FP Answers: Can I retire on $48,000 a year at age 43?

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Personal Finance Family Finance

This will be tight, but you can do it, experts say

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February 17, 2022 • February 25, 2022 • 4 minute read • 6 Responses Your defined contribution pension is secured in Ontario until the age of 55. Your defined contribution pension is secured in Ontario until the age of 55. Photo by Getty Images/iStockphoto Files

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By Julie Cazzin, with Allan Norman

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Q: I am 43 years old and now want to retire on $48,000 net per year. I have worked for 19 years and earn $95,000 a year. My investments include three rental properties worth $1.4 million with net incomes totaling $38,000 per year. I have a primary residence of $700,000, a Registered Retirement Savings Plan (RRSP) worth $90,000, a defined contribution pension (DC) worth $60,000, and $20,000 in savings. All homes have mortgages. Do I need to sell real estate to achieve my goal? And do I have to pay off a mortgage debt before I retire? † Achille

FP answers: Achille, this will be tight, but you can do it.

Let’s look at: RRSP withdrawals, claiming the Capital Cost Allowance (CCA), the cash dam strategy and a combination of the first three, as well as transferring your mortgage to a line of credit (LOC), selling your house and renting an apartment .

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Modeling your desired scenario will leave you with an income shortfall of $25,000 per year until age 64, assuming you want an annual income of $48,000 after taxes and mortgage payments, indexed at two percent.

After age 65 and then age 73, you will have an income surplus of $15,000 and $23,000, respectively. That’s because you receive your reduced Canada Pension Plan and then because your mortgages have been paid off.

You also risk dying with too much money, so we need to put in some of that future income today so you can enjoy a comfortable lifestyle.

First, let’s try withdrawing from your RRSP to close the income gap. Your DC pension is fixed until you are 55 (Ontario). After that, you can move 50 percent of the total value to your RRSP. Your RRSPs will make you 46 years old, so RRSPs alone will not suffice.

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What if you claim the CCA on your rental properties?

Each year you can deduct part of the building (not the land) on rental properties from your income, up to four percent of the original cost less the amount already declared. The exception is in the first year the property is purchased, when you can claim up to four percent on just 50 percent of the property costs (not the full 100 percent).

I estimate you can claim a $26,000 CCA in 2022. That’s the amount you can deduct from your income, saving you $6,000 in taxes. Or, put another way, that’s $6,000 less you have to make up to get $48,000 after tax.

You must understand the CCA “recapture” rules. If the building has not depreciated in value by the time it is sold, you must add up the amount of CCA claimed. If you claimed CCA in 2022 and then sold the building in 2023, you’ll need to add the $26,000 CCA claim to your income. If you’re still in the same tax bracket, you’ll pay an additional $6,000 in tax.

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Claiming the CCA can be beneficial if you are in a high tax bracket. Most people would invest the $6,000 tax refund so that the $6,000 investment will grow enough to make up for the recapture by the time you sell the rental property.

In your case, Achille, if you plan to keep your rental properties, you may prefer to use the tax break to support your current lifestyle and worry less about future taxes.

But if you just claim the CCA, you won’t get to $48,000.

How about trying the cash dam strategy? Again, this works better if you had higher taxable income.

The money dam can be used by owners of companies that have not been established as well as rental properties.

The goal is to convert your home mortgage into a tax-deductible line of credit (LOC). You do this by using your rental income to pay off your home mortgage and using an LOC to pay the rental costs. The interest on the LOC will likely be tax deductible.

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The tax savings on the cash dam strategy still aren’t enough to get you to $48,000. But this strategy shows that if your mortgage converts to an interest-only LOC and you don’t pay off your mortgage, you’ll get much closer to your income goal.

No

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Does it matter if your mortgage is no longer repaid? Do you need to withdraw money from your RRSP, pay taxes and then pay off your mortgage? This is a way to bring some future equity back to today.

Okay, but even if you combine all three strategies, you won’t come up with $48,000.

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Converting your mortgage into a LOC helps, so what would happen if you sold and rent your home for $20,000 a year, and used the five percent invested return to fund your lifestyle?

That works. It’s almost perfect because you’ll have $48,000 a year, indexed at two percent, after taxes and mortgage payments, and your final estate value will be about $6.5 million in actual dollars — or $2.5 million in today’s dollars. You can watch this video for more information.

Don’t like selling your house? You can just work for a few more years.

Allan Norman, M.Sc., CFP, CIM, RWM, is both a certified benefit financial planner at Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This comment is intended as a general source of information and is intended for residents of Canada only.

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