Will this man have to sell his home to finance his retirement? – The Globe and Mail
7 months ago Comments Off on Will this man have to sell his home to finance his retirement? – The Globe and Mail
Bernie is 55 and single with no dependents. After being restructured out of a well-paying job in the health-care field, it took him 16 months to find contract work at half his previous salary. He now grosses about $48,000 a year.
Bernie has a house in Toronto with substantial equity and about $568,000 in his registered retirement savings plan.
“Will I have to sell my home to finance my retirement?” Bernie asks in an e-mail. “Will I have to work much longer than anticipated?” He hopes to pack it in at age 63 with an after-tax income of $45,000 a year.
He is currently running a monthly deficit that he finances by taking money out of his tax-free savings account.
Bernie enjoys his neighbourhood and wants to stay in his house as long as possible even though he considers himself house rich and cash poor. When he retires, he hopes to travel more, taking a couple of bike vacations each year.
“Have I saved enough for a comfortable retirement?” Bernie asks. He has no work pension and he worries that his contract might not be renewed.
We asked Warren MacKenzie, a principal at HighView Financial Group in Toronto, an investment counselling firm, to look at Bernie’s situation.
What the expert says
Bernie has a network of friends in Toronto so he would like to stay in his home for as long as possible, Mr. MacKenzie says. “There is longevity in his family, and Bernie believes that to be financially secure, he needs a plan that shows he’ll not run out of money before age 95,” he adds.
Bernie’s parents are in their 80s, in good health. If their capital isn’t used up with health-care costs, Bernie stands to inherit about $300,000 some time in the next 10 years or so. Hanging on to his house might depend on it.
In his plan, Mr. MacKenzie assumes Bernie lives in the house until he is 80, after which he sells it and rents an apartment in Toronto for $2,000 a month. He invests the proceeds.
The planner assumes Bernie’s house price rises in line with inflation, and that he earns a rate of return of 4.5 per cent on his investments.
He also assumes that Bernie renegotiates his mortgage so that he makes lower payments for a longer period of time (until he eventually sells),thus improving his cash flow.
Even with the inheritance, “the financial plan shows that Bernie will run out of money (savings) at age 92,” Mr. MacKenzie says. He would still have his government benefits.
If Bernie wants his savings to last to age 95, “one option is to look for a higher-paying job,” the planner says. Another would be to work until age 68. (He could retire at age 65 if everything went as hoped.) Bernie could cut his spending, but that would not make as big a difference as working a few years longer.
Bernie may be “house rich and cash poor,” but he enjoys his home and should not be too hasty to sell it, the planner says. “Working in his back yard is a major source of satisfaction for him,” Mr. MacKenzie notes.
“Unless it is essential to do so, I think it’s a mistake to sacrifice an enjoyable lifestyle in order to have more money in the bank. So for lifestyle reasons, he should only plan on selling the house if he can’t get a higher-paying job, if he can’t work longer or if he receives no inheritance.”
Bernie’s biggest worry is that his contract might not be renewed. If this happens and he can’t find other work, he should plan to sell and rent, “perhaps in a city where rent is less expensive,” the planner says.
“Bernie’s ace in the hole is the equity in his house,” Mr. MacKenzie says. “If everything goes as planned, he can retire in Toronto.”
Further out, Bernie worries about having to pay for health care, either in an assisted living home or a nursing home. He might not be able to afford it. Bernie could consider buying long-term care insurance, the planner says.
A policy paying $4,000 a month might cost $3,000 a year, and Bernie might have to work a couple of years longer to pay for it.
If he paid $3,000 a year for 30 years ($90,000) and needed care for 24 months at $4,000 a month, he would recover what he put into the plan, Mr. MacKenzie says.
The person: Bernie, 55.
The problem: Can he afford to retire in his own Toronto neighbourhood?
The plan: Consider looking for a higher-paying job or working longer, if possible. Renegotiate mortgage payments to reduce the monthly deficit.
The payoff: There are things he can do now to help determine how his future unfolds.
Monthly net income: $3,547
Assets: Cash $3,000; TFSA $25,000; RRSP $568,000; residence $650,000. Total: $1.2-million
Monthly disbursements: Mortgage $1,260; property tax $275; maintenance and repair $400; utilities, insurance, garden $275; car insurance $230; fuel $310; oil $40; maintenance $100; parking $15; groceries, clothing $375; gifts, charitable $45; vacation, travel $150; dining, drinks, entertainment $225; grooming $32; club memberships $100; sports, hobbies $50; subscriptions $15; other personal $100; doctors, dentists $40; telecom, TV, Internet $180. Total: $4,217 Deficit: $670
Liabilities: Mortgage $170,000 at 2.2 per cent.
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Will this man have to sell his home to finance his retirement? – The Globe and Mail}