A Gulf Island home for $300,000 and a small condo in Vancouver is a nice retirement scenario for Charles, who is 50, and his wife Florence, who is 52. But can they do it on a present family gross income of $3,000 per month based on salaries they take out of the packaging business they own? Their goal – retirement in 10 or 15 years.
"Our plan after five years is to sell our house in the burbs and get a house on a Gulf Island and a small condo in Vancouver. This is our dream. Do you think we could make it work?" asks Charles, not his real name.
The answer, in short, is not for now and not for a while.
"The couple just can't afford it yet," says Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C.
The easiest thing would be to sell their present house for $480,000 and sell Charles's business for $400,000. Assuming that they can achieve the $880,000 total, they would have money for an island house and a small condo in Vancouver with an estimated total cost of $600,000. That would leave them with $280,000 of cash less whatever they have to spend for selling costs and moving.
The $280,000 would be added to the couple's existing retirement savings of $260,000 for total financial assets of $540,000. Their $30,000 mortgage will be paid off in a few months. Then they can add the $2,100 per month they have spent on the mortgage to retirement savings. If all that grows at 3% over the rate of inflation , they would have $435,000 plus the $280,000 from eventual sale of the condo, in five years.
At 3% over rate of inflation, that capital would produce pre-tax income of $21,450 per year. At 60, each could add CPP at $11,520 reduced by 36% for early application to $7,372 for total income of $36,194. When each is 65, they could add two OAS benefits, currently $6,456 per year, for total annual retirement income of $49,106.
After tax at an estimated 20% average rate, they would have $39,285 for all expenses.
Waiting to 65 to start CPP would push annual income up to $57,402 before tax and $45,192 after 20% tax. That's $3,274 per month with early application for CPP or $3,766 per month with CPP beginning when each is 65. They would be able to cover their present expenses of $2,960 per month excluding mortgage expenses, but they would have two sets of real estate taxes to pay (though postponement of some property tax for retirees is possible in B.C.) and two homes to maintain. They would wind up with ample housing and little else, Mr. Moran says. For now, he says, the couple should continue to work and build savings for the eventual move to the Gulf Islands.
"This is a move that might happen in future, but that cannot work before age 65," Mr. Moran says. "There are unknowns, of course. Charles's business might fetch a much higher price than his estimate. They could win a lottery. But with present numbers, the couple's Gulf Island dream has to wait."
(c) 2012 The Financial Post, Used by Permission