Retiring is an insecure moment: you always wonder if you will have enough money. But when your situation is enviable, you sometimes have to learn to stop worrying and take advantage of what you have managed to accumulate during your working life.
The situation
Judith*, 65, is retired and has the Retirement Plan for Personnel Employed by Government and Public Bodies (RREGOP). Single, she is the mother of three children and has two grandchildren. She will soon sell her triplex, where she lives, for $600,000. His mortgage is $166,000 at 2.72% interest and it matures next year. She expects to pay approximately $24,000 in taxes on this transaction.
The new house Judith buys costs $336,000. She plans around $15,000 for the receipt, moving, notary fees, transfer taxes and new furniture and appliances.
With the mortgage on his triplex being $280 per week, his annual expenses were $47,000. She projects her budget will be $3,000 lighter in 2024 because of taxes and other expenses that will be reduced with her house.
Several questions come to mind on the eve of this great change. First, she wonders if she should transfer the mortgage from her triplex to her new house. Then, in good health, she believes she will reach 100 years old and wonders whether she will have enough assets to live comfortably until that age. To mitigate the risks, she is thinking of waiting until age 70 to apply for her Old Age Security (OAS) and Quebec Pension Plan (QPP) pensions. She is also considering taking out a life annuity of $100,000 now to secure her income.
Numbers
Judith*, 65 years old
- RREGOP: $15,746 in gross annual income
- QPP: $731 per month at age 65
- RRSP: $289,000, balanced portfolio ($8,000 in unused contribution room)
- RRSP: $23,000, Fonds de solidarité FTQ
- Tax-Free Savings Account (TFSA): $109,000, balanced portfolio
- Non-registered investments: $160,000, fixed income
- Guaranteed investment certificate: $5,000
Advice
If Judith asks herself many questions, the first thing to do, according to Simon Préfontaine, financial planner at Lafond Services Financiers, is to make a retirement projection. To do this, he considered that she was immediately applying for her OAS and QPP pensions and that she was not taking out a mortgage, so she would have approximately $59,000 left to invest once her house was purchased. . He also considered that Judith will live to be 100 years old, that inflation will be 2.1% per year and that the return on her investments will be 4.5%.
“Judith could spend $54,000 per year until age 100, whereas today, if we remove the mortgage and the $3,000 less in taxes and expenses, she has a cost of living of $30,000, assesses Simon Préfontaine. That’s a big difference. Additionally, she will leave a paid-for house to her children as an inheritance. »
Reduce your tax bill in 2024
Judith does not have to worry about running out of assets, but the financial planner still draws her attention to the importance of reducing her tax bill this year since her taxable income will jump with the sale of her triplex.
“It’s important that she uses her $8,000 in unused RRSP contribution room for the year 2024,” he says.
PHOTO CHARLES WILLIAM PELLETIER, SPECIAL COLLABORATION
Simon Préfontaine, financial planner at Lafond Services Financiers
Moreover, Simon Préfontaine made his calculations considering that it is $24,000 in taxes that she will have to pay following the sale of her triplex, but he suspects that the amount could be higher. “Ideally, she would ask her accountant to do the calculation,” he advises.
Also, for his non-registered investments, if he has not already done so, he advises him to look at corporate mutual funds, or other similar tools designed to reduce the tax payable on future returns.
Apply for your government pensions
For the OAS pension and the QPP pension, it is certain that normally, for a person who thinks they will live to be 100 years old, Simon Préfontaine tends to say that it is a good idea to apply for them at only 70 years old. .
“But, in Judith’s case, it’s different because even if she asks for them at 65, she already has a lot more money than she spends per month,” he illustrates. And there is still a risk that she will not live as long, which would mean that she would have drawn more from her assets and there would be less left for her children and grandchildren. For this reason, I would be inclined to tell him to ask for them now. »
With these pensions and RREGOP, she would already have a lot of guaranteed income each month. “So, she doesn’t need a life annuity, but if she really wants it, she certainly has the means to buy one,” says Simon Préfontaine. She could then get advice on the different products from her financial security advisor. »
Free yourself from the mortgage
Now let’s look at the mortgage. “Of course, Judith could ask to transfer her mortgage to the new house, but probably her financial institution would charge her fees,” indicates Simon Préfontaine. All this, for a mortgage of $166,000 at 2.72% interest for one year. And it is certain that she will have to pay her notary. We would have to calculate whether it is really worth it. »
Judith could also decide to go for a larger mortgage, say $250,000.
“In this case, she would become a more interesting client for the financial institution which could pay her notary,” says the financial planner. This mortgage loan would, however, reduce his inheritance, but would allow him to benefit more from the fruits of his hard work. However, I don’t have the impression that Judith will make this choice, because I think she will already have difficulty spending what she has if she does not take out a mortgage. »
He therefore tends to advise him not to take out a mortgage loan, but to look at mortgage lines of credit. “Judith is not obliged to use it if she does not need it, but it would be a way to protect her against fraud,” says Simon Préfontaine. Homes without a legal mortgage are at greater risk. She would probably have to pay a fee to have a home equity line of credit, but she would have to view it as an alarm system that she puts on her house. »
Realize his dreams
Of course, several optimization strategies could allow Judith to raise more money, but in the eyes of Simon Préfontaine, this is not the most important. “She can spend $24,000 more per year,” he says. This is huge for her who has a current living cost of around $30,000. »
As a financial planner, he would like to have her in front of her and ask her what her goals are, what her dreams are? “Does she want to travel?” Are their children experiencing certain difficulties? Does she want to help them while she is alive? Does she also want to help her grandchildren directly? She can do all that. »
He even calculated that she could spend her unrecorded $160,000 now and still have about $48,000 per year until age 100.
“The biggest advice I have to give her,” says Simon Préfontaine, “is to make an appointment with a financial planner to discuss what is important to her and what she wants to do in the coming years.” . She needs to stop worrying and enjoy what she has accumulated. »
* Although the case highlighted in this section is real, the first name used is fictitious.