The situation
The residential work is expected to cost $250,000 over two years. Ginette and Alain are seeking advice on how best to optimize the financing of this work based on their financial and tax situation.
At first glance, their financial and budgetary situation suggests that there is plenty of room for manoeuvre to prepare the financing of this work.
Essentially, their joint balance sheet includes about $760,000 in financial assets and $750,000 in real estate assets that are mortgage-free (main home and small condo in town).
As for their lifestyle budget, it is close to $120,000 per year, of which a little more than a third is made up of travel and leisure expenses.
These expenses are supported by gross income of approximately $208,000 per year. This income consists mainly of pension plan annuities and provincial QPP benefits, occasional work income and the first disbursements from their respective RRSPs.
“We are a fit and active retired couple in our sixties who travel a lot. We want to expand and renovate our main house while keeping our small condo in the city,” says Ginette in discussion with The Press.
But to pay for and finance this work on our home, we are hesitating between mortgaging one or the other of our residential properties. Or making withdrawals from our RRSP or TFSA accounts, while taking into account our financial and tax planning for the smooth continuation of our active retirement.
Ginette
The situation and questions of Ginette and Alain were submitted for analysis and advice to Louis Morneau, who is a financial planner and financial security advisor at the firm Aisance Gestion de Patrimoine, based in Brossard, on the South Shore of Montreal.
The numbers
Ginette, 63 years old
RRSP: $193,000
TFSA: $114,000
Savings account: $85,000
Income: $91,000 ($26,000 casual work, $65,000 retirement pension)
Alain, 64 years old
RRSP: $305,000
TFSA: $62,000
Income: $117,000 (retirement pension)
Non-financial assets
Primary residence: $500,000
Second home: $250,000
Vehicles: $120,000 (recent car, RV, boat)
Passive
Federal eco-renovation loan: $25,000 (interest-free over 10 years)
Current budget
Couple’s income: $208,000 (gross before tax)
Major annualized disbursements: $120,000
The advice
“The financial situation of this couple at the start of retirement is enviable. Their assets [financiers et immobiliers] and their income from annuities appears sufficient to support their current lifestyle until a very advanced age,” summarizes Mr. Morneau before addressing the financing of residential work.
PHOTO ROBERT SKINNER, LA PRESSE ARCHIVES
Louis Morneau is a financial planner and financial security advisor at the firm Aisance Gestion de Patrimoine, based in Brossard.
“It can be assumed that the couple’s cost of living will remain relatively fixed in the long term. In fact, it is unlikely that the couple will be able to allocate $45,000 a year for travel in old age. On the other hand, they can expect their health and personal assistance costs to increase over the years.”
That said, how could they finance the next renovation work on their main residence?
The first option analyzed by Louis Morneau can be summarized as follows: finance this work over two years using the financial assets in their registered TFSA-type savings accounts, as well as Ginette’s excess cash in her non-registered savings account.
TFSA-type savings accounts are advantageous because they do not have tax implications when withdrawing, making them an ideal solution for home renovations.
Louis Morneau, financial planner and financial security advisor at the firm Aisance Gestion de Patrimoine
“On the other hand, I advise Ginette and Alain not to make withdrawals from their RRSP accounts to finance the work. Because such withdrawals would be fiscally disadvantageous by increasing their taxable income, which would then result in a higher tax bill.”
What would be the best scenario for using their TFSA accounts and Ginette’s cash?
“In the first year of the work, Alain and Ginette could each withdraw $62,000 from their respective TFSAs, which would allow them to cover the first half of the estimated cost of the work. [environ 250 000 $]”The following year, Ginette could empty the rest of her TFSA, about $50,000, and add $76,000 from her excess cash in a savings account,” explains Louis Morneau.
In this scenario, he notes, “because of the use of these financial assets [CELI et liquidités] At the start of retirement, adjusting their long-term financial planning suggests an asset deficit of around $223,000 by age 88.
To fill this foreseeable “deficit”, Louis Morneau considers that Ginette and Alain could then decide to resell their main home or their secondary residence, in order to have sufficient liquidity until the end of their lives.
This decision will, however, involve a tax consideration, recalls Mr. Morneau. “The sale of the principal residence would not generate any tax, while the resale of the secondary residence would be subject to a capital gains tax.”
New mortgage?
The second option analyzed by Louis Morneau for financing the work consists of taking out a mortgage loan instead of withdrawing funds from Ginette’s TFSA and savings account.
According to Mr. Morneau’s calculations, a $250,000 mortgage with a 5-year fixed rate of 4.59% and amortized over 25 years would involve payments of $1,400 per month.
On an annualized basis, this would represent an additional outlay of $16,800 on the couple’s lifestyle, which would then amount to nearly $137,000 per year.
“With this scenario of a mortgage loan, the payments of which would increase the cost of living for Ginette and Alain during their first years of retirement, the adjustment of their financial planning also suggests a retirement savings “deficit” of nearly $340,000 that could appear around their 85th birthday.e anniversary,” warns Louis Morneau.
To counter this risk of deficit, Ginette and Alain will be able to resell one of their real estate assets depending on their personal and tax situation over the years.
Ultimately, how do you choose between these two residential renovation financing options?
“Some people prefer to avoid any new mortgage, due to debt aversion, and choose to use their financial assets to avoid being tied to mortgage payments in retirement,” says Louis Morneau.
“Other people prefer to borrow in order to let their investments grow on the financial markets. But they are then betting on a rate of return higher than the interest rate on their mortgage loan.”
*Although the case highlighted in this section is real, the first names used are fictitious.