Can Bill and Ava Strengthen Their Family and Retirement Goals?


TCHAD HIPOLITO / The Globe and Mail

Bill and Ava say they’re a 39-year-old couple with retirement in mind. “I expect us to be actively engaged in retirement planning conversations more than most people our age,” Bill wrote in an email.

He earns about $ 96,600 a year in education, while Ava earns $ 69,700 working for a government agency. They also receive rental income from their basement apartment. Both have defined benefit pension plans.

They have two children aged 3 and 7, a house in BC with a mortgage, and a condo they recently bought to rent on AirBnB, which is operating at a loss. “It has obviously not been a good year for AirBnb-ing, but we hope 2022 will be better,” wrote Bill.

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Their retirement goals are naturally sketchy. They want more disposable income than they currently have for travel and leisure, and think $ 120,000 per year before tax might be a reasonable spending target. They plan to retire at age 60.

But they have several other concerns. “We have been as aggressive as possible in paying off the mortgage on our house, hoping that by the age of 50 or 55 we will no longer have a mortgage to free up more disposable income as our children move into. adolescence, ”Bill writes. They would like to pay for post-secondary books and children’s school fees. They also want to help the two children put down a down payment on their first home when the time comes, “maybe from the sale of the rental condo down the street or from a home access line of credit.” net worth, ”he adds. They also want to buy a used electric car and install a heat pump. “Are we on track to achieve these goals?

We asked Janet Gray, a fee and advice-only financial planner at Money Coaches Canada in Ottawa, to review Bill and Ava’s situation.

What the expert says

Ava and Bill expect their rental condo to break even next year once short-term rentals resume, Ms. Gray said. They should make sure they charge enough rent to cover all costs, including mortgage interest, condominium fees, utilities, insurance, and ongoing maintenance and upkeep, the planner says. “No rush to pay off the condo mortgage – let the rent pay, because mortgage interest is an expense deductible from rental income. “

They eventually plan to sell the rental unit because they may want to free up funds to pay for other goals, she says. In her forecast, she assumes they sell the year after employment income ends, when their income – and therefore their tax rate – will be lower and they will pay less capital gains tax. . Assuming an inflation rate of 2%, the value of their condominium could drop from $ 450,000 today to $ 669,000 when they retire at age 60, says Gray. The remaining mortgage, based on their current payment schedule, would be $ 123,000. “Based on their initial cost price (assuming there are no capital improvements) of $ 390,000 and a profit of $ 279,000, half of that amount, or 139,500 $, would be subject to capital gains tax in the year of the sale, ”the planner said. “Since this is a common good, the capital gains owed would be 50% by each of them. “

In the meantime, once they’ve made a profit on the condo, and after setting aside emergency funds for contingencies, they could use the extra funds for their other purposes, according to the planner. “Make sure to set aside funds for additional taxes on rental income.”

As for their mortgage, on which they are making additional capital payments, they will probably have paid it off by 2035. If they wanted to free up money once the mortgage has been paid off, perhaps to help them. kids to get an education or a down payment, they could do so using a home equity line of credit, says the planner.

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Bill and Ava contribute $ 200 per month to a registered education savings plan for their children. The current value is $ 22,620. They should make sure they contribute the maximum annual amount of $ 2,500 to each child’s RESP in order to receive the maximum federal education savings grant, according to the planner. They could check with their RESP issuer if they can increase their contributions to catch up with previous years. “Aim for a minimum of $ 208 per month per child and set that amount on automatic contributions,” says Gray. “Start early and be consistent so that the RESP has time to grow because tuition fees have increased more than inflation recently,” she says.

The couple’s short-term goals include an electric vehicle and installing a heat pump, which together would cost around $ 25,000. To pay them off, they could use their emergency savings ($ 27,450 in the bank) or reduce their extra mortgage payments, according to the planner. If they wanted to pay cash without depleting their emergency fund, they would have to save $ 694 per month for 36 months to accumulate $ 25,000. “Or they could pay the expenses monthly as part of their household expenses, which would impact their savings and mortgage prepayments,” she says. For example, a $ 25,000 loan at 5% with a payment of $ 1,000 per month would take 27 months to pay off – and delay their other savings by the same period.

Bill and Ava’s retirement spending goal of $ 120,000 pre-tax is about $ 90,000 after-tax in BC, according to the planner. They are on track to have an after-tax cash flow of $ 90,225 per year for ages 60 to 95. His forecast assumes they retire at age 60 and sell the condo the year after they retire. It assumes a 4.25% rate of return on their tax-free savings accounts and 5.13% on their RRSPs.

If they continue with the same employer, Bill will be entitled to a life annuity (100% joint life) of $ 54,530 per year before tax and Ava $ 35,665, indexed to inflation. Since they both have a bridging benefit with their pensions, the planner suggests they wait until at least age 65 to receive Canada Pension Plan and Old Age Security benefits. Their pension estimates are based on current income and may increase with salary increases.

While Bill and Ava both have unused RRSP contribution room, Gray suggests they focus on their TFSAs instead, contributing the maximum now and after they retire from the workforce.

“Since their retirement income will be relatively high because of their pensions, CPP and OAS, I suggest they add the excess funds to their TFSAs instead,” she says. This will reduce their taxable retirement income and TFSAs will provide them with much-needed tax-free income in retirement or in their final estate.

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One of their goals is to help their children with their down payments on a first home. “Assuming they give the kids $ 100,000 each when the rental condo is sold (the year after they retire), this will impact their savings and reduce their after-tax purchasing power to $ 85,207 per year. “, below their objective.

In conclusion, Bill and Ava are well on their way to achieving their goals, but at some point they may have to choose between one goal and another, Ms. Gray says.

Client situation

The people: Bill and Ava, both 39 years old, and their children aged 3 and 7

The problem: Are they on track to achieve their life goals?

The plan: Run the rental condo like a business, keep paying off the mortgage, take full advantage of RESPs, get ready to swap one goal for another.

The reward : A better idea of ​​how to get to where they want to go

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Monthly net income: $ 11,975

Assets: Joint bank account $ 27,450; his bank account $ 2,455; his $ 6,000 bank account; his TFSA $ 35,980; his TFSA $ 9,305; his RRSP $ 33,335; estimated present value of pension plans (n ​​/ a); his pension contributions to date $ 115,300; his contributions to the pension plan $ 44,180; RESP $ 22,620; $ 1.1 million residence; rental condo $ 450,000. Total assets: $ 1.8 million

Monthly expenses: Mortgage $ 3,300; property tax $ 320; water, sewers, garbage $ 170; home insurance $ 230; heating, electricity $ 330; maintenance, garden $ 125; transportation $ 385; groceries $ 1,200; child care $ 810; clothing $ 125; gifts, charity $ 285; vacation, travel $ 350; other discretionary $ 150; meals, drinks, entertainment $ 560; personal care $ 50; golf $ 250; pets $ 100; sports, recreation $ 100; subscriptions $ 30; drugstore $ 25; health, life insurance $ 140; communication $ 300; RESP $ 200; TFSA $ 200; contributions to the pension plan $ 2,240. Total: $ 11,975

Liabilities: Residential mortgage $ 492,400; rental mortgage $ 305,280. Total: $ 797,680

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