In Ontario, a woman we’ll call Linda, 48, is an administrator for a large corporation. Single, she brings home $4,870 from her job each month and nets $536 from three condo rentals with an estimated market value of $1.85 million. Her mortgages on rentals total $980,000. Her spending totals $2,834 per month. Real estate, including her home, make up 92 per cent of Linda’s total assets.

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Linda wants to retire in four years and live half the year in a warm place. Her job comes with a defined benefit pension. She can back that up with rental income and $221,241 in her RRSPs. Her goal is to make $25,000 per year after tax, which could be enough for some of the warm spots she has in mind, but first she has to pay off $39,200 of personal loans including a $20,000 home equity line of credit she used to buy her rentals. If and when to sell her own home, valued at $650,000, and when to start CPP and OAS are related issues. She should also plan to spend at least 153 days a year in Ontario to maintain eligibility for health insurance while she is away.

Current investments

Linda makes $250 per month in voluntary contributions to her company pension plan. Her spending is just $2,834 per month which is just 56 per cent of her take-home pay. She has paid off her own residential condo and she expects to sell her compact car when she retires. Diligent, she has estimated her retirement budget at $3,532 per month. The financial planning question is whether she can finance that for the length of time she has in mind.

Family Finance asked Owen Winkelmolen, a fee-for-service financial planner who heads based in London, Ont., to work with Linda in order to resolve her issues. “Modest spending and profitable investments make it possible for her to achieve early retirement,” Winkelmolen explains.

Linda’s real estate investing pays relatively little in current income. But the properties have appreciated by $424,000 in just four years. Nevertheless, she is highly leveraged and nervous about her total debt, which, including her personal loans, is just over $1 million. She also worries that her own discretionary investments in financial assets via an employer-sponsored RRSP are too small. Her worry is justified, Winkelmolen says.

Structuring retirement income

To add security to her finances and to make her early retirement plans more likely to work, Linda needs to reduce her leverage first and, secondly, grow her assets. If she makes $2,000 monthly payments on her HELOC, the loan will be gone in 10 months. Her remaining personal loan on which she has not made periodic payments, would be gone in another 10 months.

Linda plans to sell her three rental properties as mortgages come up for renewal. Her equity in them is $357,000, $355,000 and $158,000. That will reduce her leverage and liberate cash.

Selling the rental properties three years before age 65 is also wise because it will ensure that Linda can avoid the Old Age Security clawback that would be triggered by hefty capital gains. The clawback, which reviews the last two years, has a present trigger point of $79,054 in annual net income. As the properties are sold, Linda’s cash balances will grow, as will her taxes. Some of the gains can go to her Tax-Free Savings Account, which has a present balance of just $75. She should be able to start filling her TFSA at 50 when her personal loans are paid off. By then, the present contribution limit growing at $6,000 per year, should have risen to $81,500 less contributions already made.

Retirement income

For three years from 52, when she retires, to 56, when she can start her defined-benefit pension, Linda can tap her RRSP for living expenses. Her tax rate will be about eight per cent — higher if she adds capital gains on properties she sells. During this period, her original monthly living expenses would decline from $2,834 to $2,434 via the elimination of $400 in debt payments. Subtracting $536 in rental income would leave her with a balance of at least $1,898 per month that she would need to cover with taxable RRSP withdrawals and capital gains. We can estimate the taxable RRSP drawdown at $150,000 for the period with whatever she doesn’t spend kept as liquid savings. Linda can put properties on the market at one per year as conditions allow in the three year interval between the end of her employment income and the start of her pension. The sales sequence will be hers to decide.

Linda can downsize her own debt-free home at any time with no tax on gains. At age 56, she will start receiving her defined benefit pension of $14,606 per year.

At 57, Linda can obtain the proceeds of sale of the last rental property if not already sold.

Her pension, plus annuitized income from her RRSP and the non-registered savings she has accumulated from the sale of the properties, would give her pre-tax income of about $52,600, depending on the timing of the sales and how long that money has had to grow. She would be taxed at an average rate of 13 per cent, Winkelmolen estimates.

At 60, Linda can take CPP if she wishes at an estimated rate of $6,480 per year, driving total annul income before tax to $59,080 per year. At 65, she could add Old Age Security income, currently $7,362 per year, but would lose a pension bridge benefit of ­­­­­­ $9,019. Her pre-tax income would be $57,423 per year. After 15 per cent average tax, she would have $48,810 to spend each year. That works out to $4,070 per month. That permanent income is more than her estimated retirement budget requirement, $3,532 per month.

“The plan to quit at 52 is financially doable,” Winkelmolen concludes.

Retirement stars: 4 **** out of 5

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