peggy and Howard’s pension provides a solid foundation for their retirement income and covers most of their expenses, Mr. Onar says. Howard’s pension pays $70,000 a year. Peggy pays $38,555 a year, with bridging benefits until age 65, after which it drops to $29,465. His is fully indexed, hers partially.
Both are doubling the loan payments on their rental home in hopes of paying it off by the time they retire in 2026, the planner noted. Also, Peggy and Howard are matching unused portions of their contributions to their tax-free savings accounts — contributing $48,000 a year — to help pay for planned renovations to their family home before it’s sold. The renovations are estimated to cost between $120,000 and $140,000.
If the condo keeps pace with inflation, which is estimated to average 3 percent a year, “they should be able to distribute two-thirds of the income to the children and the rest of the income to support their lifestyle along with their work pension.” “Before CPP and OAS start at age 70,” Mr. O’Neill says. At age 72, they must begin withdrawing the minimum amount from their registered retirement income. “Any surplus can be invested in TFSAs because the class allows for distributions to children or emergencies.”
In the meantime, he said, they should be proactive in monitoring their spending before they retire to make sure their estimates are accurate. Many unexpected major expenses force them to make adjustments to their plans.
Peggy and Howard are right in planning to delay the sale of the rental property until they are no longer working and their incomes are relatively low, Mr. Onar said. Howard is in the 44.97 percent marginal tax bracket and Peggy is in the 43.41 percent in Ontario. In retirement, you can drop into the second lowest tax bracket using retirement income distributions. Income tax laws and market conditions are subject to change, he cautions.
It makes sense for them to contribute some amount to their RRSPs while they are still working because the tax rate may be lower in retirement, says the planner, “for cash flow needs and the RRSP portion.
Peggy has an unused RRSP portion of $50,000. “Tax refunds can be collected and invested in TFSAs.” Using this multi-level approach, they grow their assets, defer income taxes, build an emergency fund and maximize their wealth for their children, which is one of their goals.
“If one spouse dies, it should be noted that the RRSP/RRIF Rover is available to the deceased spouse on a tax-deferred basis,” said Mr. Onar. RRSPs/RRIFs are generally fully taxable upon the death of the surviving spouse, which can reduce the remaining assets available for after-tax distribution.
Should they buy their retirement home now or later in another city?
All their cash flows are accounted for, the planner says. They say they should use a secured line of credit in case of unexpected high expenses. “Buying the new property now and taking out a loan can be a challenge to their current cash flow, so they may need to rent the new property,” says Mr Onar. If you rent it, you won’t be eligible for a primary residence permit for the years you rent it, the planner says.
They must report the change of use to the Canada Revenue Agency in the year they move to the new property, and report the resulting capital gain or loss even if there is no change in ownership. This may result in another tax liability for the family. The easiest thing to do is to buy the new house after retirement and sell the existing one.
The couple’s RRSPs are invested in a globally balanced fund. Their TFSAs are invested more aggressively, but are converted to guaranteed investment certificates and cash to prepare for home renovations in 2024. Mr. Onar predicts a 6 percent rate of return on investments, a 3 percent inflation rate, and Peggy and Howard until age 98.
The people: Peggy, age 60, Howard, 62, and their two sons, ages 24 and 26.
The problem is: When should they sell their rental condos to reduce capital gains? Should they contribute the maximum to their RRSPs while still working? Should they buy their retirement home now before they quit and sell their existing home?
The plan: Sell the rental condo after they stop working and their income is relatively low. Give two-thirds to the children and let them tide over the third until they start collecting government benefits. Wait until you retire before selling the family home.
Profit: Simplify life and enjoy retirement without worry.
Monthly Net Income: 15,215 dollars
Properties: His TFSA is $40,000; Her TFSA is $10,000; His RRSP is $140,000; Her RRSP is $140,000; The estimated current value of his DB pension is $895,000; Estimated PV of DB pension $313,000; Rental condo $475,000; Residence $ 1.2-million. Total: 3.2-million dollars
Monthly expenses: property taxes $365; Home insurance $350; Electricity $135; Heater $215; Maintenance $405; Condo operating loss (including additional mortgage payments) $3,300; Transportation $450; groceries $1,120; Clothing $50; Gifts $300; Vacation, travel $600; Dining, Beverages, Entertainment $850; Club memberships are $25; Sports, hobbies $75; Subscriptions $75; other personal $45; Drugstore $30; life insurance $305; Phones, TV, Internet $190; TFSAs $4,000; Pension plan contributions $2,330. Total: $15,215
Liabilities: Rent is $189,000 at 2.04 percent
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