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Robert and Elly need to make sure they have their own life insurance, says expert

Robert and Elly both have fixed pensions upon retirement, but until then they are in the special position of using $10,269 a month in after-tax income to subsidize two rental properties. Robert and Elly both have fixed pensions upon retirement, but until then they are in the special position of using $10,269 a month in after-tax income to subsidize two rental properties. Photo by Gigi Suhanic/National Post Illustration

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In Ontario, a couple we will call Robert and Elly, both 50, are raising three children, ages 16, 18, and 20. The parents are civil servants with a combined income of $12,000 per month, which they supplement with $1,420 in Ontario investment income. They all have a fixed pension upon retirement, but until then they are in the special position of using $10,269 a month in after-tax income to subsidize two rental properties. Their 16-year-old has a neurological disability and can never be self-sufficient, so special arrangements will have to be made to support her. They want to retire at 55 in five years.

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“We want to know if we can live in retirement on two pensions, dividends and rental income,” they say.

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

Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based company Exponent Investment Management Inc., to work with Robert and Elly.

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The good news in this case is that they have a $33,000 RDSP for their disabled child, to which they add $1,000 per year. Their house has a market price of $900,000 and each rent is worth $1 million. There is $286,000 in RRSPs, $190,000 in TFSAs, and $362,000 unregistered investments. Add $96,000 in RESPs and $25,000 for two cars and they have total assets of $3,892,000. Offsetting their assets are mortgages that go up to $1,345,780. Their net worth is $2,456,220.

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Current and Future Releases

Currently, the couple spends just $3,611 a month, not including savings and mortgage payments and taxes on the rental. When they retire, they want to be assured of a basic income plus $2,000 for travel and $1,000 to add to TFSAs. That brings their minimum monthly retirement target income to $6,611, excluding everything needed to support the rental.

At age 55, the defined benefit plans will yield $5,807 for Robert and $4,330 for Elly. That’s a total of $10,137 per month or $121,644 per year. After an average tax of 18 percent, they can keep $8,312 per month. That income will meet their retirement income target. If they have a deficit in the first ten years before they are eligible for early benefits from the Canada Pension Plan at age 60, they can supplement their retirement income with earnings from their unregistered account and keep their RRSPs until they reach retirement age. 70 are and minimum admissions. The pensions have combined bridging benefits of $1,068 ending at age 65, but will be replaced by old-age insurance benefits, currently $7,707 per year.

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Their two rental homes, worth $1 million each, make up the bulk of their capital. If they sell a property at a loss that was originally purchased for $585,000, then after sales expenses and capital gains taxes, they would walk away with a net profit of $320,000 that they can add to $362,000 of unregistered investments, bringing the total to $682,000.

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The other property generates enough rent to cover the costs. It can be held until the $678,885 mortgage is paid in full in 28 years, when the partners are 78 and then sold, with the proceeds benefiting their youngest child who they believe will be dependent for life. At that point, the RDSP, with a current value of $33,000, growing at $996 per year for 28 years at three percent post-inflation, will be worth $119,543. It could be added to the realization of their other $1 million rent when sold. Those funds could provide the basis for discretionary confidence in its favour.

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The RESP family has a balance of $96,000. The two older children are no longer eligible for the Canada Education Savings Grant, which stops at 17. The RESP appears to be sufficient for the family’s needs.

Robert and Elly need to make sure they have their own life insurance policy, preferably a term to keep costs low and independent of their job-related life insurance policy. A joint and first-to-die policy tailored to their needs, with Kim as the beneficiary, would guarantee an income that is independent of other sources of income. A $1 million policy for a period of 15 years until parental pensions begin would be about $300 per month and could fund a discretionary trust for the child and contribute to other available benefits, as well as the proceeds of a registered savings plan for the disabled already in place.

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Retirement income

If Robert and Elly retire at age 55 in five years, Robert’s pension will yield $5,807 gross per month, including a monthly bridging of $668 to 65. Elly’s pension will yield $4,330 per month, including a monthly bridging of $400 to 65. That’s $10,137 per month or $121,644 per year. Their RRSPs with a current value of $286,000 and annual contributions of $12,000 combined will grow to a value of $397,175 over the next five years and then pay a taxable annual income of $16,682 through age 95. Their Total Assets TFSAs from $190,000 plus $6,000 per year each will rise to $285,883 in five years and then support $12,000 in annual tax-free payouts.

At retirement, assuming the sale of one rental home, total unregistered assets of $682,000 will grow three percent per year after inflation to $790,625. That amount would support an income of $33,210 for 40 years up to age 95. That sale would increase pre-tax income to $183,536.

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With qualifying income splits and 19 percent average tax on all but TFSA incomes, they would have $150,944 to take home. That’s $12,580 a month.

At age 65, the couple could add two OAS checks totaling $15,414 per year, a combined CPP income of an estimated combined annual value of $20,000, and lose their combined annual retirement bridges of $12,816 for a combined income of $206,134. With splits, no tax on TFSA cash flow and 24 percent average tax, with TFSA cash flow restored, they would have $159,541 per year before the OAS chargeback which currently starts at $79,845 per person and takes 15 percent of income, excluding TFSA cash flows over that threshold. The chargeback would cost $2,583 each. They would have $154,375 to spend after the chargeback. That’s $12,865 per month. A large portion could go to Kim’s trust.

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

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

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