Impoverished Millionaire: Needs to Face the Music


Andrew Allentuck

A retired B.C. music teacher would dearly like to stop teaching violin and begin her retirement in earnest. A retired musician who we’ll call Helga lives in British Columbia. At the age of 72, she feels poor. She has been able to cover her expenses with pension and investment income and by teaching music. Yet she feels trapped, unable to stop teaching and thus unable to retire completely. Ironically, she has substantial capital, including a house in B.C. and a condo in Austria that together are worth $810,000.

Helga’s income comes from Old Age Security, $540 per month, Canada Pension Plan benefits of $825 per month, Registered Retirement Income Fund distributions of $1,135 per month and teaching violin at $2,500 per month for a total of $5,000. After tax at an average rate of 20%, she has $4,000 to spend.

“I would like to retire from teaching music at the end of this school year,” Helga explains. “But I need the money it provides. I would like to spend more time in my condo in Austria. I don’t know where to turn.”

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Helga.

“She’s what I would call an impoverished millionaire,” Mr. Moran says. “She has total assets well in excess of $1-million. Her living expenses are low, she has no wish to leave a large estate to her grown children and she feels unable to retire. That her feelings and her assets are inconsistent is obvious.

She is, in fact, property rich and income poor. We can fix that.”

snapshot-violinRationalizing assets

“The first move ought to be to sell the Austrian condo and liberate its $110,000 value,” Mr. Moran says. Selling the apartment will not necessarily cut down on time Helga spends there. She can rent as need requires. The money liberated could earn, say, 4.5% in utility or pipeline stocks. That would be $4,950 of pre-tax income. The dividend tax credit would make that income mostly hers.

Next, sell the $700,000 house. Helga wants to spend as much as six months of the year in Europe. For that much time away from home, the B.C. house is not worth having. Moreover, it is much cheaper in Vancouver to rent than to own. If she did sell the house and invest the proceeds — we’re ignoring selling costs here — at 4.5% in dividend-paying large-cap stocks, she would have a return of $31,500 per year. The dividend tax credit would leave most of that income in her pocket. The income from the value realized from the two properties invested to yield 4.5% per year would be $36,450 before tax.

That move would cause her total income including CPP and OAS and her RRIF income to rise to $5,538 per month or $66,450 per year before tax with no revenue from teaching music. Various tax credits would leave her with low average tax rate of about 15% and make her after-tax income $56,483 per year or about $4,700 per month. That would be a large boost over her present income without counting music lessons. She would also capture and retain $630 per month she paid for property taxes and utilities, though some of that would be lost to taxes built into rents that she would pay as an alternative to ownership. Some utility costs for rented apartments would also trim her savings.

Revising income

Helga could raise her income even further. Assuming that she can get a 3% real return over inflation on her financial assets of $1.13-million to two decades to her age 95, she could spend income and principal at a rate of $67,900 per year. CPP and OAS would add $16,380 per year for a total pre-tax income of $84,280, though if she lived beyond 95, her investment assets would have been used up. Much of this money would be return of capital, which is not taxed, and stock dividends subject to the dividend tax credit. The average tax rate might be only 10% with this income composition, so that she would have $75,852 per year, or $6,320 per month, a huge boost to her present $2,500 income not including revenue from teaching. Moreover, given that much of this flow would be return of capital and not income, the Old Age Security clawback would not be a problem, Mr. Moran says.

One may object that selling both dwellings — in Canada and in Austria — would leave Helga at the mercy of inflation with the rents she pays in two countries edging ever upward. For an inflation buffer, she could buy stock or real estate assets via exchange-traded funds for Canada or Austria linked to various indexes and, if she wishes, hedged to the Canadian dollar or, once the euro recovers from its present difficulties, to that currency — which Austria uses. 

In the end, shedding two dwellings that make up 70% of her assets, investing the proceeds as suggested to generate $36,450 per year, and saving as much as $7,560 on utilities and property taxes for two homes adds up to about $44,000. That is spending money Helga does not now have. And that is why, though a millionaire on paper, she feels poor.

“The fix — to sell two dwellings and invest the proceeds — will let her live up to her means,” Mr. Moran says. “If she follows these suggestions, she will be able to live well without teaching.” 

(C) 2012 The Financial Post, used by Permission