Jill has two children in their 20s and a cottage they want to keep in the family.Ashley Fraser/The Globe and Mail
Jill took an early retirement package last year at the age of 54 and has been living on that and her dividend income ever since. She’s afraid to spend her savings and worried she might need to find another job.
Jill has two children in their 20s and a cottage they want to keep in the family. Her principal residence is a duplex in which she rents out the lower floor on Airbnb. Her goal is to pay off the part of her mortgage that applies to her principal residence when it comes due in 2026. Her mortgage gives her the flexibility to divide the loan into different terms and rates. She also has a mortgage on the cottage property, which she rents out 70 per cent of the time.
She has substantial assets. “After my divorce, I had my home with 20 per cent paid off so I was starting over,” Jill writes in an e-mail. “I lived within my means, rented out my basement, then bought three rental properties over six years with 100 per cent borrowed money, converting them from single family to upper and lower duplexes. I held those properties until 2021, when it was a sellers’ market, and sold them.” This, plus investing with the help of her dad’s knowledge, played “a big part” in building her nest egg. It didn’t hurt that she was paid a very good salary in the past 10 years, Jill adds.
She also has more than $900,000 owing on mortgage and other loans. She has no pension or other fixed income and she’s worried about rule changes for short-term rentals that would affect her Airbnb income. Her retirement spending goal is $90,000 a year after tax until her residence mortgage is paid off in two years and $71,000 a year thereafter. She also asks about a tax-efficient plan to draw down her savings.
“Will I be able to stay retired or do I need to work longer?” Jill asks.
We asked Hannah McVean, a certified financial planner with Objective Financial Partners Inc., to look at Jill’s situation.
What the Expert Says
Jill’s net worth is $2.9-million, of which $1.8-million, or 62 per cent, is in real estate, Ms. McVean says. “That’s a high percentage from a risk-management perspective.”
When the rental and cottage mortgages come due in 2025, Jill hopes she can extend the amortization to keep the payments the same, the planner says. “Jill expects the two mortgages to be paid off by the time she is 72, far into retirement.” She has an extra $200 a month of flexibility in her budget to help offset higher interest rates, “but regardless, her expenses are highly exposed to interest rate risk in 2025.”
Jill is concerned about carrying the mortgage debt if she were to fall ill, “a fair concern with mortgages of this size,” Ms. McVean says.
Jill is considering severing a couple of lots from the cottage property to pay down the loan on it, which “could be an opportunity to repay a large chunk of the mortgage,” the planner says. “It would be important to review the tax impact if the property has appreciated in value.”
As well, “are the kids open to contributing to the cottage mortgage?” the planner asks. “Since the kids are so committed to owning the cottage eventually, could Jill discuss with them taking on some of the expense?”
The planner notes that Jill’s heavy reliance on Airbnb in today’s changing landscape could expose her to more risk. “There is a real risk here of an income shortfall if she’s required to switch to long-term rentals.”
In drawing up her projection, Ms. McVean assumes an average annual rate of return of 6.2 per cent on Jill’s all-stock portfolio – excluding her emergency fund – and an inflation rate of 2.1 per cent. She assumes Jill defers Canada Pension Plan and Old Age Security benefits to the age of 70 and lives to be 95. She also accounts for vehicle purchases.
Jill’s retirement projections do not include income from the duplex or cottage rental, and neither do the planner’s. Even so, Jill should consider how a change from Airbnb income to long-term rental income would affect the success of her retirement plan, Ms. McVean says.
Based on the above assumptions, “Jill will easily be able to meet her income needs throughout retirement with her government benefits and withdrawals from her portfolio,” the planner says. “In fact, she’d be facing a goal surplus of more than $1.9-million at age 95.”
Success, however, hinges on steady and reliable investment returns in the 6-per-cent range. “How would the projection be impacted if her portfolio fell in value by 25 per cent in Year 1?” the planner asks. “In this extreme case, Jill would be facing significant shortfalls starting at age 78.” If that happened she would have to cut her spending.
She could also consider a less aggressive investment portfolio, Ms. McVean says. “Assuming a 50/50 asset mix of stocks and fixed income, Jill would still face a shortfall, but at age 87,” she says. “A sustainable rate of spending in this scenario could be $67,480 a year in today’s dollars, which is about $3,480 less than the current plan of $71,000 a year.
“Jill should consider the impact of an aggressive asset allocation and/or poor investment returns on her retirement goals,” the planner says. “If everything works out, she could be set for life. But a sharp drop in assets in the early years of retirement – called sequence of returns risk – could significantly impact her ability to maintain her lifestyle.”
As for how best to spend her savings, the planner recommends drawing income from her registered retirement savings plan now. “Assuming she does get those higher return numbers, waiting to take RRSP/registered retirement income fund (RRIF) withdrawals until the minimums kick in at age 72 would result in significant Old Age Security recovery tax – known as a clawback – over time,” the planner says.
“Therefore I’d suggest prioritizing drawing the balance of her income needs – beyond what she draws from her non-registered dividends – from her RRSP in the early years of retirement, particularly up to age 70 when her CPP and OAS kick in.” However, Jill should be careful not to trigger too much RSP income: It only takes $21,000 of additional income, before tax, to catapult her marginal tax rate from 29.65 per cent to 43.41 per cent. Jill should draw from her non-registered portfolio to contribute yearly to her tax-free savings account.
Client Situation
The Person: Jill, age 54, and her two adult children.
The Problem: Can she afford retirement now or does she have to look for another job? How should she draw down her savings?
The Plan: Consider severing a couple lots from her cottage property to help pay off the mortgage. Ask her children if they are willing to contribute to the costs of carrying the cottage. Tap into her RRSP early to minimize OAS clawback. Consider shifting to a less aggressive investment portfolio.
The Payoff: A better idea of how to deal with financial challenges as they arise.
Monthly net income: $3,415.
Assets: Guaranteed investment certificates $32,000; stock portfolio $970,000; expected 2024 tax refund $35,000; tax-free savings account $97,000; RRSP $890,000; duplex/residence $1,200,000; cottage $600,000. Total $3.8-million.
Monthly outlays: Residence mortgage $1,850; property tax $420; water, sewer, garbage $45; home insurance $160; electricity $120; heating $105; maintenance $100; transportation $625; grocery store $600; clothing $250; gifts $150; vacation, travel $810; large expense fund (appliances, repairs) $650; personal care $350; club memberships $50; dining out $300; hobbies $300; doctors, dentists $140; drugstore $260; phones, TV, internet $110. Total: $7,395.
Liabilities: Residence mortgage $169,000; rental mortgage $361,000; cottage mortgage $232,000; investment loans $150,000. Total: $912,000.
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