A British Columbia couple wants to leave a $ 2 million bequest to their daughter, but they must first figure out their retirement finances

A British Columbia couple wants to leave a $ 2 million bequest to their daughter, but they must first figure out their retirement finances

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Your portfolio of many mutual and real estate funds adds complexity and management risk to your expectations.

Author of the article:

Andrew Allentuck

This BC couple wants to have $ 8,000 in monthly income after taxes in retirement, and also give their daughter $ 2 million to start her life. Photo by Gigi Suhanic / National Post Photo Illustration

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A couple we’ll call Ruth, 53, and Jack, 50, live with their son, Pat, 16, in British Columbia. They bring home $ 8,016 a month from Jack’s job in the electrical industry, $ 3,650 from renting a basement suite at his home and recreational property, and $ 700 in tax-free child support until Pat has a first degree. In total, that’s $ 12,350 per month. Ruth, a former marketing consultant, recently retired and is now a homemaker.

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His expenses average $ 10,800 per month. Her highest monthly cost is $ 2,150 on her outstanding mortgage of $ 197,000 on her home, which Ruth owns. They worry that when Jack retires in 15 years at age 65, their pleasant lives will be unaffordable. His goal when Jack is 65 is $ 8,000 in monthly income after taxes.

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Family Finance asked Derek Moran, director of Smarter Financial Planning Ltd. in Kelowna, BC, to work with Ruth and Jack. They can achieve their goal and more, but their portfolio of many mutual and real estate funds adds complexity and therefore management risk to their expectations, Moran notes.

Property income

Your real estate, while appreciating, is not an efficient generator of income. They have 70 percent of their fixed assets in their $ 2 million home and a $ 1 million rental property. Income ownership generates rents that fluctuate: more in summer, less at other times. It averages $ 13,500 per year ($ 6,750 for each partner). They have a basement rental that generates $ 1,400 per month or $ 16,800 per year ($ 8,400 each). They have $ 910,458 in debt for their house and rent. In total, rentals bring in $ 15,150 per year per member.

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The property can be appreciated, but there is a risk of vacancy, risk of damage to the tenant, maintenance, etc. At best, income pays to keep the property, but on a risk-and-return basis, a handful of bank stocks or other stocks with solid and growing dividends would be more rewarding, Moran says.

Retirement income

They like rental property, so assuming they keep it, their retirement rental income would be $ 15,150 of combined annual pre-tax rental of their basement suite and income property for each partner, cash flows from the public pensions and their investments.

The couple have $ 458,697 in RRSP that grows with $ 12,000 annual contributions matched by Jack’s employer. Annual contributions of $ 24,000 that grow compounding for 15 years to age 65 will be worth $ 1,174,400 and then pay $ 65,470 per year through age 90. Your TFSAs with a total present value of $ 202,670 growing over 15 years with compound capital yields at three percent per annum after inflation will be worth $ 538,940 and then pay $ 30,422 at your age of 90. We will allocate $ 15,211 of that to each.

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Currently, Ruth, 53, has a rental income of $ 15,150 and an annual nontaxable cash flow of $ 8,400 from child support. That adds up to $ 23,550 per year. Jack has an annual income of $ 130,000 from his job and a rental income of $ 15,150. That adds up to $ 145,150 per year. Allowing for the division of eligible income and the exclusion of child support, then after taxes, they have an average tax of 20 percent, they have a disposable income of about $ 136,000 a year. That is $ 10,800 per month.

Ruth is effectively retired. At age 65, you will lose your post-marital support, but you can start Old Age Security at $ 7,384 per year at the current rate. You can also start Canada Pension Plan benefits at $ 9,720 per year. His share of rental income, $ 15,150, brings the total to $ 32,254, more than his current income. Three years later, once Jack is retired, he can add $ 15,211 as his half of the TFSA cash flow, bringing his total income before taxes to $ 47,465. After an average tax of 15 percent (excluding TFSA income), you will have $ 42,626 per year to spend.

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When Jack turns 65, his income will be $ 15,150 from rents, $ 11,160 from Canada Pension Plan, $ 7,380 from Old Age Insurance, $ 32,470 from his RRSPs, including his defined contribution company pension, and $ 15,211 from TFSA. That’s a total of $ 81,371. With no tax on TFSA cash flow, eliminating OAS recovery exposure that starts at $ 79,845 today and an average 20 percent tax on the remainder, you’ll have $ 68,139 per year to spend. Combined, your income, which is effectively divided and averaged, will be $ 9,200 per month, which is above your monthly income goal of $ 8,000.

The couple’s cost of living in retirement will be the current expense of $ 8,016 per month minus $ 1,000 for RRSP, $ 1,000 per month for TFSA, and $ 208 for Pat’s RESP. Therefore, the cost of living will be reduced by at least $ 2,208 to $ 8,600 per month. They also won’t have to continue supporting Pat and, with some reductions in their miscellaneous expenses, they could be sitting on a large monthly surplus, which will only increase when the mortgage on the rental property is paid off.

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Asset allocation

There are risks in this projection. The complexity of the couple’s portfolio, the very high concentration of assets in two BC properties, and the relatively low return on the rental property expose Ruth and Jack to the risk of reduced income in retirement.

They want to give Pat $ 2 million to start a life of his own. If they live long, paying off their financial assets would reduce Pat’s wealth. They could just give Pat the house now and take a life interest in the property, but if they live into their 90s, Pat would be in their mid-50s before the house could be his. To make up the difference, Ruth and Jack must purchase life insurance from an independent agent, Moran advises. A 40-year term policy with a premium up to age 93 for Ruth, who owns the home, would be expensive, but could set aside some of her excess for premiums.

Retirement Stars: 5 ***** out of 5

Financial position

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A British Columbia couple wants to leave a $ 2 million bequest to their daughter, but they must first figure out their retirement finances

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