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Frederick Sullivan 0

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Personal Finance Family Finance

Her goal is $60,000 after tax, which in Ontario would require $75,000 in pre-tax income. This plan will help her get there

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Feb 18 2022 • Feb 18 2022 • Read 5 minutes • Join the conversation Terri needs to reduce debt by reducing her mortgage and other obligations, as simplification will make long-term planning easier. Terri needs to reduce debt by reducing her mortgage and other obligations, as simplification will make long-term planning easier. Photo by Gigi Suhanic/National Post photo illustration

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A woman we call Terri, 60, lives in Ontario. Her kids are grown and gone, her data management career is thriving. She works for a large corporation and has a pre-tax annual income of $101,520 and a carry-over wage of $67,600 a year. She is a prudent investor and has several stock and real estate assets, including her home and two rental properties. Her problem is figuring out what her assets will pay in retirement income. Her goal is $60,000 after tax, which in Ontario would require $75,000 in pre-tax income. Her problem: can she sustain her income and way of life for three decades? It’s a long-term planning problem, but there is a solution.

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A portfolio of problems

Terri wants to retire, but instead of a date she has set a financial hurdle: She wants to retire when her defined benefit, CPP and later OAS and investment income are enough to pay for the projected expenses of $5,633 per month, including $2,408 in existing debt service and a projected $5,000 per year for travel to see grandchildren and children. She faces questions about when to start CPP, when to sell investment properties, and how to invest $120,000 if and when a child repays a loan she has as an asset in her total net worth.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC, to work with Terri. She should try to reduce her debt by reducing her mortgage and other obligations, Moran suggests, as simplification will make planning easier.

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shrink

Terri would have to sell an $800,000 rental home with a $359,200 mortgage, Moran says. She paid $471,300 for it and lived in it for four or six years of her property, so 4/6ths of the $328,700 profit will be tax-free. The tax formula adds a free year, making it 5/6 tax free. Real estate and legal fees will be $35,000, reducing the capital gain to approximately $293,700. One sixth of the profit is $48,950, half taxable. The tax rate is 43.41 percent on that half, so the tax payable is $10,625. After the dust settles and the mortgage is paid, she has $395,175 left. She can use this money to pay off the $374,000 mortgage on her home, leaving her mortgage free and with $21,000 in cash.

Terri bought the third property, an unfinished flat, for $373,000. She estimates its value at $775,000. It may not be taken into possession until later in 2022. The rent will probably be between one and three percent of the street price. She would like to sell it. If the sale is in 2022 when she’s out of work, her tax rate with no earned income will be lower than if she was sold last year while employed, Moran notes.

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Her profit will be $402,000 less expenses of $35,000, leaving a taxable profit of $367,000. Half of that is taxable, so she would have a taxable profit of $183,500 and a potential tax of $67,530.

She would be left with $367,000 minus $67,530 or $299,470. Take off the $196,000 she owes on a line of credit and she would have $103,470. Add in $21,000 other cash and $126,000 payment for money lent to her son, so she would have $250,470 cash.

Retirement income

Terri’s income is $101,520 per year or $63,660 after tax. If the mansion is sold, she will no longer receive rental income.

Terri’s TFSA, currently $32,000, has $45,500 in dues space. If she added that amount of cash, she would have $77,500 in the TFSA. If that amount grows at three percent per year for 34 years to age 95, it will pay her $3,600 per year from age 61.

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Terri has $416,403 worth of RRSPs. She has $27,506 unused room. If she makes that contribution, the total rises to $443,909. She needs $75,000 pre-tax income and gets $34,000 from her pension. She therefore needs $41,000 per year for eight years, after which the payouts based on the remaining money will drop to $12,324, Moran estimates.

Assuming her income properties are sold and all $929,200 in lines of credit and mortgages are paid off, she will have $171,000 in cash. She needs $30,000 to supplement her pension in 2022.

If the remaining $141,000 grows at three percent per year for 34 years, it will yield about $6,600 per year.

Terri has a defined benefit pension that will pay her $34,000 a year in 2022 and future years. Her CPP should be $10,534 at 65. She can delay the start to 70 with a 42 percent bonus, increasing it to $14,958 per year.

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Her OAS will be $7,707 per year using 2022 rates. For age 70, it will be $10,481 per year, including a 36 percent bonus.

If she added her retirement income to 70 in the near future, she would have $34,000 from her job pension, $41,000 from her RRIF, $3,600 from her TFSA, and $6,603 taxable income from the sale of her properties. That works out to $85,203. After 19 percent average tax on all cash flow except TFSA, she would have $69,700 per year or $5,800 per month. That’s more than the $5,000 a month she thinks her living expenses will be in retirement.

By age 70, her RRIF will be reduced to $221,000 and will support an income of $12,324 for 25 years to 95 years. Terri’s total income will then be $34,000 from her retirement, $14,958 from CPP, $3,600 from her TFSA, $10,481 from OAS, and $6,600 from taxable investment income, totaling $81,963. After taxing 20 percent on all cash flow except TFSA, she would have $66,290 per year to spend. That’s $5,525 a month, still enough to reach her goal.

Retirement stars: 3 *** out of 5

Financial item

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This post Ontario woman needs to get rid of real estate and debt to meet her retirement income goal

was original published at “https://financialpost.com/personal-finance/family-finance/this-ontario-women-should-shed-real-estate-and-debt-to-meet-her-retirement-income-goal”

Categories: Finance

Author: Frederick Sullivan

Hannah Sullivan: As a seasoned journalist, Hannah's blog provides hard-hitting analysis and in-depth reporting on major crime stories. Her thorough coverage and fearless reporting make her a trusted voice in the field.