“Will we have to sell our house to finance our retirement years?” Tom and Tilly ask in an e-mail.
It’s a question that comes up frequently from people nearing that age when they plan to leave the workforce for good. Tom is 59, Tilly 60.
They’ve had conflicting advice from their current and former financial advisers. Their former adviser said they’ll have to sell their Hamilton-area home in 10 years. The new one says that won’t be necessary.
Tom earns about $137,000 a year working for a non-profit. Tilly has gone back to school to satisfy her love of learning and potentially give her part-time income later on. Her tuition is covered by a scholarship.
They wonder whether Tom can afford to hang up his hat in three years or so. He has a group registered retirement savings plan to which he and his employer both contribute. Tilly has a defined-benefit pension plan from a previous employer that will pay $12,090 a year starting at age 65, indexed to inflation.
Their retirement spending target is $75,000 a year after tax, about $15,000 of which is for travel. Before then, they need to fix up their house a bit and replace one of their cars.
“Are we on track?” they wonder.
We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Tom and Tilly’s situation.
What the expert says
Tom is saving $1,100 a month to a group RRSP, to which his employer contributes $630 a month, Mr. Ardrey says. They are each saving $700 a month to their tax-free savings accounts. Mr. Ardrey assumes they continue saving this amount until Tom retires, after which the RRSP savings cease and the TFSA contributions fall to $500 a month each.
They have a cash-flow surplus of about $1,400 a month, which they are saving to pay for $25,000 of home renovations and to replace a car for another $25,000.
The planner assumes they begin collecting Canada Pension Plan and Old Age Security benefits at age 65, about 70 per cent of maximum CPP for Tilly and 90 per cent for Tom. He recommends they apply to share their CPP to help lower their taxes. At age 65, Tilly will begin collecting her pension.
Because parents of both Tom and Tilly lived well into their 90s, Mr. Ardrey assumes they will both live to age 95.
Looking at their investments, their asset mix has a historical rate of return of 4.4 per cent, with an average management expense ratio of 1.3 per cent, for a net return of 3.1 per cent.
“Based on these assumptions, Tom and Tilly can meet their retirement spending goals but with minimal financial cushion,” Mr. Ardrey says. That assumes Tom, who turns 60 later this year, retires at age 63. If they spend all of their investment assets, leaving only real estate and personal effects, they will have a cushion of only $2,400 a year.
“This is right on the line of success or failure,” the planner cautions. “Any one large, unexpected expense could have a significant impact on their retirement plan.”
If they sold their house, now valued at about $675,000, and downsized to a $400,000 condo at Tom’s age 85, “they would greatly increase their financial flexibility,” Mr. Ardrey says. This would give them a financial cushion of $9,000 a year. It would also give them the option of retiring earlier than planned.
An alternative would be to try to improve their investment returns. They are investing mainly through mutual funds. Given the size of their portfolio, they could benefit from using the services of an investment counsellor – particularly one who offers alternative income strategies as part of their overall asset mix, Mr. Ardrey says.
Although investment returns are not guaranteed, alternatives to stocks and bonds – funds that specialize in such things as private debt, global real estate and accounts receivable factoring – could potentially enhance returns on the fixed-income side of their portfolio while having little or no correlation to stock markets, Mr. Ardrey says. “They represent a unique diversifier.”
Their current asset mix is 40-per-cent fixed income, 20-per-cent Canadian, 15-per-cent U.S. and 25-per-cent international stock funds. He recommends 25-per-cent fixed income, 25-per-cent alternative income and 50-per-cent globally diversified stock funds. “With this new asset mix in place, we would expect a return of 6.5 per cent and investment costs of 1.5 per cent, for a net return of 5 per cent a year.”
If Tom and Tilly achieved this rate of return and downsized their house when Tom is 85, they could have a substantial cushion, the planner says: $19,200 a year. If they wanted to, they could retire when Tom turns 61 in 2020 and still have a cushion of $9,000 a year.
Client situation
The people: Tom, 59, and Tilly, 60
The problem: Will they have to sell their house to finance their retirement?
The plan: Try to improve investment returns, but keep an open mind to selling the house and downsizing in 25 years or so.
The payoff: Retiring as planned with a comfortable financial cushion.
Monthly net income: $8,455
Assets: Cash in bank $60,000; his personal and group RRSPs $395,000; her RRSP $245,500; his TFSA $44,500; her TFSA $37,000; estimated present value of her DB pension plan $187,250; residence $675,000. Total: $1.6-million
Monthly outlays: Property tax $460; home insurance $90; utilities $285; maintenance, garden $75; transportation $580; groceries $650; clothing $205; gifts, charity $250; vacation, travel $700; other discretionary $50; dining, drinks, entertainment $600; personal care $100; subscriptions $30; dentists, drugstore $20; life insurance $185; phones, TV, internet $270; his group RRSP $1,100; TFSAs $1,400. Total: $7,050Surplus $1,405
Liabilities: None
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Some details may be changed to protect the privacy of the persons profiled.
