Bev, 40, Erik, 39, and their two children, 6 and 8.
To continue to rent out the family home they inherited or sell it to improve their lifestyle and enable them to retire early.
Because it’s not strictly a financial decision, the couple need to sit down and decide where they want to live, how long they want to work and whether it’s worthwhile to continue being absentee landlords absorbing a rental loss.
Once that decision has been made, they can get on with their lives and the financial planning necessary for Bev to resume her studies, the children to go to private school and the saving necessary to retire early if they choose to.
Monthly net income:
Bank accounts $76,587 (bequest); savings accounts $23,892; RRSPs $90,489; stocks $28,750; Bev’s locked-in retirement account $6,404; children’s trust $40,000; RESP $32,584; children’s stock portfolio $5,000; residence $275,000; rental property $750,000. Total: $1.3-million.
Employer pension plan $207; food and eating out $1,000; clothing $100; drugs, dental $20; child care $175; gym $66; miscellaneous $530; property taxes $266; house insurance $228; utilities $150; TV, telecom $220; maintenance $100; vacations $400; entertainment $20; auto expense $250; loan payment $84; life insurance $40; donations $45; RESP $500; gifts $50; kids piano, sports $360. Total: $4,811. Savings capacity: $709.
Line of credit $20,000; mortgage on Gananoque house $113,000. Total $133,000.
When Bev’s father died four years ago, he left her some money and the house he built for his family on the shores of the St. Lawrence River near Gananoque, Ont. Last year her brother, who was only 42, died of cancer and left her a bequest. Saddened and perplexed, Bev, who just turned 40, is torn between hanging on to her childhood home or selling it to benefit herself and her children. She and her husband Erik, 39, “find ourselves in the position of having more money than we could ever have imagined,” she writes in an e-mail. The inheritance from her father enabled them to pay off the mortgage and set up a trust fund for the two children, aged 6 and 8. The family is comfortably settled in a small town north of Toronto where Bev works in communications and Erik in sports. Occasionally, Bev imagines moving into the Gananoque home, but the children are already settled in school and her husband is happy in his work. She would like to quit her full-time job and perhaps take a graduate degree. If they sold her father’s house, they could afford an in-ground swimming pool and private school for their children. “In truth, I am not sure we are managing our finances in the best way since taking on all this extra money,” she writes. “Is it crazy to hang on to my family home when it loses money each year?” We asked Michael Cherney, principal of Michael Cherney Financial in Toronto, to look at the couple’s situation.
What the Expert Says
A big change in financial circumstances is a perfect time to draw up a new financial plan, Mr. Cherney notes. Yet the question – whether to keep or sell the house Bev inherited from her father – is not strictly a financial one.
Selling the house would free up enough cash for the couple to achieve all their goals, including retiring early, the planner says. To help with the decision, he prepared two projections, one in which they sell the house before retirement and the second where they keep it indefinitely.
If they keep the Gananoque home indefinitely, they will be able to retire at age 65 with an annual income of $70,000, or about 82 per cent of their pre-retirement income, he calculates. If they sell the property and work part-time, earning $25,000 between them for 10 years, they could retire a full 10 years earlier, at age 55, with an income of $75,000 a year.
Mr. Cherney’s calculations assume an inflation rate of 2.5 per cent, that they raise their annual RRSP contributions from $5,000 to $9,000 a year and that they reduce their registered education savings plan contributions from $6,000 to $2,000.
They already have about $33,000 in an RESP, “which is substantial for kids of this age,” he says. As well, they can gradually transfer the $40,000 in trust for the children into the RESPs ($5,000 a year for two children) to take advantage of the federal government’s Canadian Education Savings Grant.
Mr. Cherney also assumes they will earn an average annual rate of 5 per cent on their registered savings and investments and 4 per cent after tax on their non-registered accounts. If they work to 65, Erik would qualify for the full Canada Pension Plan but Bev would not because her income is lower.
Mr. Cherney offers three reasons to sell the Gananoque house now: The upkeep and taxes are high and are not fully offset by rental income; the real estate market may have peaked and prices in future could be lower; and it may be easier to manage the money from the sale than being absentee landlords.
He also offers a couple of reasons to sell later. They could keep the house in the family, at least for now. And the potential appreciation in value would be taxed at the capital gains rate – and perhaps could even be non-taxable through the use of the principal residence exemption.
However, the fact the property has been rented may limit any exemption, Mr. Cherney cautions. As well, they would have to use the property themselves, if only as a cottage, rather than continuing to rent it. Other tax planning opportunities may be possible if the exemption applies, he adds.
Bev and Erik should gradually shift their non-registered investments into their tax-free savings accounts, and then gradually withdraw the money when they retire. Having good-sized TFSAs would be especially advantageous if they decide to retire early, he says.
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