Reid, 59, and Nikki, 62, have rented out three houses they own in an Ontario college town.Nick Iwanyshyn/The Globe and Mail
After 27 years of teaching abroad, Nikki, 62, and Reid, 59, retired to Canada in 2023, living off their investments and rental income.
Their circumstances are unusual in that while they were away, they rented out three houses they own in an Ontario college town. The yearly net rental income from all three is $24,475 after tax, Nikki wrote in an e-mail.
“When we returned to Canada, we didn’t want to sell a house to live in because we didn’t want to live in that city,” Nikki says. The couple didn’t want to buy a fourth property either, so they decided to rent a house in a different city for $3,400 a month.
“We use rents from our three houses plus our credit card for daily living,” Nikki writes. Two houses are fully paid for and they owe $76,000 on the third.
“We use our line of credit to fully pay our credit card at the end of each month. When our line of credit increases to about $40,000, we use our investments to pay most of it off,” she says. “There’s always a balance of around $20,000 on our line of credit. We don’t pay all of it because we make more money on our investments than we pay in interest.”
Their investments have performed exceptionally well over the past few years, in line with the financial markets, Nikki says.
The couple wants to know if and when they should begin selling off the rental properties to replenish their savings. While they don’t have a specific spending target, they wonder: “Will our investments be enough to sustain us until death?”
We asked Steve Bridge, an advice-only certified financial planner at Money Coaches Canada, to look at Nikki and Reid’s situation.
What the expert says
The couple has built an impressive net worth of $2.6-million, Mr. Bridge says. “The issue is not size, but structure. Roughly three-quarters is tied up in real estate, leaving only about 25 per cent liquid.”
That results in limited spending flexibility, concentration in one asset class, tax-inefficient income (since rental income is taxed at marginal rates) and capital that cannot easily be redeployed, the planner says. “The opportunity cost of illiquidity becomes more relevant as they transition into retirement.”
They’ve already indicated they intend to sell at some point, Mr. Bridge says. He offers two potential approaches: Begin selling one property per year to spread capital gains over multiple tax years, or draw down non-registered investments first and then sell the properties later.
“Because all properties are jointly owned, rental income and capital gains can be split 50/50, resulting in favourable tax treatment when sales occur,” he says.
Reid and Nikki have no children and no desire to leave a large estate. “Keeping the properties would mainly increase their estate value at the expense of current spending flexibility,” Mr. Bridge says.
Next, the planner looks at their investment portfolio, which he says would benefit from a clearer structure. A reasonable asset allocation would be 10- to 15-per-cent cash or near-cash, 40-per-cent fixed income and 45- to 50-per-cent stocks or stock funds, he says.
“When properties are sold, the invested proceeds should align with this allocation. This should give them an annual average rate of return of around 5 per cent,” Mr. Bridge says.
“I would also suggest either a GIC ladder or setting aside three or four years’ worth of spending needs in safe, accessible accounts to fund near-term withdrawals. This protects against being forced to sell long-term investments at depressed prices during market downturns.”
In years when they sell a property, the couple can reduce withdrawals from their non-registered investments. “That becomes an important annual tax-planning exercise,” the planner says.
Based on Mr. Bridge’s projections, their plan appears sustainable to age 95. Their estimated after-tax spending capacity is $99,000 to $114,000 annually.
“They would have a somewhat higher spending flexibility if the properties are sold, although having rental income narrows the gap,” the planner says. “Keeping properties increases the estate value but reduces spendable capital. Since estate maximization is not a priority for them, this becomes a lifestyle choice rather than a legacy one.”
Nikki and Reid are expecting very little in the way of Canada Pension Plan benefits and only about 60 per cent of Old Age Security. Deferring their benefits to age 70 would be advantageous in this case, the planner says. It increases lifetime after-tax income and allows for better tax-bracket management in the early retirement years.
Rental income is taxed fully at marginal rates. Non-registered investments benefit from preferential capital-gains treatment and dividend tax credits. “That distinction matters when designing withdrawal sequencing,” Mr. Bridge says.
They have no registered retirement savings plans because of years of non-residency, which limited the accumulation of contribution room.
Going forward, they should commit to contributing the maximum to their tax-free savings accounts each year, the planner says. “They should use the TFSAs strategically for growth assets. Given their lack of RRSP sheltering, maximizing TFSA room each year becomes especially important.”
Nikki and Reid are unsure of their target retirement spending, he notes, yet “this is the most important number in the plan.”
They should conduct a structured review of their monthly core expenses, annual irregular costs and lump-sum capital items, such as vehicle replacement and rental property renovations.
“For maintenance assumptions, I suggest one per cent of property value annually for detached homes and 0.5 per cent for condos, since fees offset some repairs,” Mr. Bridge says. “Clarity here increases planning precision dramatically.”
The couple’s current cash-management system is to spend on a credit card, pay it off using their line of credit and draw on their savings and investments to pay down the credit line when it hits $40,000. This guarantees an interest cost of 5.65 per cent because that is what they are paying for the credit line.
“It works during strong markets but it introduces risk during downturns,” the planner says. “If investments fall and they liquidate to repay the LOC, they compound sequence-of-returns risk.”
A simpler structure would be to maintain the line of credit at zero, fund their spending from rental income, plus cash reserves, and rebalance investments rather than borrowing. “Keeping the LOC at zero is effectively a risk-free 5.65-per-cent return.”
In looking at their spending, Mr. Bridge notes some categories appear to be underestimated. Travel at $2,400 annually appears modest, although possibly intentional, he says.
“Health care at $840 annually is more concerning. Without extended coverage, they are exposed to expenses for dental, vision care, prescriptions, travel insurance and physiotherapy, among other things. This is manageable while they are healthy, but risky if high-cost medication becomes necessary.”
They could increase their projected health care spending, buy third-party extended health insurance, or a blend of both.
Overall, Nikki and Reid are financially secure, the planner says. “With improved liquidity, disciplined asset allocation, annual TFSA maximization and elimination of unnecessary borrowing, they are positioned for a flexible and sustainable retirement.”
Client situation
The people: Reid, 59, and Nikki, 62
The problem: When and how should they sell their rental properties? Will their assets last them a lifetime?
The plan: Sell the houses one at a time – either soon, or after they have drawn down their financial assets. Keep a cash reserve rather than borrowing to finance living expenses.
The payoff: A clear idea of how much they can afford to spend.
Monthly net income: $6,630, variable.
Assets: Cash $3,700; non-registered index funds and bonds $634,000; her TFSA $34,600; his TFSA $34,000; three rental houses $1,910,000. Total: $2,616,300.
Monthly outlays: Rent $3,360; contents insurance $45; transportation $415; groceries $1,100; clothing $50; line of credit $110; gifts, charity $80; vacation, travel $200; dining, drinks, entertainment $390; personal care $20; club memberships $350; sports, hobbies $200; subscriptions $115; health care $70; phones, TV, internet $125. Total: $6,630.
Liabilities: Mortgage $75,800, 3.83 per cent, variable; line of credit $20,000 at 5.65 per cent. Total: $95,800.
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