Lifestyle | At 70, a couple is finally thinking about retirement

Pierre* and Ginette*, 70 years old, are thinking of retiring, but have no RRSP. Does their plan still work?

The situation

While Pierre* still works full time and receives an annual salary of $85,000, Ginette* looks after animals, which gives her $6,000 per year. The couple also began withdrawing their pensions from both governments.

Their two children in their mid-forties left the family nest a long time ago, are financially independent and have not had children.

“My wife and I are at an important turning point in our lives,” writes Pierre, who plans to reduce his working hours for two to three years before embracing full retirement.

Until now, the couple has never had a plan, says his son on the phone, who convinced his father to ask us for help.

Pierre was first an entrepreneur, then worked for a few years in construction before being hired by the government while Ginette focused on managing the home and the children.

“My father is tired, but has no choice but to continue working,” explains the son. However, he is in very good shape. He still wins Ironmans in categories younger than his age.

“My mother, on the other hand, has health problems. She is not interested in her finances at all. For her, it’s taboo and she says that whatever happens will happen,” says the son who is worried about his parents.

The septuagenarians currently live in a bungalow valued at $750,000, with a remaining mortgage of $250,000.

The couple has been renting one of the rooms in the house with a bathroom since 2011, the year they purchased the property, which earns them $500 per month.

“We are considering selling our house to invest the proceeds and become tenants in less expensive accommodation. The idea is to provide for our needs through the income generated by these investments,” explains Pierre, who, before making this decision, would like to have the opinion of a specialist.

Is the strategy viable? How much will she earn them to live on?

“Without a pre-established retirement fund, it is crucial for us to adjust our lifestyle based on our future financial resources,” explains Pierre.

The couple continues to put their savings into their Tax-Free Savings Accounts (TFSA) at the rate of $10,000 each year. But he recently had to empty the accounts to pay for new windows.

“What would be your recommendations for the management of our portfolio and the disbursement of our assets? », asks the septuagenarian.

Analysis

Sylvain B. Tremblay, financial planner, vice-president private management at Optimum investment management, analyzed the file.

First, he simulated the fact that the two septuagenarians would completely stop working this year.

“I made a disbursement scenario from 2024,” explains the planner. Both receive the Old Age Security (OAS) pension, the retirement pension from the Quebec Pension Plan and the man has the pension from his former employer.

“That’s a joint basic income of $41,784,” calculates Sylvain B. Tremblay. It’s also splittable income, so the total tax bill for the couple is around $3,000. »

Selling the house

Secondly, the financial planner simulated the sale of the property. Of the seven rooms in the house, the couple rents one with a bathroom and obtains an income of $500 per month. This rental corresponds to 21% of the property.

“If the couple declared this rental income and applied maintenance and interest expenses, this means that when the house is sold, they will have to pay tax on a portion of the capital gain. »

Pierre says he paid $260,000 for his house and did not do any major renovations.

If the house is sold for $750,000, the purchase cost of $260,000 will have to be subtracted from this amount. The gain on the house would then be $490,000.

“As we can assume that the couple declared the rental income and expenses, there would be 21% of this gain taxable. The tax payable would be calculated on $102,900 of gain and the tax bill would be $25,750. »

The inclusion rate is 50%, because the amount is below $250,000, specifies the planner.

How much money would the couple end up with? To get the answer, we must subtract $25,750 from the $750,000. From this balance of $724,275, we must still subtract the remaining mortgage of $250,000.

The planner chose to play it safe and use $450,000 in winnings as the amount to be invested.

In this retirement plan, Sylvain B. Tremblay removes TFSA contributions because, he says, it is no longer the time to save.

If Pierre is convinced that his annual lifestyle amounts to $85,000, the planner’s calculations show instead that it is $63,000 net of tax. If this amount is indeed the right one, Pierre and Ginette’s plan could work.

Filling the gap with investments

From the $450,000 in investments, they could make up what is missing to reach $63,000, considering that retirement income is $41,784.

“For the portfolio, I put returns of 5% gross, therefore 3% net, once the tax has been paid,” explains the expert. I advise them to have a portfolio made up of 60% fixed income and 40% in stocks. In this way, with an annual income of $63,000 net, indexed at 2%, the couple could live until age 92,” he maintains.

And if the returns are more like 4% gross, therefore 2.5% net, the couple can have this annual lifestyle of $63,000 until age 88. Income is indexed at 2%.

Without indexing, the portfolio will be empty at age 91.

Pierre and Ginette say they want to move to less expensive accommodation. Currently in their expenses, they are paying off a mortgage of $1714 per month. They will therefore be able to find an apartment with rent at this price. But it would be even better if they aimed for $1500 per month.

A rent of $1,500 would represent 29% of the couple’s net income for housing. “They would not be far from the recommended 25%. »

The couple says they want to organize their lives and their expenses according to the planner’s forecasts. Sylvain B. Tremblay advises them not to exceed an annual living cost of $63,000 net of tax, which corresponds to $5,250 per month.

Although they are not in the expert’s estimates, the federal pension income tax credit and the Quebec retirement income credit can also be used by Pierre and Ginette.

* Although the case highlighted in this section is real, the first names used are fictitious.