Situation: Couple with home by the water and boat won’t cut costs or downsize for 20 years
Solution: Maintain lifestyle by spending taxable income to age 80, then downsize, invest capital
In British Columbia, a couple we’ll call Drew and Penny, both 60, live by the sea and sail their boat often. They are trying to make the most of financial and other assets that total $2,175,000. Drew has already retired. Penny, a health-care professional, expects to quit work within a few years. Family income is $2,000 per month from Penny’s part-time work plus investment income from $790,000 of financial assets. Their expenses are $4,300 per month or $51,600 per year. That’s their target retirement income. It’s based on a determination to live precisely as they do now for as long as they can. They need a fix that keeps their way of life intact and allows for a good life after age 80, all within budget.
The financial problem is to find ways to increase their income in a fashion that is tax-efficient. The base of their retirement plan consists of two commitments: one, keep their house, their largest asset, until age 80 and two, keep their boat until they can sail no more. In one sense, this is a carefree life by the water plan. In another sense, it is a form of capital conservation with a termination date that could as well apply to others who are determined to drive their RVs as long as they can or to keep a cottage in a faraway place until, in old age, they figure that driving great distances is no longer practical.
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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Drew and Penny. He designed a two-stage solution based on taking out savings and income in a 20-year period and then, when capital has been spent, downsizing their $1,200,000 house by half to obtain more money for the remainder of their lives. This is a plan for the long-term.
Costs and benefits
Their plan has an unusual cost, Moran notes. The boat, with a market price of $125,000, has an appetite for cash. They spend $850 per month, $10,200 per year, mooring it, maintaining it and keeping its gas tanks full. They want to keep it as long as possible, but if they were ill or just too old to use it safely, it could be sold, its price added to capital and its costs shifted perhaps to long-term care.
The couple’s financial assets are in three accounts — TFSA, RRSP and taxable. Their income will be composed of draws from the accounts plus Old Age Security at $7,360 per year and Canada Pension Plan benefits of $714 per month for Drew and $987 per month for Penny, all starting at age 65.
The strategic problem is to maintain they way of life for the first two decades of retirement.
Cash flows
Looking at the accounts in detail, the couple’s $143,000 TFSA balance growing at three per cent per year after inflation would support untaxable income of $9,330 per year for 20 years to age 80.
The $535,000 combined RRSP balance growing at three per cent per year after inflation would support a taxable income of $35,960 per year.
Their $102,000 of taxable investments generating a three per cent return after inflation would produce a total annual income of $6,856 starting at 60.
We are leaving $10,000 cash uninvested in chequing accounts.
If we add up the various components of income from now to the time that both partners are 65, they would have $9,330 from TFSAs, RRSP payments of $35,960, and taxable income of $6,856 from non-registered accounts for a total of $52,146 per year. With splits of eligible income, no tax on TFSA cash flow and six per cent average income tax, they would have $4,131 per month to spend. That is below their present spending of $4,300 per month, but with small economies they would get by.
When both partners are 65, they could add CPP payments of $8,568 per year for Drew and $11,844 per year for Penny and $7,360 Old Age Security benefits for each partner. That would push total annual income to $87,278. With splits of eligible income and no tax on TFSA payouts and after 14 per cent tax on remaining income and restoration of TFSA payouts, they would have $6,364 per month to spend. What they don’t spend, they could save, adding perhaps $2,000 per month to their capital for travel or even a new boat.
The endgame
When they reach 80, though all investment income and capital may have been distributed, Drew and Penny would still have CPP, OAS and their home with a present value of $1,200,000. For more income, they could then downsize. If they extracted, say, $600,000 from the house and invested it at three per cent after inflation for 20 years from age 80 to their age 100, that capital would generate $40,330 per year. It would be surplus to their needs and could be used for care or, perhaps, for sailing on other people’s boats. The balance of the sale, 95 per cent of $1,200,000 less $600,000 or $540,000 could pay for a condo or small house.
This solution accepts the idea that Drew and Penny can keep their boat and pay its bills for two decades and then, if they still wish, keep cruising in ocean liners as passengers. It allows for maintaining their present way of life until age 80 and then, perhaps with savings from not consuming all income, a decision on whether to sell their boat or keep it. The solution is realistic in that it gives the couple more spending in early years and lets them reduce assets via downsizing later in life.
“This solution for a couple in love with the sea could be the same for others with a house and garden they want to keep until, in old age, tilling is too hard,” Moran explains.
Retirement stars: Four **** out of five
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