Situation: Mom bought a $300,000 condo for child at university, but covering costs is problematic
Solution: Keep the condo, raise rents when her daughter leaves, and retire at 61
A teacher in British Columbia who we’ll call Jane is helping support her daughter, Kim, through university. Now 50, Jane brings home $4,797 per month from her job and adds modest rental income from condos in B.C. and Quebec.
Jane purchased the Quebec condo, which she mortgaged her previously debt-free home to buy, so that Kim would have a place to stay at school. Kim pays rent that covers the $1,229 monthly mortgage payment — below the going rate for comparable units — but that doesn’t include the costs of insurance, property taxes and maintenance.
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Jane worries the condo purchase may have hindered her retirement. Family Finance asked Caroline Nalbantoglu, head of CNal Financial Planning Inc. in Montreal, to work with Jane.
The significant debts Jane is now carrying are the biggest issue threatening her retirement. In addition to a $300,000 mortgage on the Quebec condo, Jane owes $62,305 on her B.C. condo, which is an investment property.
She pays 3.35 per cent interest on the B.C. mortgage, which works out to $600 month, plus an additional $300 in condo fees and taxes. Those costs, subtracted from gross rental income of $1,700 per month, leave her with net pre-tax return of $800 per month or $9,600 per year.
Using an estimated current value of $389,000 and deducting her debt, her equity in the unit is about $326,700. The annual return on that equity is three per cent, not a lot for the trouble, but acceptable.
Mortgage payments on the Quebec unit are about $1,220 — covered by Kim’s rent — so Jane incurs a loss of about $575, the amount of the additional costs.
When Kim graduates in a year, however, Jane can charge market rent of $2,500 per month and will wind up with positive income of $695 per month, making it a profitable investment. Rising interest rates could thwart that.
Her total financial assets, excluding $13,000 in RESPs for Kim that will be used up this year, are $251,200.
Jane is targeting retirement income of $5,000 per month after tax.
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The core of that will come from a substantial defined-benefit pension with three options. Retirement at 55 would provide $2,248 per month and a $422 bridge to 65, total $2,670. Retirement at 61 would have a $3,620 monthly base plus a $495 bridge to 65, total $4,115. Retirement at 65 would have a $5,013 monthly pension payment with no bridge
When to retire is the issue. Retirement at 55 is too punitive, Nalbantoglu explains. She would take a massive cut in her pension for life. “Unless she really wants out, I would not suggest retirement at 55,” the planner says.
Retirement at 61 is acceptable. Jane’s income would consist of a $4,115 monthly pension including a $495 monthly bridge to 65, rental income of $1,495 per month or $17,940 per year, and reduced Canada Pension Plan benefits of $822 per month. That adds up to $6,432 per month or $77,184 per year.
Jane’s TFSA balance, $61,000 at present and growing with $3,840 contributions per year at three per cent after inflation for 11 years, would become $133,620 at her age 61. Annuitized to pay out all income and capital in the following 34 years to her age 95, she would get $512 per month or $6,140 per year. The TFSA payments would boost annual income to $83,324 per year. With no tax on TFSA payouts and 20 per cent average tax on the balance, she would have $5,657 per month to spend. That’s over her $5,000 minimum retirement income target.
At 65, she would lose her $495 monthly pension bridge but add about $600 per month in Old Age Security, leaving her with about $5,745 per month after tax.
Adding RRIF income
At 71, Jane would have to convert her RRSP to a Registered Retirement Income Fund and start taking money out at 72. Her RRSP balance, $105,000 at present, would grow at an estimated three per cent after inflation with present $4,560 annual additions boosted to $6,000 per year for 11 years to retirement at 61 to $224,500 then grow at the same rate with no further contributions for 10 more years to her age 71 with no further contributions to $301,715.
Set to pay out all income and principal for the following 24 years to her age 95, she would get $17,300 per year. Her total income would be $101,962. With no tax on TFSA cash flow and 22 per cent average tax, less a charge from the OAS clawback which she’ll have $78,146 per year or $6,512 per month. Jane’s generosity will not have left her short of her retirement income goal. If the Quebec condo appreciates, she can make further gifts to Kim or good causes with her surplus.
Retirement stars: Three *** out of five
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