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Personal Finance Family Finance
Because of bad experiences with stocks, they have put most of their savings in real estate
Publication date:
29 Apr 2022 • 18 minutes ago • 5 minutes read • Join the conversation 
Much of their savings is locked up in their two rental homes — with a combined net worth of $1.26 million — and their $1,600,000 home. Photo by National Post photo illustration
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An Ontario couple we’ll call Jerry and Kathy, 43 each, are raising three children, ages 11 to 14. Jerry is a consulting engineer, Kathy a civil servant. Their income can be as high as $250,000 a year, but on average they bring home $1,333 a month and add $1,000 net to the cost of two rental units. They are tired of their jobs. Their goal: retirement at 55.
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They would like to retire with an after-tax income of $82,000 per year. The problem is, much of their savings are locked up in their two rental homes — with a combined net worth of $1.26 million — and their $1,600,000 home. They have $94,000 in a RESP for their children, $110,000 in their RRSPs, and two new cars, worth an estimated $80,000. The couple’s savings are in cash at a bank that earns next to nothing even before inflation.
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Email andrew.allentuck@gmail.com for a free Family Finance analysis.
So far, Jerry and Kathy have focused on deleveraging rather than additionally investing in individual stocks or ETFs and mutual funds. Their portfolio is relatively illiquid, with much of their wealth tied up in the two rental properties and government retirement income that will not be available in a few decades.
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Income Savings Structure
Family Finance asked Owen Winkelmolen, head of Planeasy.ca, a consultancy based in London, Ontario, to work with Jerry and Kathy. His opinion – “they miss opportunities,” he explains.
“They have a net worth of $2,355,000, but because of bad experiences with stocks, they’ve put most of their savings into real estate. Only $110,000 of that wealth, six percent, is in financial assets. They’re not diversified. ”
First – the children. Jerry and Kathy are adding $458 a month to RESPs with a current balance of $94,000. That attracts the Canada Education Savings Grant bonus from the lower of $500 or 20 percent of contributions with a maximum of $7,200 per beneficiary. That makes total contributions $6,595 per year and the sum of all past and future contributions $126,975 over five years. At that point, subject to the CESG cutoff at 17, the RESPs will provide each child with $42,325, enough for four years of study if they live at home.
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Retirement Income Basis
Kathy will have a defined benefit plan at the age of 55. But since she’s retired from work to raise their children, the expected payouts will be rather modest: just $2,618 a month if she’s taken at age 55, and much less if she’s taken earlier.
Their biggest drawback is the opportunity cost of keeping their savings entirely in cash, the result of Jerry’s painful stock market losses more than a decade ago. Jerry and Kathy have preferred to pay off their line of credit, which is now $25,000 outstanding and due in full within two years, and buy back part of Kathy’s pension.
Building up a safe pension will require a change in savings and investment strategy, Winkelmolen argues. The couple’s main investments are currently two rental properties. The mortgages will not be paid off until Jerry and Kathy are 72, which is 17 years after their current retirement date. Since the mortgages are still absorbing rental income, it would be a good idea to sell them. The sale should take place in the first or second year of retirement, when the couple’s regular income has stopped and their tax bracket has fallen, but before 65 when OAS and CPP begin, Winkelmolen advises.
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The properties have a current combined value of $1,260,000. After a five percent charge for primping and transaction fees, $63,000, there would be $117,400 capital gains tax payable, as well as the cost of paying off mortgages, estimated to be $320,970 outstanding in 12 years. That would yield a net proceeds of $758,630.
They can use that money to pay off their home mortgage, which Winkelmolen estimates will have an outstanding balance of $61,295 in 12 years at age 55. Then use retained savings to build TFSAs. They don’t have TFSAs now. The contribution space should be $153,000 for each partner by age 55, Winkelmolen estimates. The remaining $391,335 can be invested in unregistered accounts.
By the time they are 45 and the line of credit and pension buybacks have been completed, Jerry and Kathy can begin to replenish their RRSPs with the cash available from real estate sales. Jerry, with the higher income and lots of RRSP space, should make the contributions. The couple’s current $110,000 balance, growing at $36,000 in annual contributions of 3% after inflation, should be $560,530 in 10 years when they are 55. If they pay out all income and capital over the next 40 years, it would make $23,544 a year.
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The couple should have a total combined TFSA room of $153,000 each or $306,000 by age 55. The combined amount, invested at three percent post-inflation, would yield $12,852 per year for the next 40 years. Unregistered funds of $391,335 invested with a three percent return after inflation over 40 years would yield $16,437 per year.
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Income at the start of pension
Assuming a three percent post-inflation return on their investment accounts, they will have an annual income of 55 to 95 from $23,544 from RRSPs, $12,852 from their TFSAs, and $16,395 from unregistered accounts. Combined with a retirement income of $2,618 per month or $31,416 per year, they will have a total of $84,207 per year by age 55. After splitting qualifying income and 14 percent average tax on all withdrawals except TFSA, they will have $74,217 to spend per year, less than their $82,000 annual retirement income. Working a little part-time will close the gap, suggests Winkelmolen.
At age 65, Kathy’s retirement will lose an annual bridging benefit of $3,274, so she will net $28,142 per year. CPP pays combined benefits of $22,621 and OAS pays two benefits of $7,707. That’s a total of $118,968. After a qualifying income split and an 18 percent average tax on everything but TFSA cash flow, they have $99,870 to spend per year, well above their target.
Retirement stars: three *** out of 5
Email andrew.allentuck@gmail.com for a free Family Finance analysis.
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This post Couples in their 40s with $3M in assets must diversify if they want to retire early
was original published at “https://financialpost.com/personal-finance/family-finance/couple-in-their-40s-with-3-million-in-assets-must-diversify-if-they-want-early-retirement”
