Mimi wonders if she should sell her properties to continue supporting her daughters as she plans her retirement.Aaron Hemens/The Globe and Mail
Mimi describes herself as a 52-year-old professional who lives alone and is supporting her two children through university.
“I need to make some decisions,” Mimi wrote.
She earns $210,000 a year working in education. Both Mimi and her employer contribute to her defined contribution pension plan, which is valued at $657,000, and she has a large, mortgage-free house with a rental suite in the university town where she works.
“The house has a huge yard and it is older, making it hard for me to keep it up,” Mimi wrote. The rental suite generates $1,580 a month. “The house is heavy, psychologically and financially. But it is beautiful!”
Last year she bought a condo in the city for her elder daughter to live in while she goes to university. The mortgage is $410,000.
Should Mimi keep the condo?
“Or, do I sell it all? Will I save more money by divesting myself of these properties than I would make by holding on to them, in the future?” she wrote. “I have my pension, but really that is all I have, so I need to be careful. I can’t see a clear solution.” Any sale or downsizing of her house would be several years out.
Mimi plans to retire when she is 65 with a tentative spending target of $100,000 a year after tax.
“How much support can I give my kids?” she wrote.
We asked Barbara Knoblach, a certified financial planner with Money Coaches Canada in Edmonton, to look at Mimi’s situation.
What the expert says
As a single parent, Mimi finds herself balancing her retirement planning with the educational needs of her two children, aged 22 and 18, Ms. Knoblach said. Both children are pursuing postsecondary education out of town, and Mimi hopes to support them through graduation so they aren’t burdened with student debt.
Mimi is committed to her career and intends to stay in her position long-term.
She owns two properties and has considered downsizing, but the local real estate market is depressed, according to Ms. Knoblach. Additionally, Mimi wants to keep the house as long as her children still come home for the summer.
“Mimi’s key concerns are how to support her daughters through university without compromising her retirement, and how to manage her real estate holdings in a way that supports her long-term financial well-being,” Ms. Knoblach said.
With an annual salary of $210,000, Mimi contributes 5.2 per cent of her earnings to her defined contribution pension plan, and her employer adds another 9.5 per cent, for a total of about $30,900 a year. This plan is her primary retirement asset.
Outside of her pension, Mimi has less than $150,000 across RRSPs, a tax-free savings account and non-registered accounts. She contributes $500 monthly to her TFSA. “The low value of this account suggests either inconsistent contributions in the past or possible withdrawals,” the planner said.
Mimi holds two registered education savings plans (RESPs) totalling $87,600, with $19,500 in cash and the remainder in a balanced mutual fund that has experienced recent losses owing to market volatility. “She draws about $18,000 annually per child from these plans but also provides additional financial support to them on an ad hoc basis, though the exact amounts are unclear,” Ms. Knoblach said. Mimi’s older daughter has two years remaining in her postsecondary program, while her younger daughter is just starting a four-year undergraduate degree.
Mimi’s monthly cash flow is around $13,000, about $11,500 from employment and $1,580 from rental income. Her documented monthly expenses are $8,500, leaving around $4,500 unaccounted for. “A good portion of these monies is likely used to support her daughters,” the planner said.
Financial Facelift: Is Preston, 39 and single, saving too much or too little to retire at age 58?
At the current withdrawal rate, the RESPs will fully fund both daughters through 2026. Starting in 2027, RESP funds will only partly support her younger daughter, and by 2028, the accounts will be depleted. This projection assumes a 5-per-cent annual return on RESPs and a 3-per-cent yearly increase in education costs.
“Because Mimi is already supplementing RESP withdrawals with additional, untracked contributions, there is a real risk that she will face financial strain once the RESPs are exhausted,” Ms. Knoblach said. “To avoid this, she should immediately implement a cash flow plan. By tracking all education-related spending and setting a fixed monthly budget for support, she can better assess what is truly needed and affordable.”
If cash flow becomes too tight, Mimi should consider allowing her younger daughter to take out a student loan. “This does not mean she is stepping away from her role as a supportive parent,” Ms. Knoblach said. “Rather, she will defer some of the financial burden to a time when her situation is more stable; perhaps when one child is financially independent or when real estate decisions have improved her liquidity.”
Mimi should also encourage her daughters to pursue scholarships, part-time work and other funding opportunities. “Helping them develop financial independence now will serve both them and Mimi in the long run,” the planner said. “Many preretirees continue to be financially responsible for adult children, which can be a serious drag on achieving retirement readiness, particularly for singles like Mimi, who must fund their retirement alone.”
Given the current financial pressures, Mimi should avoid making extra mortgage payments on the condo. “Preserving cash and establishing financial boundaries around education support are more pressing priorities.”
Should she sell one or both properties? Ms. Knoblach evaluated multiple scenarios to explore how real estate decisions might affect Mimi’s retirement outcome.
In the first scenario, Mimi retains both her home and the condo throughout retirement. She plans to retire in 2038 at 65 and will continue TFSA contributions at $6,000 a year, which will become her retirement assets. In this scenario, her projected after-tax retirement income will be about $93,400 annually, falling short of her $100,000 target. The condo mortgage will remain until 2050, when Mimi will be 77. This scenario will leave her with little financial flexibility in retirement.
A second, more favourable scenario involves selling the condo in 2030, after her older daughter has completed her studies. Assuming the condo appreciates with inflation, it could sell for around $634,000, with a mortgage of $365,000 remaining. After closing costs, Mimi could free up about $235,000 in equity. If this lump sum is invested in her TFSA – to the extent of contribution room – and in non-registered investments thereafter, it could boost her annual retirement income to $109,200 while simultaneously reducing her property maintenance obligations.
Another option is to downsize her primary residence in 2030. If she sells for $1.3-million after closing costs and purchases a smaller property for $900,000, she could use the $400,000 difference to pay off the condo mortgage. Her retirement income will be around $96,500 annually. Renting out the condo at market rate, which has not been factored into this projection, could further improve her cash flow, Ms. Knoblach said.
A fourth and financially advantageous scenario involves both selling the condo and downsizing her home once her daughters are financially independent. If she invests the freed-up equity, she could achieve an annual retirement income of about $122,900. This scenario may allow her to retire before age 65, provided she preserves the capital for her own retirement.
Client situation
The People: Mimi, 52, and her two daughters.
The Problem: Should she sell one or both of her properties? How much can she afford to help her children financially?
The Plan: Start keeping close track of her spending, including what she gives to her children. Consider downsizing the family home at some point.
The Payoff: A better understanding of the alternatives and how they will play out over the next few years.
Monthly net income: $13,065
Assets: Cash $30,000; TFSA $18,000; RRSP $94,000; non-registered stocks $35,000; RESP $85,000; condo $560,000; residence $1,250,000; DC pension $655,000. Total: $2,727,000.
Monthly outlays: Mortgage $2,490; property tax $400; water, sewer, garbage $175; home insurance $85; electricity $150; heating $200; garden $200; transportation $570; groceries $1,200; clothing $200 gifts $100; vacation, travel $500; dining, drinks, entertainment $200; personal care $200; club membership $60; pets $500; sports, hobbies $200; subscriptions $80; health care $100; phones, TV, internet $225; TFSA $500; pension plan contributions $200. Total: $8,535.
Mortgage: $410,000 at 5.4 per cent.
Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the persons profiled.
