This BC Couple Should Cut Their $1 Million Rent and Invest in Dividend Stocks to Boost Their Retirement Cash Flow

Posted on by Duane Roberts

This section is presented

This section was created by the editors. The client has not been given the opportunity to limit or revise the content prior to publication.

by TD Insurance

Personal Finance Family Finance

They will withdraw nearly four times the property’s current income per year if they sell the proceeds and invest in dividend stocks

Publication date:

February 11, 2022 • February 11, 2022 • 5 minute read • 6 Responses This couple is heading into a five star retirement. This couple is heading into a five star retirement. Photo by Gigi Suhanic/National Post Illustration

Reviews and recommendations are unbiased and products are selected independently. Postmedia may earn an affiliate commission for purchases made through links on this page.

A couple, who we will call Sid, 60, and Adele, 58, live in British Columbia, along with their two children, ages 18 and 21. Sid works for a global engineering firm, Adele for a local government unit. They bring home $9,038 from their jobs and add $1,295 net of a $1 million rental home for a total net income of $10,333 per month.

This ad hasn’t loaded yet, but your article continues below.

The couple’s assets are approximately $3.8 million and they have only $43,000 outstanding on a mortgage on the rent. They are meticulous in their records, careful in their investments and thinking about their future. Their questions focus on the composition of their pension capital: $508,000 in shares in Sid’s employer and two future occupational pensions – $5,200 per month for Sid and $200 per month for Adele. They wonder what to do with the rent and how best to manage tax liabilities on their pensions and financial assets.

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC, to work with Sid and Adele.

This ad hasn’t loaded yet, but your article continues below.

An unprofitable rental

The first assignment is what to do with the $43,000 mortgage on the rent. They pay 2.87 percent or $14,232 per year, of which $1,287 is annual interest. This payload is deductible and decreases quickly. It’s a modest amount, but the bigger question is why keep the property?

It generates $15,540 gross rent minus $7,186 for property taxes, interest, insurance, and utilities for net rental income of $8,354 per year. Their equity is $957,000, so their return on equity is a modest 0.87 percent. That’s trivial and since they never lived in it, any profits from sales will be fully taxable. It is hardly profitable. Best move — sell it, Moran advises.

Sale of the $1 million rent after five percent sales and start-up costs and the discharge of the $43,000 mortgage balance would leave $907,000. They paid $270,000, so they should have a capital gain of $637,000. The property is jointly owned and at the current 50 percent withdrawal rate, the taxable profit is $318,500. That’s $159,250 for each. Sid’s income taxes would rise from $20,646 without the sale to $92,669, a boost from $72,053 for the year.

This ad hasn’t loaded yet, but your article continues below.

Adele’s tax could rise from $7,659 now to $69,348, up from $61,691. She has $75,243 RRSP space and could use all of this to protect her profits. If she did, she would cut her taxes by $33,572 to $35,776.

The proceeds from the sale would therefore be $907,000 less taxes of $72,053 and $35,776, respectively, net $799,171. They can get four percent from strong dividend stocks, $32,000 a year, which is nearly four times the real estate’s current income.

Pension Income and Expenses

Looking ahead to retirement spending, current spending of $10,333 per month will drop when $3,220 monthly savings and the $1,186 monthly mortgage and $294 property taxes are removed. That leaves $5,633 core spend to be supported.

Sid can expect a monthly pension of $5,200 from his company, Adele $200 a month from her employer. Neither is bridged or indexed. When Sid retires, he should receive $14,445 per year from CPP in 2021 dollars, and Adele $10,834 from CPP on her 65th birthday. Each receives full Old Age Security, currently $7,707 per year.

This ad hasn’t loaded yet, but your article continues below.

Their TFSAs have a current balance of $113,260 made up of contributions and valuation. They have $45,000 in unused dues space. They can use their money for additions. If they keep working for another two years and add $6,000 each year and the sum grows at three percent per year after inflation, their TFSAs will rise to $192,988 at retirement. That amount will support the payout of $9,766 per year until Adele’s age 90.

Their RRSPs total $217,984. Sid just added $13,600 to max out his RRSP for 2021. If Adele adds her $75,243 to offset the home sales tax, the total would be $306,827. If they work for two more years and add $13,600 a year, then with two years of three percent post-inflation growth, it becomes $353,950 at retirement.

This ad hasn’t loaded yet, but your article continues below.

This amount could support a taxable income stream, indexed to inflation of $17,910 per year until Adele’s age 90. Withdrawals can wait until each partner’s age 71 so that benefits can grow and compensate for the declining purchasing power of their occupational pensions.

Sid has $508,000 in taxable company stock. Their cost is $248,000 and their appreciation is $260,000. They receive $12,022 a year in dividends from those stocks. They can cash out and diversify, but that’s best done when their retirement income has fallen, reducing the burden and potential chargeback from OAS, Moran explains. This flow can start in two years.

The pair also have $188,823 in mutual funds and $65,456 in segregated funds. Seg funds guarantee a return of 80 percent of capital if held for ten years. The combined amount, including company shares, is $762,279. If this money is spent over 30 years from Adele’s age 60 to her age 90, it would support an additional $36,570 per year.

This ad hasn’t loaded yet, but your article continues below.

Taxes to pay

Before either partner turns 65, they would have annual retirement income of $62,400 from Sid’s pension and $2,400 from Adele’s pension, $17,910 from RRSPs, $9,766 from TFSAs, and taxable income of $36,570. That’s a total of $129,046. Assuming a split of qualifying income and an average tax rate of 17 percent, excluding TFSA income, and then returning it to cash flow, they would have $9,064 per month to spend.

Julia has tried to manage her affairs, but the costs of carrying debts and supporting her family weigh on her.

This Alberta chemist’s guilt is a fleeting part of the mix in retirement

The challenge and opportunity in making financial forecasts three decades before retirement is uncertainty. But this couple has a solid foundation to build on.

This couple in their thirties with a net worth of $390,000 has decades to save

Early retirement means that when inflation picks up, corporate pensions lose purchasing power and interest rates tend to rise.

The specter of inflation adds to the risk of early retirement for this young BC couple

Marty and Eve's retirement income would exceed their expectations, with one concern: life insurance.

This couple wants to retire at 60, but needs to save faster to get there

When Sid is 65, their income increases with his $7,707 OAS and $14,445 CPP to $151,198. If the TFSA cash flow is removed, the qualifying incomes are split and the average tax is 19 percent, and if the TFSA cash flow is restored, they have $10,360 per month to spend.

This ad hasn’t loaded yet, but your article continues below.

Finally, when both partners are 65, the household income would increase by Adele’s $10,834 CPP and her $7,707 OAS to $169,739. With a split of qualifying incomes and removal of TFSA cash flow, after 20 percent average tax and refund of TFSA cash flow, they would have $11,480 per month to spend.

The OAS chargeback, which begins to lower the OAS when total income, excluding TFSA payouts, reaches $79,845 and then takes 15 percent until all OAS is eliminated at approximately $129,750, will increase the couple’s income each by reduce the modest amount of $20 a year when both partners are 65.

Retirement stars: five ***** out of five

Financial item

This ad hasn’t loaded yet, but your article continues below.

By clicking the sign up button, you agree to receive the above newsletter from Postmedia Network Inc. receive. You can unsubscribe at any time by clicking the unsubscribe link at the bottom of our emails. Postmedia Network Inc. † 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300

Comments

Postmedia is committed to maintaining a lively yet civilized discussion forum and encourages all readers to share their thoughts on our articles. It can take up to an hour for comments to be moderated before appearing on the site. We ask that you keep your comments relevant and respectful. We’ve enabled email notifications – you’ll now receive an email when you get a reply to your comment, there’s an update to a comment thread you’re following, or a user follows comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

This post This BC Couple Should Cut Their $1 Million Rent and Invest in Dividend Stocks to Boost Their Retirement Cash Flow

was original published at “https://financialpost.com/personal-finance/family-finance/this-b-c-couple-should-ditch-their-1-million-rental-and-invest-in-dividend-stocks-to-boost-retirement-cash-flow”

Related Posts