Situation: Couple considers downsizing their $1.6 million home to raise retirement income
Solution: They will be in good shape either way due to strong saving and pensions
In British Columbia, a couple we’ll call Larry, 60, and Emily, 52, both financial services managers, are on the verge of retirement. They have substantial education savings for their teenage children, two car loans and substantial life insurance should either parent depart this life sooner than later. But there is also the nagging question: have they done enough — dotted the i’s and crossed the t’s?
“I want to retire within a few months when my pension hits its full, unreduced value,” Larry explains. “My wife would retire in five years when she reaches her full, unreduced pension date. We’ll stay in our house until the children finish university. Do we then need to downsize our house to save money?”
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Family Finance asked Graeme Egan, head of CastleBay Wealth Management Inc. in Vancouver, to work with Larry and Emily.
“The questions they ask are absolutely right, but the answers are complex,” Egan says. “There are many issues, but the main one, the summary issue, is whether they will need to supplement income by selling their house or cashing in life insurance.”
Larry and Emily have made solid plans for retirement, Egan says. If Larry does retire in a few months at 60, his work pension will be $5,442 plus a bridge to 65 of $448 per month. Emily will continue to work full time to her age 57 and then retire with a pension of $3,293 per month plus a bridge to 65 of $1,046 per month.
Thus if Larry retires in a few months, their income with no draws from savings would be Larry’s bridged pension of $5,890 per month plus Emily’s $5,233 take home salary, total $11,123 per month, just a little less than their present $12,137 take-home income. Clothing spending for the office might decline and Larry’s RRSP contributions would end, so income would be unchanged from the pre-retirement level, Egan notes. No need to sell anything, he adds.
The couple’s RRSP accounts add up to $270,200. Assuming they make no further contributions, this sum, invested to pay out all capital and income for the 43 years to Emily’s age 95 would generate $4,490 per year.
If Emily continues to contribute $6,000 per year to her $162,500 RRSP for the next five years, then at 3 per cent growth it will rise to $221,200, and generate $9,835 per year to her age 95 in 2018 dollars.
The couple has two Tax-Free Savings Accounts, each with $52,000 in assets. If both Larry and Emily add $5,500 each for the next five years using surplus cash, the accounts, generating 3 per cent a year would rise to $180,700 total and be able to pay $7,800 per year for the next 38 years, at which time all capital would be expended.
At retirement, Larry and Emily will each be entitled to about $13,500 Canada Pension Plan benefits per year and, at 65, full Old Age Security benefits of about $7,040 per year in 2018 dollars.
Discretionary elements in retirement income
The plan to downsize their house from its present value of $1,600,000 is on hold. They could harvest income to add to their $330,000 cash balances, but the money might also be used to provide benefits such as home down payments for their children or to pay off $39,050 of outstanding car loans. However, if they did take $600,000 out of their house in downsizing to a $1 million home — we’re ignoring selling and moving costs — that sum, starting in five years when Emily retires, could generate $28,500 per year in 2018 dollars to Emily’s age 95. But it is not needed, as we will see.
Adding up the components of retirement income, for the first five years of retirement and assuming no early start to Canada Pension Plan benefits for Larry, they would have Emily’s take-home salary, $5,233 per month and Larry’s bridged pension, $5,890 per month. The total, $11,123 is close to their present $12,137 monthly income and perhaps more after Larry’s commuting and office attire costs are reduced.
When Emily retires in five years, Larry will be 65. His pension would drop to $5,442 per month, but he would add $1,125 in monthly CPP and $587 in OAS. Emily’s bridged pension of $4,339 would also kick in.
Larry’s RRSP would add $4,490 per year or $375 per month to income, Emily’s would add $9,835 per year or $820 per month, and their TFSAs would add $7,800 per year or $650 per month. The money from downsizing the home would add $28,500 per year or $2,375 per month to Emily’s age 95. We are excluding any investment of funds obtained from cashing in their $97,500 of cash value in life insurance
Adding up these components from the time that Emily retires, they would have $15,713 in pre-tax monthly income. Assuming that $650 monthly TFSA income is not taxed and that they split Larry’s eligible pension income, they would pay tax at a 22 per cent average rate and with TFSA cash flow added back and taking into account the OAS clawback, they would have about $12,000 to spend each month.
Without selling the home, monthly income after tax would be $2,375 less or about $9,675 per month.
At 65, Emily would lose her monthly bridge, but gain about $1,125 in CPP and $587 in OAS benefits per month. The net effect would be a modest monthly income increase.
“Careful investing has given the couple a financial cushion that covers a lot of contingencies,” Egan says.
Retirement stars: four retirement stars **** out of five
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