In Vancouver, a chemical engineer we'll call George, 51, is thriving in his business. With his wife Jennifer, they spend weekends at their Vancouver Island home, often staying in their condo in Vancouver during the business week. George works for a small energy company and, as well, has a holding company through which he does consulting work. His gross monthly salary, $12,500, together with the $3,500 monthly gross salary of his wife, who is 61, gives them $192,000 a year and take-home income of $11,437 a month.
They have done well in decades of business, building up net worth of $2,156,465. They have striven for the usual things — security, some property and a pleasant life — but along the way, accumulated too much for the lives they really want to live, losing focus on the simpler life they prefer.
"I want to see what we can do to work less, eventually to shed property we don't need to live the life we want," George explains.
Their Vancouver Island residence, with a market value of $620,000, makes up little more than a quarter of their net worth, which is low for the people in the hot B.C. property market. Yet property is very much the core of their problem, for the condo and a $65,000 commercial garage and office space with an estimated value of $94,000 add up to a value of $1,164,000, about half of their total assets. Not only is that property an anchor, most of it will be unnecessary and unproductive when they are retired. Simplification of their assets, having fewer toys, is the foundation of the future they are planning.
They have other assets: a dozen mutual funds with heavy fees, numerous dividend-paying large-cap stocks, $237,200 of cash in a joint personal account and another $300,000 in their businesses. All that cash is earning nothing.
Family Finance asked registered financial planner Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with George and Jennifer. His road map for the move from active to passive management balances a process for getting a good return from assets while minimizing tax liabilities.
Their island home will be their retirement home when they make the move to leave their careers. The house has a $173,400 mortgage that is their only debt. Interest on the mortgage is not deductible. The easiest thing to do is to use some of their cash to pay off the mortgage. That will reduce living costs by $1,428 a month, the planner says.
A critical issue is whether to keep the condo, at least until they retire. They need a place to stay in the city when they work there. That's about 10 days a month. If they keep the condo, it's an expensive hotel room that ties up $385,000 of their capital. That money could earn as much as $20,000 after the dividend tax credit if invested in a public utility. Divide that by 120 days a year that they may use the condo and it costs them $167 per night. Moreover, since they own the property outright, there is no mortgage interest to deduct. George and Jennifer need to look at this cost and decide if they will keep the condo or sell it and free up a large chunk of capital.
There is an alternative: Mortgage the condo at today's low interest rates. They could then get cash, say 75% of its value, or $288,750. That could produce a nice return, depending on their luck in stocks, bonds or whatever they choose, but it also adds risk.
Neither has a capital gain, for the condo, which had been rented for a few years, became their principal residence after their tenant left. The couple paid capital gain taxes at that time. Their island house has no gain. There is, therefore, no tax issue in sale. The condo can be sold mortgage-free and the net equity rolled into their investment portfolio, Mr. Moran says.
Over a period of a decade or more, recovery is likely in a diversified basket of stocks. This move would probably be profitable, the planner says.
There is an alternative way to handle the properties. George will sell the garage at a $30,000 loss — that's the present market reality. He will sell the office unit for $94,000, what he paid for it. He and Jennifer could work a deal to increase financial assets by keeping both the house and the condo and adding to their debt by increasing the mortgage on the condo or remortgaging the house. The idea would be to seek a higher return on either or both properties by investing in other assets at a rate of return higher than the intrinsic cost of ownership of the home against which they take out a loan.
The 10-year age difference between George and Jennifer complicates income estimation in retirement. However, once George is 65 and their businesses are wound down, assuming no sale value for the companies that are really just wrappers for their own professional work, then if present assets continue to earn 3% over inflation estimated at 3% per year, Mr. Moran estimates the couple would have total investment income of $67,513 per year to Jennifer's age 95 plus $8,640 from George's CPP based on his earnings history; $10,368 from Jennifer's CPP based on her earnings history; and two Old Age Security payments of $6,456 each, starting when each is 65.
Total annual income would be $99,433. If the CPP and RRSP income were split, each partner would have about half that total income or $49,717, well below the trigger point for the OAS clawback, $67,668.
For the goal of a simpler life, the plan of selling one residential property, selling the garage and the office unit and reducing investment management costs should provide the retirement they want. "That retirement will be one in which their time will their own, not time that their complex businesses take from them," Mr. Moran says.
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