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Family Finance: Investments and pensions make Gloria and Rob likely to retire at 63 and 65 respectively
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British Columbia-based couples Gloria* (49) and Rob (51) focus on Gloria’s early retirement and career change. But are the two goals compatible?
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They each earn around $80,000 a year before taxes, and Rob is eligible for two pensions from his previous employer, who will have to add up $2,000 a month if he retires at age 60.
Gloria, who moved to Canada in 2009 and started working here in 2010, wants to retrain her to move into a new field (she refused to identify her field for privacy reasons). She expects that leaving her current role and field will likely reduce her annual income by about $10,000. “Will this move help you retire at age 63?”
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The couple recently paid off their mortgage at their main residence, which is valued at $800,000. They plan to stay for at least the next 10 years. They also own rental properties with a current market value of around $600,000, generating rental revenue of around $3,000 a year after the cost. There is a $200,000 mortgage at 3.8% ($1,300 a month) scheduled to be renewed in 2027.
“We see rental properties as a way to diversify our investment,” Gloria said. However, it is an older property with a large maintenance bill on the horizon, including a new roof. Maintenance and insurance costs exceed rental growth and inflation. “Our plan was to keep it for another 10-20 years, but would it be better to sell now and invest revenue?” she asked. Couples are hesitant as the real estate market is softer.
“We currently have long-term renters who pay $1,975 a month. If they leave, we could have increased our rent to better reflect the market price, but that doesn’t seem likely.” The couple feels stuck and wants to know what experts will advise. Are you waiting for it to be sold right now?
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Gloria and Rob have an investment portfolio that includes approximately $30,000 in cash to cover emergencies, a tax-free savings account (TFSA) and $242,000 in registered retirement savings plans (RRSP). All of these registered accounts are invested in the growth of funds traded on the exchange. They have paid off the mortgage at their primary residence, so they plan to focus on maximizing their TFSA and RRSP contributions.
Regarding retirement planning, I would like to travel for at least the first five to eight years, including a 3-4 month stay in different countries. The current monthly cost is around $4,840. Gloria and Rob also plan to continue working part-time for retirement, but they don’t know what it will look like or how much money they will make. They wonder when should consider deriving benefits from Canada’s pension scheme (CPP) and geriatric security (OAS).
What experts say
Elliot Einerson, a retirement planner with Ottawa-based index investment management, said mortgages have been paid back at key residences to free up cash flows to increase savings, making it an ideal time to attract experts to help develop financial plans.
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“There are a lot of variables in their situation that need to be considered, some need to be clear,” he said. “This includes forecasts for income and assets over the next 40 years, leading to strategies to maximize income and minimize taxes during retirement.”
There are a few important questions that the couple needs to deal with, Einerson said. For example, is Rob willing to retire five years earlier on almost half his lifetime pension? Is his pension indexed by inflation? If they are retired and working, how much can they earn part-time and how long can they earn? With the mortgage being paid back, how much do they plan to save each year? How much is it really for a massive trip after retirement? Do they have health or medical concerns? What are your real estate goals? When will they shrink and how fairness there is, will it unlock? How do they feel about losing money on a rental property? Do they want to manage their portfolio throughout their retirement? And how do you deal with market changes?
“The rental property is a great example of the need for planning consultations and the need for a broader discussion of how this investment fits into the photograph,” Einarson said. “They argue that rentals are a way to diversify investments, but real estate accounts for around 80% of total net worth and generates only $3,000 a year. This property can be the biggest risk that could derail your retirement plan, so it should be addressed in the context of goals and risk tolerance.”
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Based on current investments and estimates of future pensions and government benefits, Gloria and Rob are likely to meet 63 and 65 basic income needs, Einerson said he acknowledged that the basic needs differ from their gross income targets.
“Because Rob works until he is 65, he is able to earn a total net profit of around $8,000 a month until he receives a completely disinfected pension and CPP. Retirement before this age would significantly damage his income, as Rob has a largely rebate pension and CPP and investments have less time to grow. If Rob leaves when he turns 60, he and Gloria can maintain a slightly lower 37% and maintain a total net profit of around $5,000 a month.”
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The 63-year-old wonders if she can retire from a debt of $100,000.
Currently, using cash to sell rental properties and increase your investments and future income can reduce risk and improve your faster, more comfortable retirement.
“But cash flow is only one side of the equation,” Einerson said. “The key is to discover future needs through the planning process. Once they know what they need and are happy with their target, they can plan it. If it’s about $5,000 a month, it’s a dream retirement, but for many others it’s not.”
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Are you worried that it’s enough to retire? Do I need to adjust my portfolio? Are you wondering how to get started, make a difference, or build wealth? Are you trying to interact? Please drop us at wealth@postmedia.com with your contact information and the point of your issue. We will find some experts to help you while writing family financial stories about it (of course, we will protect your name from that).
*Name changed to protect privacy
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