Aaron and Adele have good jobs, they in education, he for a government agency. Together they bring in about $ 195,000 per year. Like many people with defined benefit plans, they hope to retire early, especially because they can.
They are both 50 with two children, 11 and 16.
"Will we be ready within five to eight years?" Adele asks in an e-mail. "Do we have to sell our house, rent the profits from the sale and invest to support our pension?" Their goal is to retire at age 55 with $ 72,000 a year after tax and perhaps give some advice.
Their home in Toronto is valued at about $ 1.5 million with a remaining mortgage of $ 300,000. They also have a small house north of the city worth $ 260,000 that they want to renovate.
For Adele and Aaron the attraction to sell on a warm housing market is enhanced by the amount of work they would have to do to their existing home if they keep it – rebuilding the conservatory, replacing the windows and waterproofing the cellar, among other things.
Should they sell now or wait until they retire? Asks Adele. "We still want to live in the same neighborhood to have our children finish their training and would be willing to hire," she adds. Houses in the neighborhood rent anywhere from $ 3,500 to $ 4,000 per month.
We have asked Trevor Van Nest, a certified financial planner (CFP) and owner of the Niagara Region Money Coaches in St. Catharines, Ontario, about Adele and The Situation of Aaron.
What the expert says
Like many, Aaron and Adele want to know if they can stop working earlier than the standard age of 65, says Mr. Van Nest. "In fact, thanks to two generous defined benefit plans and substantial equity building in their home, they can indeed retire at age 55 without compromising their lifestyle," he adds, adding that they can now sell their house – if they want to. "Although they may want to enjoy some semi-retirement work, perhaps some advice, there is no financial need to do this."
Both pensions can be split to minimize taxes, and as soon as Canada Pension Plan and Age Protection benefits start in the same year (because they both have the same age), they will actually be in a surplus, which they will benefit from by adding to tax-free savings accounts, says Van Next. This assumes lifestyle expenditures of $ 6,847 per month ($ 82,164 per year) in today's dollars, growing by inflation.
At the age of 55 Adele receives a pension of $ 80,886 per year, including a bridge payment to the age of 65. At that time her pension will fall to $ 71,950 per year, or about $ 60,000 after tax. Aaron will start collecting his retirement of $ 20,197 per year when he is sixtieth, or $ 17,639 after tax. So from 55 to 60 years they have to withdraw a small amount from their savings to make up for the shortfall. "It comes down to only the interest on the proceeds from the sale of houses, so capital is protected", says the planner.
Adele and Aaaron want to sell their house for a big profit and are comfortable with the prospect of renting something similar in the same neighborhood for $ 4,000 a month. "Since they want to take over a $ 300,000 home renovation, the proceeds from home sales can be used," says the planner.
Alternatively, Aaron and Adele can afford to stay in their home for the next five years, when their youngest child will finish high school. "Both scenarios (now or later selling) result in comparable estate values at the age of 100 – meaning that this decision is not so much a financial one as a lifestyle decision," said Mr. Van Nest.
The couple also want to cover all costs related to the post-secondary education of their children. With the $ 105,000 that they have already saved and the $ 415 per month they continue to spend on their registered savings plan, they will be able to fully fund the children's education, says the planner. That presupposes a return of 4 percent on their RESP funds. The full cost is $ 189,000, based on an annual increase of 5% of the tuition fees, board and lodging and books, "and they are well on track to reach this number."
Regardless of whether they choose to sell their home sooner or later, "they will have some serious capital to invest," says Van Nest. They wonder how they can invest it.
"There is at least $ 1.2 million in them (depending on the size of their mortgage when they sell), it would be wise to learn what they should do with the money before they need to do it. "
He recommends using low-cost exchange-traded funds" to minimize costs, maximize diversification and benefit from the benefits of a passive investment strategy. " they are both relatively conservative investors (according to their risk profiles), a mix of 40 percent shares and 60 percent bonds is suitable for money that is not needed for at least five years, according to the planner.
available premium space in RRSP & # 39; s and TFSA & # 39; s must be supplemented with the proceeds from the sale of a house in order to benefit from the tax-free and tax-free growth of these vehicles. The remainder must be invested in a joint, non-registered fund. "And thanks to the value of pensions, CPP and OAS, Aaron and Adele do not have to go home (after the renovation of the cottage), so they can invest it with confidence without having to change the strategy or holdings over. least over the next 10 years, "says Mr. Van Nest.
Regarding the renovation of the house, they may want to wait until they are retired, so that they can closely follow the work, he adds. The $ 300,000 marked for renovations must be held in short-term deposits & # 39; s or GICs, so no risk is taken on this capital. "
The people: Aaron and Adele, 50, and their two children.
The problem: Can they retire at 55, to sell their Toronto for profit and their current standard of living? at rest? How should they invest the proceeds of their home when they sell it?
The plan: Retire in five years at the age of 55, rent for $ 4,000 per month, renovate the house and enjoy a flexible lifestyle without fear of coming without money.
The payment: A comfortable pension.
Monthly net income: $ 10,245  Assets: house $ 1.5 million, cottage $ 260,000; RRSP & # 39; s $ 28,300; RESP: $ 105,000; TFSA $ 0; unregistered investment $ 0; es valued cash value of n her DB pension plan $ 1.6 million; estimated present value of its DB pension plan $ 258,000. Total: $ 3.75 million
Monthly payments: mortgage $ 2,465; property tax $ 460; property insurance, utilities and repairs $ 380; transportation, gas, car insurance, maintenance, parking $ 545; groceries $ 1,000; clothes / dry cleaning $ 200; charitable $ 25; telephone, internet, cable $ 210; holiday $ 500; gifts $ 20; going out, eating out, alcohol $ 275; personal care $ 25; children's activities $ 800; subscriptions $ 45; healthcare costs $ 50; RESP contributions $ 415; pension plan contributions $ 1,940. Total: $ 9,355
Obligations: Home mortgage $ 300,000
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