Q: I’m 57 and hoping to retire this fall. I will receive an OMERS defined benefit pension of $44,000 plus a $10,000 bridge until I turn 65. I have a $75,000 RRSP and $300,000 in cash. I have no debts and am a lifelong renter.
I would love some tax-efficient and potentially income producing advice.
Also am I financially ready to retire?
Any thoughts on buying retirement property so late in life?
A: 68% of Canadians are homeowners according to Statistics Canada. Home ownership rates generally rise with age and peak at around age 65 at 75%, where rates plateau until around age 75 and decline thereafter.
As a lifelong renter, you have bucked the trend, Cathy, but it sounds like you’ve done well for yourself. Statistically, stocks have performed better than real estate over the long-term in Canada, so on a dollar-for-dollar basis, stocks may be a better investment than real estate anyway.
That said, most renters wouldn’t invest 100% in stocks and homebuyers benefit from the leverage that a mortgage allows (a 20% down payment means a 20% increase in your home’s overall value, which is a 100% return on your down payment). So real estate has its relative merits as well, beyond just the pride of ownership.
I think you need to ask yourself why you would consider buying now when it’s never been a consideration before. The financial component is only one part of this decision. Has renting been a lifestyle decision that you have enjoyed? Much like the car owner who prefers to lease a new car every few years, a renter may benefit from the resultant change in scenery when moving between rentals. Not to mention avoiding the headaches of home ownership.
From a financial perspective, buying a home outright with your savings now won’t allow you to benefit from the leverage of a mortgage. And depending on what city you are considering, you may be buying in at what could otherwise be considered a potentially high point in the real estate price market cycle.
That said, having stability going into retirement—where your landlord can’t force you out—could be a pretty appealing opportunity as you prepare for the next phase of your life.
Whether or not you can retire comfortably at this age and stage kind of depends, Cathy. The numbers you’ve provided are all great, but I’d say you need to consider things like your monthly spending, your life expectancy, if you expect any inheritances and so on. These are hugely important factors as well.
As a 57-year-old woman, you have a 25% change of living until age 94, so barring something extraordinary in your personal health or family history, I think you need to plan for a 30+ year retirement.
Factoring in your Canada Pension Plan (CPP) retirement pension (I’ll assume 75% of the maximum entitlement) and Old Age Security (OAS) pension, I figure you can comfortably spend about $5,000 per month or $60,000 dollars a year, indexed at 2% inflation, until age 94. This assumes a 4% return on your investments and further assumes that you continue to rent, with your rent payments included in your spending budget.
If you were to buy a home, things change considerably. Would you buy a home or condo? What would the ongoing maintenance costs be? Would you be open to borrowing against home equity or selling and renting at some point in the future? How retirement ready you are in a case like this requires a bit more scenario analysis, Cathy.
From a tax efficiency perspective, I think you’ll be in the second tax bracket paying roughly 15-20% average tax each year depending on your province of residence. You should be below the OAS clawback limit of about $73,000.
You should maximize your TFSA contributions and consider holding fixed income in your RRSP and Canadian stocks in your non-registered account to the extent you can. Given your large, indexed defined benefit pension, you should invest your $375,000 portfolio based on your risk tolerance, but consider a healthy allocation to stocks given your pension is like a big GIC.
There really is no right or wrong answer, Cathy, to whether you rent or buy. I make this assertion from both a lifestyle and a financial perspective. And whether or not you have enough money to retire comfortably depends on Cathy factors as opposed to Jason opinions. Retirement modelling can be personalized and help you assess retirement readiness. Use it as a tool to help make your retirement decision, but be mindful that it is just a guideline and that circumstances change over time.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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