Suzanne* faces a dilemma and a deficit retirement budget. To continue to travel, the 71-year-old retiree could sell her condo and take advantage of her net assets, but she would then have to relocate at a high price. In his region, “the cost of a rental similar to [son] current condo is between $1,800 and $2,000 per month,” she notes.
The situation
“I want to know if it would be advantageous for me to remortgage and even to get a larger mortgage margin to take advantage of the equity on the condo right now. »
Suzanne lives alone and her retirement income is limited to the Quebec Pension Plan (QPP), the Old Age Security pension (PSV) and the Guaranteed Income Supplement (GIS), which total approximately $21,200.
His savings consist of the $70,000 in his retirement savings plan (RRSP), which has just been transformed into a registered retirement income fund (RRIF). The mandatory minimum withdrawal at age 71 adds some $3,700 to his income.
“I don’t have a TFSA [compte d’épargne libre d’impôt] either, because I don’t put aside, I spend, she says laughing. I am at harvest age, not seed age. »
Her annual expenses are rounded up to $40,000, including the annual trip to Europe, to which she devotes $7,000 to $8,000 a year — “just a trip, but a nice trip!” “, she specifies.
“I know that I don’t have another 10 years to be able to do this kind of trip, physically speaking. My goal is to try to enjoy it as much as possible while I’m still in good shape. »
To reach it, she has drawn on her mortgage line of credit in recent years, which now peaks at $66,000.
Until recently, she accepted small assignments as a self-employed worker.
“I had small incomes, but now I’m fully retired,” she says. Above all, it kept the neurons occupied, because I continued to tap into my mortgage margin. »
In addition to the mortgage margin, his condo, worth $400,000, is burdened with a mortgage of $40,000.
Living there costs him about $800 a month, including condominium fees and property taxes. On top of that, she spends $184 per month paying off her mortgage (2.69%) and $304 on her line of credit (6.9%).
The mortgage loan must be renewed next February, with a sharp increase in the rate.
She doesn’t want to dip too much into her RRIF, because of the tax on withdrawals and their impact on the GIS. “If we cash in RRSPs,” she says, “we’re missing the boat. »
But she wants to fly.
“I have children who are quite well off financially, so I don’t have to worry about leaving them an inheritance. And they don’t ask me to either. They strongly encourage me to take advantage of it! »
But how much?
Numbers
Suzanne, 71 years old
Revenue
QPP : $7700
PSV : $7486
GIS : $6000
RRIF withdrawal : approximately $3,700 (mandatory minimum withdrawal at age 71)
Annual expenses : $40,000 (including a trip of $7,000 to $8,000)
RRIF : $70,000
apartment
Value : $400,000
Mortgage balance : $40,000
Mortgage line : $66,000
The answer
With a budget deficit of $15,000, a miracle was needed.
Émile Khayat tried everything to achieve it.
“It’s a reality that affects a lot of people,” observes the financial planner and senior regional manager at TD Wealth Management. “Many retirees dream of a lifestyle based on ‘merit’ and not on their real means. »
And yet, he announces a surprise: “She will be able to travel to Europe every year until the age of 77. »
With some compromises and some effort, however.
PHOTO ALAIN ROBERGE, LA PRESSE ARCHIVES
Émile Khayat, Financial Planner and Senior Regional Manager at TD Wealth Management
“It takes two things,” he says. You have to get the money that the condo is currently worth and use it intelligently, investing it and then controlling the withdrawals. And all that, of course, has to be planned, it’s calculated, it’s measured. »
The easiest and most effective method of recovering the equity in the property is to sell the condo. For the sake of conscience, Émile Khayat however considered other hypotheses, such as the reverse mortgage. “Programs like CHIP go up to 55% loan-to-value and charge rates of 8% to 9% as well as set-up fees of around $2,000,” he observes. It’s not very interesting for her. »
The avenue of an increase in the home equity line of credit also leads to a dead end.
“We would have encountered two problems. First, insufficient funds after five years, because Suzanne would have to withdraw between $15,000 and $22,000 per year on this margin on which she already owes a certain amount. Moreover, her total debt on the condo is $106,000 and she could not envisage borrowing more than 50% of the value of the condo, considering her level of income. »
Sale of the condo
By selling her condo immediately, Suzanne can pay off her mortgage debt and invest the balance of the sale proceeds, $212,500 in non-registered investments and $81,500 in TFSAs.
“For the placements, I have planned two sequences,” says Émile Khayat.
During the first decade, he offered a portfolio composed of 65% fixed income and 35% equities. “I applied a rate of return of 4.5% because right now, you can have 4.5% in guaranteed investment. Even in the long term, it is possible. »
“Afterwards, I plan to lower this rate of return because she could become more and more cautious in her investment choices. »
And in his travel choices. This decline corresponds precisely to the time when she will have to reduce her travels.
“Disbursements at retirement would be made primarily from the non-registered investment account as well as the minimum withdrawal from the RRIF,” he continues. Suzanne would start disbursing the TFSA from 2031, at age 80. »
During the first years, these new revenues would lead to a reduction in the Guaranteed Income Supplement, however, despite Suzanne’s reluctance. “We have no choice,” he said.
The GIS will return to its current level when the non-registered investment account is nearly depleted, around its 79e anniversary.
Don’t get lost along the way
The itinerary proposed by Émile Khayat still requires a significant budgetary effort.
Starting in 2023, Suzanne will have to maintain a cost of living of approximately $46,800, including travel and accommodation.
The planner suggests that she find a place for rent of $1,450 to $1,500, which is $300 to $350 less than the $1,800 she expected. She will still have to cut $150 to $200 from her monthly discretionary expenses, “left, right, by reviewing certain expenses, by making the budget that she had perhaps not taken the time to do before.”
Suzanne would thus ensure several years of travel ahead of her, by extracting herself completely from debt.
“And despite that, we still manage to survive all of her funds, including the tax payable and the reduction in the Guaranteed Income Supplement, until she reaches 94,” says the planner.
“If it is well accompanied, it is doable, no problem for that. »
Accompanied? This is the key, indeed. Suzanne will need a financial travel companion. She will benefit from regularly consulting a planner or a budget advisor to help her maintain solid discipline and follow the itinerary of this planning without getting lost along the way.
* Although the case highlighted in this section is real, the first names used are fictitious.
Are you planning a project that requires a wise use of your money? Do you have financial problems?