Lifestyle | Can we afford to renovate everything before retirement?

The situation

Spouses Daniel* and Louise*, both aged 60, wish to retire within a year.

Their main project at the start of retirement is to expand and renovate their chalet in order to make it their next primary residence. This project is estimated to cost $300,000 within two years. The couple plans to finance mainly with the net sum expected from the upcoming resale of their current main residence.

Fact to clarify: Daniel is the only owner of this house whose net resale value is estimated at $300,000. This is the market value balance of $415,000 after subtracting the mortgage balance of $115,000.

The chalet is a co-ownership in equal shares between Daniel and Louise.

In its current state, before renovations, the net value of the chalet is estimated at $235,000. This is the market value balance of $400,000 after subtracting the mortgage balance of $165,000.

As for their financial situation as pre-retirees, the savings habits of Daniel and Louise in the absence of retirement plans linked to their respective jobs allowed them to accumulate financial assets totaling 1.57 million in their retirement accounts. registered savings (RRSP, TFSA and CRI).

Their balance sheet of non-financial assets (real estate and vehicles) is also in a favorable position, with a net asset value of around half a million dollars ($880,000 in market value less $366,000 in debt balances). linked).

Furthermore, in their lifestyle budget, Daniel and Louise anticipate the imminent end of their employment income ($200,000 in total) to adjust their budgetary priorities at the start of retirement, when they will renovate their chalet in main residence.

“We plan to finance this work through the net gain obtained from the resale of the house. However, we also want to have the means to do great activities at the start of retirement, such as motorcycle trips and moving into a vacation property renovated to our liking,” summarizes Daniel during an interview with The Press.

On a budgetary level, Daniel and Louise anticipate that the reduction of expenses linked to their current residence after its resale (approximately $25,000 per year in mortgage costs, taxes, energy, maintenance, etc.) as well as the possibility of temporary housing at a lower cost during the work at the chalet ($1000/month in the vacant condo of a deceased relative) should allow them to reduce their lifestyle budget during their first years of retirement.

They plan this budget at around $70,000 per year, compared to their current lifestyle budget close to the threshold of $100,000 per year (excluding retirement savings contributions).

In this context, Daniel and Louise submitted their two main concerns as pre-retirees to the Lifestyle section.

On the one hand, how can they optimize their balance sheet (assets and liabilities) in order to properly prepare the financing of the work on the chalet to convert it into their next main residence, while taking into account their medium and long-term financial planning towards an advanced age?

On the other hand, how can we optimize the disbursement of their retirement savings assets, from a financial and tax perspective, based on their active retiree lifestyle budget? And this, taking into account the absence of retirement pensions before their 65^e birthday and their eligibility for full provincial QPP and federal PSV benefits?

Daniel and Louise’s questions were submitted for analysis and advice to Alexandre Beaulieu, who is a financial planner and financial security advisor at the firm DMA Gestion de Patrimoine, based in Brossard, on the South Shore.

Advice

“Before talking about optimizing their financial situation in the medium and long term, we must first review the budgetary situation of Daniel and Louise with the imminent end of their employment income and the significant real estate expenses – resale of the property. house, work at the chalet – during the years at the start of their retirement,” notes Alexandre Beaulieu straight away.

First, it considers the scenario of an inflow of funds in 2024 with the resale of the main residence, after repayment of the mortgage loan of $115,000 and the line of credit of $72,000, in order to pay the costs renovation of the chalet.

“I estimate this net inflow of funds to be around $228,000, or $72,000 below the planned budget of $300,000 for the work on the chalet. This difference will therefore have to be financed from the financial assets of Daniel and Louise,” anticipates Alexandre Beaulieu.

To do this, he advises them to make “a withdrawal from Louise’s TFSA with a view to postponing withdrawals from their registered RRSP and LIRA retirement savings accounts for as long as possible.”

Secondly, considering that the financial years 2023 and 2024 are Daniel’s last employment income, Mr. Beaulieu advises him to prioritize contributions to his RRSP while his tax rate (and value of credits tax) is even higher – around 45% – compared to that expected – around 36% – when the RRSP disbursement begins during the first years of retirement.

“Daniel should contribute up to $16,500 to his RRSP by February 29, 2024, to maximize his tax refund for the 2023 tax year. Then, he will be able to use this tax refund to repeat such a level contribution during the 2024 tax year,” suggests Alexandre Beaulieu.

This advice differs for the situation of the spouse, Louise.

“Because she is already in the same tax bracket [de revenu d’emploi] than that which is predictable on the withdrawals of RRSP and LIRA funds that she will have to make during her first years of retirement, the priority of contributions to her TFSA would be more relevant for Louise’s financial and tax situation”, summarizes Mr. Beaulieu .

As for financing their retirement lifestyle, after moving into their renovated chalet, Alexandre Beaulieu believes that Daniel and Louise have enough assets to support themselves until old age.

However, he notes, this long-term financial sufficiency will depend on two conditions.

On the one hand, to finance a lifestyle of around $70,000 per year until they are 96^e birthday, which is the average life expectancy considered in retirement financial planning, Daniel and Louise will have to maintain a return of at least 4% per year on their financial assets in the RRSP, TFSA and LIRA accounts.

“This projection of financial sufficiency is very sensitive to annual net investment returns. Thus, it would no longer hold if this average yield slipped to 3% per year,” warns Alexandre Beaulieu.

On the other hand, in order to optimize their retirement income towards their advanced age, Daniel and Louise should postpone the start of pensions from public retirement funds (provincial RRQ and federal PSV) as much as possible by first drawing from their accounts personal retirement savings (RRSP, CRI, TFSA).

Firstly, advises Mr. Beaulieu, “Daniel and Louise should give up applying for their provincial RRQ pension until they are 65^e birthday, which is the age of eligibility for the pension amount without penalty and indexed until the end of life”.

Secondly, as they approach 65^e birthday, and after the first years of their retirement lifestyle, Daniel and Louise should consider postponing the start of their pensions from the provincial and federal plans for a few additional years.

“If they were able to adapt to their new budget during their first years of retirement, deferring these public pensions until age 70 (federal PSV) and age 72 (provincial RRQ) would be even more beneficial for their security financial long-term at an advanced age until the end of their life, points out Alexandre Beaulieu.

“The maximum provincial QPP pension from age 72 is around $26,000 per year, and $23,250 per year in the case of the federal PSV from age 70,” explains Mr. Beaulieu.

“We are talking about nearly $50,000 in enhanced annual pension income for each spouse, which would be guaranteed and indexed until the end of their lives. »

In the meantime, concludes Alexandre Beaulieu, Daniel and Louise will have taken care, after their 65^e birthday, to convert their RRSP accounts into a new RRIF (registered retirement income fund) in order to benefit from the $2,000 tax credit on pension income.

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