Crucial Kitsilano Boomer Anecdote – “Selling her valuable home might be the best option for woman hankering to retire”

BC is on the cusp of the Boomer Retirement Years. The number of people turning 65 in any given year is about to almost double. A large number of those boomers are overdependent on RE for retirement funds, and will have to sell. This will result in a significant increase in RE supply and will apply downward pressure to prices. Falling prices may in turn increase the rate of retirees cashing out, as they see their retirement funds (aka market value of home) dwindling. Here is an anecdote from a boomer, reproduced in full because of its crucial relevance to the Vancouver RE market. -vreaa

This from Dianne Maley in the ‘Financial Facelift’ section of the Globe and Mail, 22 Jan 2010 6:06 pm

Hard choices, changes are called for : Selling her valuable home might be the best option for woman hankering to retire

January 20, 2010. Vancouver, BC. Ruth plans to travel when she retires. For Facelift. Photo: Laura Leyshon

“At 61, Ruth’s thoughts are turning to the day when she can quit her stressful job with its long hours and spend more time travelling, doing yoga, hiking and taking courses at the university. While she is active and in good health now, Ruth had a health scare last year. “An incident like that makes you think and reflect on what’s really important in life,” she writes in an e-mail.

What’s most important is being able to help her 21-year-old son, who graduates in July, to pursue a career in the theatre.

Ruth’s main asset is her house in the trendy Kitsilano neighbourhood of Vancouver, which she figures is worth $1.35-million. We asked Gina Macdonald, financial planner and portfolio manager at Macdonald, Shymko & Co. Ltd. in Vancouver to look at Ruth’s situation.

What our Expert Says If she continues to work until she’s 65, Ruth’s income will still fall short of her retirement goals if she continues to live in her Kitsilano home. Without paying off her mortgage, Ruth will need $59,000 a year after taxes, the planner estimates. That number would fall to $42,000 if the mortgage is paid off. Ruth’s two indexed pensions will only give her about $696 a month. She will be eligible for full Canada Pension Plan and Old Age Security benefits of $17,414 a year, which will raise her monthly income stream to $2,147, or about $26,000 a year. This does not even cover her housing expenses of $2,632 (mortgage, property taxes, insurance, utilities, telephone, repairs), Ms. Macdonald points out. As well, the interest rate on her 24-year, $230,000 mortgage could rise from the current 5.1-per-cent rate, requiring more than the $1,430 a month she currently pays. With the mortgage, her income shortfall is $2,770 a month, about $33,000 a year. Even without the mortgage, she’d be short about $1,353 a month, about $16,000 a year. The mortgage is clearly an obstacle. If Ruth continues to rent out her basement suite at $933 a month, the shortfall (with the mortgage) would drop to $1,837, about $22,000 a year. One option for Ruth is that she could apply for the B.C. Property Tax Deferral program, saving her another $458 a month and shaving the shortfall to $1,379.

Ms. Macdonald offers several possible solutions for Ruth to make up the shortfall. First, Ruth could withdraw money from her registered savings to generate enough income to stay in her home. She would need to take about $22,000 a year in order to get after-tax income of $16,548. (This, plus her pension income of about $26,000, would raise her income to the desired $42,000). At a 3-per-cent rate of return in her RRSP account, she could do this for up to 13 years before she ran out of money – and the mortgage still would not be paid off in full. At that point Ruth would have to sell her home. Other possible solutions include renting out more space in the house or even moving into the basement apartment until the mortgage is paid off or until she receives a possible inheritance. Alternatively, Ruth could downsize to a house that costs no more than $850,000, which would leave enough money to generate an income stream (with her other income sources) of about $50,000 a year. “The new house could have a basement suite to generate additional cash flow for travel goals and for big ticket replacements such as a new roof or new furnace,” Ms. Macdonald says.

Critical to Ruth’s success is a revamping of her investment portfolio, Ms. Macdonald notes. “A 100-per-cent equity portfolio is inappropriate for a 61-year-old woman nearing retirement with limited resources.” Given the relatively small size of Ruth’s RRSPs, Ms. Macdonald recommends a diversified portfolio of index funds because of their low cost and the diversification they offer. She also suggests a bond or GIC ladder, in which a portion of the fixed-income securities mature each year. Finally, Ruth has the capacity to save about $1,000 a month as long as she continues working, which she can use to replace her 17-year-old car with a new used one, catch up with her $10,000 in unused RRSP room, open a tax-free savings account and make repairs to her house.”

6 responses to “Crucial Kitsilano Boomer Anecdote – “Selling her valuable home might be the best option for woman hankering to retire”

  1. House repairs and maintenance = $85?

    HAHAHAHAHAHA! A bit on the low side. Ruth needs to sell. Having tenants sounds so easy too. This plan is fraught with risk, which a pensioner should have no part IMO.

  2. With a map of Italy in front of Ruth’s face, I think they’re missing a few more expenses. This financial planner needs to retake Planning 101.

  3. Just sell, buy a mansion in PEI and live like a Queen. Her savings will instantly last twice as long and she wouldn’t need to work another day till she kicks the bucket.

  4. Always amazing when people close to retirement still have a mortgage. When they got the mortgage didnt they do a bit of math and sa “wait, I will be 85 when this is paid off!”

    what the hell was the plan and who told them it was a good idea?

  5. Budget a bit flawed….up repairs (as mentioned above), why does she have life insurance? – son is 21….no need, need to add capital costs – costs to replace car, fix house, etc….conclusion still to sell house. Should take adv of stupid high current prices…downsize to situation w rental suite. Though trying to subsidize an offspring’s dream of working in the arts/theatre might be a sign of early-onset dementia… (joke, well, kinda…)

  6. Ruth should sell now, move to a much cheaper area, and retire as soon as feasible. There are many nice places in the world, if not in Canada, that she could live a decent life on the money she’d have. She shouldn’t assume she’ll make it to age 65.

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