Marc and Sarah's Story
Meet Marc and Sarah, a retired couple whose debt is starting to climb faster than their ability to pay it down. Marc, now 61, was packaged out by his company at age 55 and Sarah, now 60 recently retired from her part time job. With Marc leaving the workforce five years before his original retirement date it has left a shortfall of five years of income and vested pension plan. With the increase of municipal taxes from the rapid rise of value of their property they were faced with choices that were not part of their original retirement plan.
Marc and Sarah thought they had two options:
- They could start to draw on their RRSPs earlier than anticipated
- They could sell their home and downsize their principal property.
Fortunately, Marc and Sara contacted our team, and we were able to evaluate the two choices that they had come up with on their own and offer them a solution that was much more appealing to them and allowed them to maintain their lifestyle.
Let’s look at the drawbacks of their two strategies to support their retirement:
Fortunately, Marc and Sara contacted our team, and we were able to evaluate the two choices that they had come up with on their own and offer them a solution that was much more appealing to them and allowed them to maintain their lifestyle.
Let’s look at the drawbacks of their two strategies to support their retirement:
1. Early withdrawl of RRSPs:
- From their financial planner, Marc and Sara realized they would lose about 30% in taxes immediately.
- the rest of their RRSPs would go into very conservative investment returns. This is typically done when people start to draw on their RRSPs for retirement
- Once they start withdrawing their RRSPs, their tax-deferred savings account starts to lose its principal as they draw on the fund to support day-to-day living.
- A better strategy is to allow their RRSP fund to continue to grow tax deferred, the same way it did in the years leading up to retirement to a point in time where they may be able to withdraw the money more slowly at a favourable tax rate.
2. Downsizing:
- If Marc and Sara downsized, they would be leaving the house that they love and settle into a smaller place before they are ready.
- Even in a perfect market, they’re not likely to find anything for less than 70% of the value of their current residence. Add onto the cost of the house, real estate fees, moving expenses, land transfer taxes, and other ancillary costs related to moving, it adds up quickly to eat away at their profit margin.
- Another impact which is rarely considered when downsizing is that they will be trading a higher value appreciating asset for a lower price appreciating asset. Think of their home like this:
- If their house is worth $1,000,000 and it grows with the market at 10%, It has $100,000 of growth in its equity every year. Year 2 it is worth and $1,100,000 and increases by $110,000. This is the power of compounding growth. (This model is under perfect market conditions and the numbers in the real market may change but the principle is the same.)
- If they downsize their house to $700,000 and it grows a the same 10%, it only has $70,000 of growth per year. That $30,000 of difference can make up their retirement shortfall. So, Marc and Sarah asked how can they access that $30,000 a year and not move out of their home?
The Solution, a Reverse Mortgage:
- A reverse mortgage: With Marc and Sarah’s current age and home location our team was able to set up a reverse mortgage and they were able to access $375,000 of their current home value.
- They still own and live in their home, but by accessing of the equity in their home through a reverse mortgage, they can fund the shortfall of their current retirement plan tax free
- They get to stay in the home they love while the home grows in value with the market. Additionally, as the property grows in value they can continue to access more equity out of their home tax free!!!
They get to decide when they are ready to move, and not before!
