As we get older, many people want to stay at home as long as possible. This often means adapting your home or even finding a new one more compatible with your needs. But that comes with costs. How to finance this type of project? Even if you have the necessary savings, it can be complex if your investment strategy is inconsistent with your needs.
The situation
France*, 66 years old, has been retired for a year. She lives alone in a two-story house. “The stairs are starting to be a concern and I would like to move to a single-story house suitable for an aging person with a walk-in bathtub, non-slip floors, gas fireplace, etc. », she lists.
France estimates that this type of house sells for around $500,000. She wonders if she can afford this purchase while having a lifestyle of around $40,000 per year, a little more than what she currently has. “Is it reasonable,” she asks, “if I don’t want to use up my savings before I’m 95? »
Another option would be to remodel her house: she estimates the cost of the work at around $150,000. “Can you help me see which solution would be the most advantageous? »
Numbers
France*, 66 years old
House: value of $280,000, fully paid
Pension from the Quebec Pension Plan (QPP): $630 per month, requested at age 60
Annuity from a pension fund: $2,100 per month, indexed to the cost of living
Old Age Security (OAS) pension: postponed to age 70
Registered retirement savings plan (RRSP): $141,000 with different maturities
Tax-Free Savings Account (TFSA): $88,000 with different maturities
Non-registered investments: $270,000 with different maturities
Checking account cash: $10,000
Debts: $0
Costly decisions
When Hadi Ajab, an independent financial planner and group savings representative with PEAK Investment Services, took a first look at France’s case, he thought the solution was so obvious given that she has the savings to finance his project that he did not see the point of making a newspaper article about it. Until he digs a little…
First, he asked if placements from France were available now. This is where things get bad.
PHOTO MARTIN TREMBLAY, LA PRESSE ARCHIVES
Hadi Ajab, independent financial planner and collective savings representative attached to PEAK Investment Services
“France has many guaranteed investment certificates [CPG] with a total of 55 due dates, he is surprised. This is very difficult to follow and, above all, it means that the vast majority of his money is not available to finance his project. »
Taking into account the deadlines, he notes that she would have to wait until June 17, 2031 to have enough cash to renovate her house while affording a lifestyle of $40,000 per year. “It’s an aberration in my eyes,” says the expert. His investment strategy is not at all suited to his needs. »
He also sees a tax issue. “The majority of what she holds in her non-registered investments are GICs that earn interest,” he says. However, interest is 100% taxable. But she has almost $40,000 in stock funds in her RRSP that give a 50% taxable capital gain. It would have been more advantageous to have these stock funds as non-registered investments and the GICs in your RRSP. »
Hadi Ajab also highlights the fact that she applied for her pension from the Quebec Pension Plan (QPP) at age 60. “She is penalized by 36% because of this decision: she would receive $1,070 per month if she had waited until age 65,” he explains. This difference of $440 per month is not negligible, especially since she did not need it since she was working part-time at the time. She also does not have any particular health problems that shorten her life expectancy. »
Since this year, it is even possible to postpone the QPP pension until age 72, which increases it by 58.8% compared to the amount expected at age 65.
According to the financial planner, these decisions that were taken show that France was poorly advised, or not advised at all. Fortunately, despite this, there is a way to realize your project.
The option to buy a new house
France seems to prefer buying a new property for $500,000. To carry out this project, she is short $220,000 if she sells her house for $280,000.
“In 2024, she will have $129,000 available if we look at what she has in her checking account, her TFSA and her non-registered investments,” says Hadi Ajab. Once the tax has been paid on the amount withdrawn, then approximately $20,000 in notary fees, transfer taxes and expenses related to the move, then allocating sums to achieve a lifestyle of $40,000 per year, he would remain about $90,000. »
With what she would get from the sale of her house, we arrive at $370,000. There would therefore be $130,000 left to collect.
“I asked a mortgage broker how much a person who earns $32,760 per year can expect to have in a mortgage loan if they have a good credit score and no other financial commitments,” explains the financial planner. It’s only $100,000. »
To obtain the necessary amount, she would have to increase her income. “She could do it by applying for her OAS pension [Sécurité de la vieillesse] which, postponed for one year, will reach $764.70 per month taxable, indicates Hadi Ajab. But it’s worth thinking about it because the OAS pension is increased by 7.2% each year if you defer it until age 70. The mortgage will have an interest rate of around 5%. »
France will subsequently have to consider the payment of its mortgage loan in its cost of living. “By seeking the help of a financial planner to make a careful disbursement plan, she could achieve this while having enough assets until the end of her days,” says Hadi Ajab. A healthy 66-year-old woman has a 25% chance of living to age 96 according to the Financial Planning Institute. »
However, he emphasizes that moving requires a lot of energy, that buying a new house comes with an element of unknowns and that it is also possible that she will have to carry out work there. “It’s doable, but there are a lot of elements, costs and constraints to consider,” he adds.
The option of renovating your house
The financial planner finds the option of renovating the house more attractive because it is less expensive. He advises France, if possible, to withdraw its investments over two years, i.e. 2024 and 2025, to reduce its tax rate. She would therefore need a mortgage of only $100,000, which would not require her to apply for her OAS pension now.
“With this avenue, she would have enough money to support her lifestyle of $40,000, keep a cash cushion, have $50,000 net for her renovations and pay her mortgage by following a disbursement plan that holds taking into account its needs and taxation,” says Hadi Ajab.
Additionally, since the OAS pension is increased by 7.2% per year until France reaches age 70 and is in good health, he would advise her to wait before applying for it. “This far exceeds the expected return on his investments,” notes the financial planner.
Reverse Mortgage
We have taken into consideration here that France has a good credit rating. But if this is not the case, or if she has for example guaranteed a loan, or if she leases a car, she will not be able to qualify for a mortgage loan of $100,000 or $130 000 $. So he would still have one option.
“This is the reverse mortgage, which has a higher interest rate than a mortgage loan,” says Hadi Ajab. Since her house is paid for and she is 66 years old, she could get $84,000 at once. She would not be required to repay this loan until the house was sold or she died. »
By also withdrawing unregistered investments, she would be able to carry out her project. “On the other hand, it’s an option that ends up being expensive,” says Hadi Ajab. This is something to consider if she wants to leave a legacy. »
But no matter what France decides to do, he insists on one point: “She must seek the help of a financial planner to develop a personalized disbursement plan in order to achieve her objective. »
* Although the case highlighted in this section is real, the first name used is fictitious.
Calling all
Are you planning a project that requires wise use of your money? Do you have financial problems?