New retirees have chosen to sell their duplex to move into a condo. How should they handle the sale amount?
The situation
Luc* and Jeanne D’Arc*, 60 years old, have just retired. Officially, it was only Jeanne D’Arc who took it, because Luc had to go on sick leave. He was diagnosed with Parkinson’s disease.
The couple fears of not having taken enough registered retirement savings plan (RRSP) during their working life. Because retirement means projects. And new retirees want to make sure they can achieve theirs while they’re still healthy.
“For the moment, my partner receives disability benefits from his employer combined with those from the government,” says Jeanne D’Arc over the phone. But at age 65, employer benefits will stop and my partner does not have a retirement plan. There’s going to be a hole and that’s what worries us. My partner will have less income. »
The sixty-year-olds therefore decided to put their duplex up for sale and live in a condo.
“By going into a condo, our goal is to no longer have debt,” explains Jeanne D’Arc.
The couple has a $198,000 mortgage on the duplex. The rate is good: 2.64% until 2025. The listed price of the building for sale is $519,000. By selling, they will have to pay 50% capital gain, since they have a tenant.
As for the condo, $153,000 was paid for last May (it’s a condo in the region). The 5.5% mortgage until 2026 is $120,800.
“After doing some calculations, our annual cost of living goal is $100,000 gross for the family. This includes a travel budget of $12,000 net per year for 10 years. We also have renovations to do to the condo which are estimated to cost $15,000. »
“With the sale of the house, we also want to take the opportunity to buy an SUV for $45,000. We ordered it and it should arrive in May. »
“With all that, we would be very happy,” says Jeanne D’Arc on the phone.
Luc and Jeanne D’Arc wonder if they should use the proceeds from the sale of the duplex, after taxes, to pay off all their debts. Should they completely pay off the condo mortgage? Should they invest part of the amount? Or would it be a good idea to buy another condo and rent it out?
Numbers
Luc*, 60 years old, retired
- Employer disability benefits up to age 65: $4,070/month
- QPP at age 65: $1,268/month
- Retirement plan: none
- RRSP: $16,800
- TFSA: $12,000
- Unregistered investments: none
- Unused RRSP rights: $193,000
- Condo mortgage loan: $120,800
- Duplex mortgage: $198,000
Jeanne D’Arc*, 60 years old, retired
- Retirement plan: $4,280/month indexed
- QPP at age 65: $1,060
- RRSP: $37,000
- TFSA: $500
- Unregistered investments: none
- Unused RRSP rights: $56,000
Analysis
Pierre-Raphaël Comeau, senior advisor, financial planning, Laurentian Bank Securities, financial services firm, analyzed the file.
“With the economic situation, job cuts, company restructuring, it is really in the spirit of the times to reduce your living space,” notes the financial planner.
PHOTO MARCO CAMPANOZZI, LA PRESSE ARCHIVES
Pierre-Raphaël Comeau, senior advisor, financial planning, Laurentian Bank Securities, financial services firm
He welcomes this couple’s decision to reduce their lifestyle, to have less maintenance to do, because it will be more difficult as they get older with Luc’s situation. And by reducing their living space, they will have more time to enjoy life and travel.
The couple discussed the possibility of purchasing a second condo intended for rental. However, the financial planner is adamant.
I don’t see how the idea of buying a rental is a good idea, because the decision to sell the duplex to move to a condo is linked to lifestyle. Do they want to maintain a second apartment and take care of tenants?
Pierre-Raphaël Comeau, senior advisor, financial planning, Laurentian Bank Securities, financial services firm
At first glance, when Pierre-Raphaël Comeau looked at the couple’s assets, he feared that their desire to have an annual retirement budget of $100,000 gross would not be achievable. That their desire to travel to the tune of $12,000 per year is in danger. But by entering all the detailed figures into his specialized software, it works, he says. “The software wrote ‘Congratulations,’” he describes.
“It’s going to be possible, especially because Jeanne D’Arc has an excellent retirement plan from her employer. They will also have the income from the two governments and the capital that they manage to free up from the sale of the duplex. »
It’s even possible to increase spending by $450 to $500 per month throughout retirement, either to travel more or renovate more. At age 95, they will still have the value of the condo remaining.
Pierre-Raphaël Comeau indexed each year the $12,000 provided for travel.
The year the duplex is sold, the financial planner advises them to buy $40,000 in RRSPs each to cancel almost all of the tax payable on the capital gains and reduce their taxable income below $51,780.
Invest or pay off the mortgage?
Pierre-Raphaël Comeau compared the two scenarios proposed by Jeanne D’Arc and Luc. Should they use the capital gained from the sale of the duplex to pay off the condo mortgage or invest the money?
The planner used the Financial Planning Institute’s estimated returns of 4.25% for the balanced profile and an estimated prospective mortgage rate of 4.3%.
The real decision will have to be made when the mortgage matures in 2026, because the costs of breaking a mortgage before term are rarely advantageous, he maintains.
Looking at the results, Pierre-Raphaël Comeau notes that the final decision will not be mathematical.
“Whether the mortgage is repaid or the money is invested, the difference is marginal,” he believes.
“If they live to be 95, they will have $30,000 more. That’s all.
“The decision to be made should not be based on monetary benefits, but rather based on the degree of comfort with debt, which seems, in their case, low, as well as the degree of comfort with investments, which seems low also, and mortgage rates at renewal in 2026.”
“Since they don’t have a lot of investment, I would believe that they haven’t experienced many stock market crashes and stock market recoveries. Jeanne D’Arc also claims that she has no debt and that seems to be important to her. I would therefore advise them to opt for repayment of the mortgage in 2026.”
After paying all the notary fees, moving fees, purchase of new furniture and curtains, painting, purchase of the SUV and renovations, the planner suggests everyone take $40,000 in RRSP ($80,000 ) and put the rest into a tax-free savings account (TFSA), or approximately $96,000.
For the retirement plan to work, Luc takes his pension at age 65, while Jeanne D’Arc must wait until age 70 to receive the increased amount. She could even wait until age 72 for the Quebec pension plan (QPP).
The RRSP and TFSA are disbursed from 2030 when Luc’s disability insurance stops and Jeanne D’Arc undergoes the coordination of her retirement plan with government pensions.
In addition to tax credits for medical expenses, Pierre-Raphaël Comeau advises Luc to apply for the tax credit for disabled people (CIPH), the rules for which have been broadened in recent years and which makes it possible to obtain services . For her part, Jeanne D’Arc could request the federal caregiver tax credit and the provincial caregiver tax credit.
Pierre-Raphaël Comeau reminds us that a disbursement plan is lively and flexible. It is important to review it along the way to ensure you are on the right path.
* Although the case highlighted in this section is real, the first names used are fictitious.