Cam and Freda at their current home in Edmonton.Candice Ward/The Globe and Mail
With the bloom off the rose in Alberta, folks from the Maritimes who travelled West for work are casting their eyes homeward again. So it is with Cam and Freda, who are in their early 60s and thinking about retiring some day. Their children and their extended family all live in the Maritimes.
Cam is self-employed and his line of work requires him to travel. His income is variable, ranging from $50,000 to $80,000 a year. Freda has been helping him out in the office.
“The plan is to move to the Maritimes soon,” Cam writes in an e-mail. They’d keep the Edmonton house and rent it for a couple of years, hoping the price recovers. Freda has upgraded her skills and expects to find work in her chosen field, paying about $30,000 a year.
They wonder how best to structure their finances and prepare for their retirement a decade or so out.
We asked Aaron Hector, a financial planner and vice-president at Doherty & Bryant Financial Strategists in Calgary, to look at Freda and Cam’s situation. Mr. Hector holds the advanced registered financial planner (RFP) designation.
What the expert says
Cam and Freda don’t plan to retire until 2028, when he will be 71 and she will be 73, Mr. Hector says. “They enjoy working and it gives them purpose.”
They have been looking at real estate in Moncton where the property prices are significantly less than Edmonton. They have found centrally located properties with price tags ranging from $120,000 to $140,000, the planner says.
When the dust settles, they should have about $300,000 left to add to their retirement portfolio, Mr. Hector says.
They have a retirement goal to spend $4,500 a month. When Freda is 65 she will be eligible for $822 a month from the Canada Pension Plan (CPP) and $600 a month from Old Age Security (OAS). At age 65, Cam will be eligible for $1,020 a month from CPP and $600 per month from OAS. These all add up to $3,042 per month.
Accounting for the shortfall and taxes payable, their annual withdrawal from their portfolio would be about $25,000. This equates to a manageable 2.5 per cent withdrawal rate on their future portfolio, which will surpass $1-million upon the sale of their Edmonton home.
“Essentially, they are nearly financially independent as it stands right now. If they continue to work until their early 70s, as planned, they will be in a very strong financial position.”
Their biggest financial risk would come if one of them were to pass away unexpectedly, Mr. Hector says. That’s because so much of their retirement income will come from government sources. OAS has no survivor benefit.
With respect to CPP, the combined retirement pension, plus survivor’s pension, cannot exceed the maximum retirement pension limit for an individual, currently $1,134 per month. If Freda passes away at Cam’s age, 65, then Cam would get slightly more than $100 per month from Freda’s CPP. If Cam passes away, then Freda would get about $300 of Cam’s CPP.
In addition, the survivor’s average tax rate would go up because they would no longer be able to split income. Continued good health and plans to continue working later on in life will afford the couple the luxury of easily postponing CPP and OAS benefits beyond age 65. They would get higher benefit payments as a result.
Because interest rates are rising, the planner suggests the couple withdraw some money from their non-registered investments and pay off their line of credit and credit card balances. The remaining balance in the non-registered account should go to their tax-free savings accounts.
Because they are looking to buy a house soon, the planner suggests the couple park $30,000 from their TFSAs (a 20 per cent down-payment plus incidental costs on $140,000 purchase) in a high-interest savings vehicle “so that they can pounce on their dream retirement property if they find it.” The mortgage on the new house should be short term because it will be paid off when they sell the Edmonton house.
As long as Freda’s income remains quite low, the planner recommends she draw out enough from her RRSP each year to bring her income “up to the top of the bottom tax bracket but without going over.” The idea here is that they will probably be in a higher tax bracket when they retire in their early 70s.
“This is doubly true as a survivor situation when there is only one taxpayer for all of the income,” Mr. Hector says.
When Freda turns 65, she could convert a portion of her RRSP into a RRIF so that she can draw out $2,000 per year to take advantage of the pension income tax credit, the planner says. Once Cam is also 65, then he too could benefit from the pension income tax credit, either by splitting at least $2,000 of Freda’s RRIF income or by establishing his own RRIF.
If Freda and Cam rent out the Edmonton house for a year or two, they should make an election under subsection 45(2) of the Income Tax Act to allow them to maintain the use of Edmonton property as their principal residence for up to four years after moving, the planner says. Otherwise, there will be a deemed disposition of the property upon the change in use from principal residence to rental and any increase from that point onward would be taxable.
Finally, buying property and moving is always expensive. Realtor fees, moving belongings, flights and so on, will add up. Considering the fact that they are looking for work, they might want to explore job opportunities in Moncton, Mr. Hector says. If they move to work, then the above-mentioned expenses could be deductible under the moving-expense tax deduction.
Client situation
The people: Cam, 61, and Freda, 63
The problem: Can they afford to buy a home in Moncton, where their family is and where they plan to retire? Should they hang onto their Edmonton house for awhile?
The plan: Position themselves so that if the perfect retirement property presents itself they are ready to pounce. Maximize long term retirement income while keeping lifetime taxes low.
The payoff: Spending more time with family. Continue working for enjoyment, knowing financial independence is within reach.
Monthly net income: $3,000 to $5,000 (fluctuates)
Assets: House $600,000; cash, $3,505; his non-registered $27,455; his RRSP/LIRA $459,085; her RRSP/LIRA $242,760; his TFSA $30,185; her TFSA $5,150. Total: $1.37-million
Monthly distributions: Mortgage $900; property taxes, water, garbage $360; home insurance $130; electricity, heating $300; maintenance, garden $25; transportation $360; groceries $400; clothing $50; gifts and charitable $350; vacation and travel $300; phones and internet $235; entertainment, dining out, personal care, hobbies $145; health care, life and critical illness insurance $670; miscellaneous\credit card $500. Total: $4,725
Liabilities: Mortgage $162,590; line of credit $12,245; credit card $2,500. Total: $177,335
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