Personal Finance Family Finance

“Jean and Lorraine have prepared for retirement with surplus capital that meets their needs,” says expert. ‘They have the skills and focus to make retirement work’

Publication date:

07 Jan 2022 • 7 Jan 2022 • 5 minute reading time • 5 Responses As Jean and Lorraine's mortgages are paid off, the interest rate risk decreases. As Jean and Lorraine’s mortgages are paid off, the interest rate risk decreases. Photo by Gigi Suhanic/National Post Illustration

Reviews and recommendations are unbiased and products are selected independently. Postmedia may earn an affiliate commission for purchases made through links on this page.

In British Columbia, a couple we will call Jean and Lorraine, 62 and 48 respectively, share their home with children Elizabeth, 18, and Larry, 16. The parents have very different incomes – Jean’s tech business costs $28,000 a month, while Lorraine’s income from her personal care business is closer to $1,500. They both hope to retire in three years’ time, when Jean turns 65. Their children, supported by adequate RESPs, will be out of the house by then.

This ad hasn’t loaded yet, but your article continues below.

Before retiring, Jean and Lorraine must figure out what their retirement needs and income will be and how best to achieve their goals: to live a good life and give their children as much wealth and income as possible. They will have to balance their desire to live well now with the need to accumulate as much wealth as possible for what could be a three or four-decade retirement.

email andrew.allentuck@gmail.com for a free Family Finance analysis

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC, to work with Jean and Lorraine. He sees the problems as their 14-year age difference and the $619,700 in debt they have to manage. The debt consists of mortgages secured against real estate. Interest rates are low single digits, but if they retire the debt when their incomes shrink, it becomes a different story.

This ad hasn’t loaded yet, but your article continues below.

Goals and means

The couple’s retirement goals are to generate $6,000 a month after taxes for living expenses and travel perhaps five years in the U.S. and abroad, send their two children to post-secondary education, and pay off debt whenever possible.

They have a $975,000 home and two rental properties with estimated street prices of $360,000 and $384,667 and liabilities of $334,765 for their home and $224,488 and $60,445 for their two rental properties. Their real estate assets are $1,719,667 against liabilities of $619,699. The asset-to-liability ratio is 2.78, which is still within the guidelines for bank lending.

Several customers pay Jean a total of $28,000 per month. It goes to his private company from which he receives a monthly salary. The remainder that he does not pay himself is held in cash. Jean would have to take a salary of $62,000 a year to maximize contributions to the Canada Pension Plan and tax the rest at 12 percent, which is the small business rate in BC. He can then withdraw savings from the company as a dividend during retirement. Judging by the numbers, $28,000 in income per month will be less the tax-exempt portion of $5,740 and $5,100 or so in salary, leaving $17,160 per month or $205,920 per year in the business.

This ad hasn’t loaded yet, but your article continues below.

Savings and pensions

If Jean retires at age 65, he can count on an estimated $7,850 per year from OAS and an estimated $12,400 from CPP. Lorraine receives $5,980 CPP per year and the same OAS as Jean.

The couple’s tax-free savings accounts have a total balance of $179,830. If they continue to add $6,000 to Jean’s age 65 for three years, then, at three percent growth over inflation, they will become $215,600 by 2022 dollars at Jean’s age 65. That capital will grow three percent over the next 39 years from inflation to Lorraine’s age 90 would yield $9,450 a year.

The couple has $313,200 in RRSPs, including locked accounts. Jean has $52,000 in dues space. He can move that amount from his company to his RRSP. That would bring his total to $365,200. If he adds $11,088 per year for three years and gets a three percent return after inflation, the sum will rise to $434,365. That amount, spent over the next 39 years, could bring in $19,044 a year.

This ad hasn’t loaded yet, but your article continues below.

If Jean can save $201,120 a year in his business, 12 percent or $24,134 will go to taxes. The balance, $176,986 will rise to $756,864 in three years, assuming three percent annual interest. That money, spent over the next 39 years, would make $33,185 a year.

Retirement income

At age 65, Jean will receive his annual pension of $2,727, CPP of $12,400, OAS of $7,830, RRSP income of $19,044, TFSA payments totaling $9,450, $33,185 from Jean’s company, and $6,812 from their rent, for a total pre-tax income of $91,448. After splitting qualifying income and 14 percent average tax, they would have $79,968 annual income or $6,664 per month.

No

Pensions and money from a cottage sale put this Ontario couple’s retirement on solid ground

Rick and Marianne feel they could be in for a tight cash flow after retirement.

Four years of extra work will pay off for this Ontario couple

No

A $2.5 million retiring teacher has enough financial firepower to withstand cost pressures

This ad hasn’t loaded yet, but your article continues below.

When Lorraine is 65, they have Jean’s $2,727 pension, CPP benefits of $12,400 and $5,980, two annual OAS benefits of $7,830 each, $19,044 RRSP income, $9,450 TFSA cash flow, $23,985 from the company, and $6,812 rental income for a total income of $96,058. After splitting eligible income and 15 percent average tax, they would have $83,070 per year or $6,925 per month to spend.

There are many unknowns in these projections. Future interest rates, the trend of real estate prices in BC and how the company will fare are uncertain. Jean will have a lot of money in his business to be taxed at a rate that can change. That money can help the children, who may still be in college, or cover unexpected expenses.

This ad hasn’t loaded yet, but your article continues below.

Debt on their rental properties is another concern. However, time is on their side. As the mortgages are repaid, the interest rate risk decreases. Assuming tax and filing rates remain the same, the couple will have enough income to keep spending at current levels with more free cash flow as mortgages are paid off and equity increases.

“Jean and Lorraine have prepared for retirement with surplus capital that meets their needs,” concludes Moran. “They have the skills and focus to retire.”

Retirement stars: Three retirement stars ***out of five

Financial item

email andrew.allentuck@gmail.com for a free Family Finance analysis

This ad hasn’t loaded yet, but your article continues below.

By clicking the sign up button, you agree to receive the above newsletter from Postmedia Network Inc. receive. You can unsubscribe at any time by clicking the unsubscribe link at the bottom of our emails. Postmedia Network Inc. † 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300

Comments

Postmedia is committed to maintaining a lively yet civilized discussion forum and encourages all readers to share their thoughts on our articles. It can take up to an hour for comments to be moderated before appearing on the site. We ask that you keep your comments relevant and respectful. We’ve enabled email notifications – you’ll now receive an email when you get a reply to your comment, there’s an update to a comment thread you’re following, or a user follows comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

This post The BC couple have significant mortgage debt on their way to retirement, but the risk should diminish over time

was original published at “https://financialpost.com/personal-finance/family-finance/b-c-couple-has-significant-mortgage-debt-heading-into-retirement-but-risk-should-diminish-with-time”