Jill has two children in their 20s and a cottage they want to keep in the family.Ashley Fraser/The Globe and Mail
Jill took an early retirement package last year at the age of 54 and has been living on that and her dividend income ever since. She’s afraid to spend her savings and worried she might need to find another job.
Jill has two children in their 20s and a cottage they want to keep in the family. Her principal residence is a duplex in which she rents out the lower floor on Airbnb. Her goal is to pay off the part of her mortgage that applies to her principal residence when it comes due in 2026. Her mortgage gives her the flexibility to divide the loan into different terms and rates. She also has a mortgage on the cottage property, which she rents out 70 per cent of the time.
She has substantial assets. “After my divorce, I had my home with 20 per cent paid off so I was starting over,” Jill writes in an e-mail. “I lived within my means, rented out my basement, then bought three rental properties over six years with 100 per cent borrowed money, converting them from single family to upper and lower duplexes. I held those properties until 2021, when it was a sellers’ market, and sold them.” This, plus investing with the help of her dad’s knowledge, played “a big part” in building her nest egg. It didn’t hurt that she was paid a very good salary in the past 10 years, Jill adds.
She also has more than $900,000 owing on mortgage and other loans. She has no pension or other fixed income and she’s worried about rule changes for short-term rentals that would affect her Airbnb income. Her retirement spending goal is $90,000 a year after tax until her residence mortgage is paid off in two years and $71,000 a year thereafter. She also asks about a tax-efficient plan to draw down her savings.
“Will I be able to stay retired or do I need to work longer?” Jill asks.
We asked Hannah McVean, a certified financial planner with Objective Financial Partners Inc., to look at Jill’s situation.
What the Expert Says
Jill’s net worth is $2.9-million, of which $1.8-million, or 62 per cent, is in real estate, Ms. McVean says. “That’s a high percentage from a risk-management perspective.”
When the rental and cottage mortgages come due in 2025, Jill hopes she can extend the amortization to keep the payments the same, the planner says. “Jill expects the two mortgages to be paid off by the time she is 72, far into retirement.” She has an extra $200 a month of flexibility in her budget to help offset higher interest rates, “but regardless, her expenses are highly exposed to interest rate risk in 2025.”
Jill is concerned about carrying the mortgage debt if she were to fall ill, “a fair concern with mortgages of this size,” Ms. McVean says.
Jill is considering severing a couple of lots from the cottage property to pay down the loan on it, which “could be an opportunity to repay a large chunk of the mortgage,” the planner says. “It would be important to review the tax impact if the property has appreciated in value.”
As well, “are the kids open to contributing to the cottage mortgage?” the planner asks. “Since the kids are so committed to owning the cottage eventually, could Jill discuss with them taking on some of the expense?”
The planner notes that Jill’s heavy reliance on Airbnb in today’s changing landscape could expose her to more risk. “There is a real risk here of an income shortfall if she’s required to switch to long-term rentals.”
In drawing up her projection, Ms. McVean assumes an average annual rate of return of 6.2 per cent on Jill’s all-stock portfolio – excluding her emergency fund – and an inflation rate of 2.1 per cent. She assumes Jill defers Canada Pension Plan and Old Age Security benefits to the age of 70 and lives to be 95. She also accounts for vehicle purchases.
Jill’s retirement projections do not include income from the duplex or cottage rental, and neither do the planner’s. Even so, Jill should consider how a change from Airbnb income to long-term rental income would affect the success of her retirement plan, Ms. McVean says.
Based on the above assumptions, “Jill will easily be able to meet her income needs throughout retirement with her government benefits and withdrawals from her portfolio,” the planner says. “In fact, she’d be facing a goal surplus of more than $1.9-million at age 95.”
Success, however, hinges on steady and reliable investment returns in the 6-per-cent range. “How would the projection be impacted if her portfolio fell in value by 25 per cent in Year 1?” the planner asks. “In this extreme case, Jill would be facing significant shortfalls starting at age 78.” If that happened she would have to cut her spending.
She could also consider a less aggressive investment portfolio, Ms. McVean says. “Assuming a 50/50 asset mix of stocks and fixed income, Jill would still face a shortfall, but at age 87,” she says. “A sustainable rate of spending in this scenario could be $67,480 a year in today’s dollars, which is about $3,480 less than the current plan of $71,000 a year.
“Jill should consider the impact of an aggressive asset allocation and/or poor investment returns on her retirement goals,” the planner says. “If everything works out, she could be set for life. But a sharp drop in assets in the early years of retirement – called sequence of returns risk – could significantly impact her ability to maintain her lifestyle.”
As for how best to spend her savings, the planner recommends drawing income from her registered retirement savings plan now. “Assuming she does get those higher return numbers, waiting to take RRSP/registered retirement income fund (RRIF) withdrawals until the minimums kick in at age 72 would result in significant Old Age Security recovery tax – known as a clawback – over time,” the planner says.
“Therefore I’d suggest prioritizing drawing the balance of her income needs – beyond what she draws from her non-registered dividends – from her RRSP in the early years of retirement, particularly up to age 70 when her CPP and OAS kick in.” However, Jill should be careful not to trigger too much RSP income: It only takes $21,000 of additional income, before tax, to catapult her marginal tax rate from 29.65 per cent to 43.41 per cent. Jill should draw from her non-registered portfolio to contribute yearly to her tax-free savings account.
Client Situation
The Person: Jill, age 54, and her two adult children.
The Problem: Can she afford retirement now or does she have to look for another job? How should she draw down her savings?
The Plan: Consider severing a couple lots from her cottage property to help pay off the mortgage. Ask her children if they are willing to contribute to the costs of carrying the cottage. Tap into her RRSP early to minimize OAS clawback. Consider shifting to a less aggressive investment portfolio.
The Payoff: A better idea of how to deal with financial challenges as they arise.
TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.
The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.
The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.
“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.
“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”
The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.
New listings last month totalled 15,328, up 4.3 per cent from a year earlier.
In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.
The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.
“I thought they’d be up for sure, but not necessarily that much,” said Forbes.
“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”
He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.
“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.
“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”
All property types saw more sales in October compared with a year ago throughout the GTA.
Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.
“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.
“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”
This report by The Canadian Press was first published Nov. 6, 2024.
HALIFAX – A village of tiny homes is set to open next month in a Halifax suburb, the latest project by the provincial government to address homelessness.
Located in Lower Sackville, N.S., the tiny home community will house up to 34 people when the first 26 units open Nov. 4.
Another 35 people are scheduled to move in when construction on another 29 units should be complete in December, under a partnership between the province, the Halifax Regional Municipality, United Way Halifax, The Shaw Group and Dexter Construction.
The province invested $9.4 million to build the village and will contribute $935,000 annually for operating costs.
Residents have been chosen from a list of people experiencing homelessness maintained by the Affordable Housing Association of Nova Scotia.
They will pay rent that is tied to their income for a unit that is fully furnished with a private bathroom, shower and a kitchen equipped with a cooktop, small fridge and microwave.
The Atlantic Community Shelters Society will also provide support to residents, ranging from counselling and mental health supports to employment and educational services.
This report by The Canadian Press was first published Oct. 24, 2024.
Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.
Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.
Average residential home price in B.C.: $938,500
Average price in greater Vancouver (2024 year to date): $1,304,438
Average price in greater Victoria (2024 year to date): $979,103
Average price in the Okanagan (2024 year to date): $748,015
Average two-bedroom purpose-built rental in Vancouver: $2,181
Average two-bedroom purpose-built rental in Victoria: $1,839
Average two-bedroom purpose-built rental in Canada: $1,359
Rental vacancy rate in Vancouver: 0.9 per cent
How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent
This report by The Canadian Press was first published Oct. 17, 2024.
