The situation
From the moment her second child reached the age of 3, Nicole returned to her post as secretary, which she never left. Since 1983, she has worked full time and enjoys four weeks of vacation per year.
“I’m on fire and I don’t take medication,” she says over the phone. I maintain my house myself, but you never know… I want to plan for the day when I will no longer be able to do so. »
When she thinks about retirement, Nicole becomes disillusioned. Will her meager savings be enough to ensure that she can continue to see the sun rise over the river? “Maybe the planner has some tips for me, she says, maybe she can find a solution so that I can keep my house. »
“In the private sector, we don’t have a retirement fund,” she continues. I have a sister-in-law who was a secretary in the public network. She stopped at 55 and traveled the world. I always knew I had to change employers, but when you love what you do…”
Rather than sink into regrets, Nicole rolls up her sleeves and works again. She manages to put aside $400 a month, which she uses to treat herself, except for the years when she has to change a window or repair the roof.
“It’s because I work that I can do this. But if I stop working, what will happen? How long will I be able to keep the house? »
Nicole is also considering the possibility of going from five to three or two days of work per week. She also rents out her house in the summer on Airbnb for $275 per night. Last year she made $3,000. However, renting generates expenses and taxes to be paid. His daughter welcomes him to her home during the days when tourists enjoy the house with a view of the river.
Could she use the reverse mortgage to keep her house? she asks.
“It’s really beautiful, where I live. I am from Montreal and there is not a day that I am not moved by the river. »
Numbers
Nicole, 70 years old
Salary : $37,000
Federal and provincial pensions: $18,220
RRSP: $50,000
TFSA: $4200
Mortgage : $83,000
House value: $275,000
House rental income: $3000
Fixed costs : $1075/month (electricity-mortgage-insurance-taxes)
Advice
PHOTO HUGO-SÉBASTIEN AUBERT, LA PRESSE ARCHIVES
Chantal Matos, Certified Financial Planner and Investment Manager
Chantal Matos, certified financial planner and investment manager, analyzed Nicole’s finances.
First observation: the septuagenarian knows her fixed costs, but these expenses which inevitably come up every month are only a glimpse of her real cost of living.
The planner, who is used to dissecting personal finances, therefore established Nicole’s cost of living by deduction. “The flat fee is $1075 per month. However, it is the rest that is important. We must determine what she spends on with the annual surplus of $4,800 that she manages to obtain by working and renting her house. »
Nicole seems to allocate $1,475 to food, clothes, hairdresser, outings, travel and gifts, observes the planner.
Currently, she earns $37,000 for her job as a secretary, plus pensions from both governments of $18,200. His total income is $55,200 gross and $40,000 net.
“So I calculate that she needs $30,000 net to live on if she keeps the same lifestyle without the annual surplus. »
According to the planner, Nicole must absolutely review her budget in detail to verify that she is indeed spending $30,000 net per year.
Two Options
If Nicole really wants to stop working, the first option is to withdraw $16,000 from the RRIF per year. Combined with government pensions of $18,200, they will provide him with gross income of $34,200.
“I used tax software to calculate the amounts she would have to pay,” explains Chantal Matos. She is entitled to several tax credits, including the federal GST, the provincial solidarity tax credit and the provincial tax credit for career extension. »
The tax credit for career extension is intended for workers aged 60 and over. With income below $36,590, Nicole will be entitled to the maximum amount of $1,650. Quebecers aged 60 to 65 can get up to $1,500 and those over 65, $1,650.
The maximum income to be entitled to the solidarity tax credit is $58,527 and the maximum amount of income for the GST is $49,166.
Currently, with her $55,000 in gross income, Nicole cannot obtain these tax credits.
Next year, she will have access to the senior assistance tax credit, which has increased, says the planner. With income of $34,000, she would get $1,500 in refundable credit.
In summary, if Nicole makes $34,000 gross, she will have $32,000 net. But after four years, she will unfortunately have to sell her house, announces Chantal Matos.
Assuming she sells it for $275,000, pays off the remaining mortgage of $50,000, she will have $225,000 left. She will then be able to disburse $15,000 annually up to age 95 and over.
She would still have $30,000 in income.
However, she will have to redo her budget by checking the cost of rent in her region. She will no longer have to pay taxes, but the rent will surely cost more than her current mortgage.
The second option is to continue working, but less, in order to keep your house longer. “She could get an annual income of $13,000 by working two days a week, suggests Chantal Matos. It disburses the mandatory annual RRIF minimum of $3,000, we add pensions of $18,200 and we arrive at $34,000. »
“We arrive at the same figures to get all the tax credits, specifies the planner. If she works and earns $13,000, she keeps her career extension credit, which is very interesting. »
“Of course the day she stops working, we come back to the same scenario. We have no choice but to sell the house,” warns the planner.
And the reverse mortgage?
“In his case, it’s not a good option,” says Chantal Matos. It could be financed for a maximum of 55% of the value of the property. We are talking about $151,250 less the mortgage of $83,000. Then there will be costs, including notary fees. To free up $70,000, it’s not worth it. »
Should she rent out her house in order to reach the $13,000 income she needs? She would have to live somewhere else and want to wash sheets and do housework several times a week.
According to Chantal Matos, the first step for Nicole is to check if $30,000 is the right cost of living. If this is the case, the septuagenarian will have to determine her priority: to retire and reluctantly sell her house or continue to work to keep it.
* Although the case highlighted in this section is real, the first name used is fictitious.