Can Lucas, 59, and Reena, 57, afford a $250,000 down payment for a duplex for their kids?

Lucas is 59 years old and makes $220,000 a year in sales. His wife, Reena, is 57 and makes $85,000 a year in research. They plan to retire next year and want to help their two children, both in their mid-20s, with housing.

Lucas and Reena have a mortgage-free home in a Western province and a rental unit with a mortgage that generates positive cash flow.

They wonder if it makes sense to pony up $250,000 for a down payment on a duplex for their children to live in. The children would then pay rent to Lucas and Reena.

Lucas and Reena both have work pensions, not indexed to inflation, and substantial savings. They also wonder how best to draw down Lucas’s big holding in his company’s stock.

Their retirement spending goal is $100,000 a year after tax, some of which would go to travelling more than they do now.

We asked Kaitlyn Douglas, a certified financial planner and investment adviser at Wellington-Altus Private Wealth in Winnipeg, to look at Lucas’s and Reena’s situation. Ms. Douglas also holds the chartered financial analyst designation.

What the Expert Says

“Normally, when I build a retirement plan for my clients, the idea is that it is not a ‘set it and forget it’ type of plan,” Ms. Douglas says. “We regularly review the plan with our clients, making adjustments each year depending on returns and distributions, while keeping tax efficiency in mind.”

Lucas has a non-indexed pension plan that will pay about $4,667 per month, or $56,000 a year, waiving all survivor benefits, the planner says. (Those benefits provide for a certain percentage of a pension – usually 50 per cent or 100 per cent – to be paid to a surviving spouse.) Reena has a pension plan that will pay about $1,250 per month, or $15,000 a year, not indexed for inflation, also waiving any survivor benefit. “These amounts are assuming they start their pensions immediately when they retire,” she says.

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Ms. Douglas assumes the couple will both retire in 2026, Lucas at age 60 and Reena at age 58, and that they will live to age 95. Inflation will run at 2.2 per cent on average and the average rate of return pre- and post-retirement is assumed to be 5 per cent. Their rental property is assumed to grow at the rate of inflation. She also assumes Lucas and Reena continue to max out their tax-free savings accounts for the remainder of their lives.

Ms. Douglas presents three scenarios.

Scenario 1: “Using our financial planning software and the above assumptions, the first scenario assumes retirement income of $100,000 a year after tax, or $8,333 per month,” the planner says. Lucas defers his Canada Pension Plan benefits until age 70 and Reena defers until age 68. They both take Old Age Security benefits at age 65. They hold on to their personal and rental properties for the rest of their lives. This scenario has 148 per cent goal coverage – meaning they would have 48 per cent more than needed – with $6.4-million of assets remaining, the planner says. The final tax bill would be about $323,000 or 5.03 per cent of the estate.

“Due to the client’s income and assets, rather than purchasing a rental property for their children to rent, we would recommend that the clients instead gift the $250,000 to the children to purchase the property themselves,” Ms. Douglas says. “This property could be the children’s primary residence, meaning there would be no tax implications on the sale of the property,” the planner says. “They could investigate converting this gift into a loan if they wanted to receive a monthly income.”

Scenario 2: This forecast assumes Lucas and Reena need more money when they retire – $135,000 a year net, or $11,250 a month, an increase of $2,917 over their target. With all other assumptions the same, goal coverage is 101 per cent with $1.8-million of assets remaining at age 95 and a final tax bill of $129,000 or 7.01 per cent of the estate.

Lucas and Reena are earning about $305,000 gross a year or about $190,000 net, Ms. Douglas says. “For a normal retirement plan, we assume that you can live on about 35 per cent less than your pre-retirement income,” she says. “That assumption comes from the idea that you no longer have certain expenses.”

Lucas and Reena don’t have a mortgage on their personal residence but they will be retiring with debt because they have a rental property with a mortgage. So for them, it is possible they won’t see as large of a decrease in expenses in retirement, the planner says. They are also looking at travelling in retirement, so it’s important to consider the travel budget in their plan.

Scenario 3: Lucas dies prematurely. This scenario includes the higher spending forecast of $135,000 a year in Scenario 2. All other assumptions stay the same except that Lucas dies when he is 75 years old. Goal coverage would then drop to 73 per cent with no assets remaining in the estate.

“We often see the negative tax implications of single people, whether widows or widowers, divorced or single,” Ms. Douglas says. “As a widow, Reena loses the ability to pension-split the pension plan with a spouse, loses the other spouse’s OAS and in this case, the majority of the [spouse’s] CPP.”

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Both Lucas and Reena have opted to waive the survivor benefit for their defined benefit pension plans. If Lucas died, Reena would have to draw more income from her investments to meet the same income requirement as when Lucas was alive.

“She may end up spending less monthly than what they spent together, but losing a spouse in retirement does not automatically cut your expenses in half; many expenses, property taxes, house insurance, etc., stay the same, regardless of if it is one person or two,” Ms. Douglas says.

“This is often why we do end up recommending a client take the joint 100 per cent option in their pensions if it is available,” the planner says. If Lucas and Reena were to follow the higher spending budget and Lucas died at 75, Reena would need to drop her expenses to $7,500 month net. “Doing so would mean she has 102 per cent goal coverage, with $1.8-million in assets left remaining at her death.”

“Even with the best estimates, there are still things that are out of our control when it comes to retirement planning,” Ms. Douglas says. “Disappointing investment returns, higher-than-expected inflation or a market crash within the first few years of your retirement are all scenarios that can largely impact the success of your plan.”

As for Lucas’s company stock, there is no optimal time to sell it, she says. If Lucas thinks it is a good hold, he can sell it as needed. “That would be the best.” If he doesn’t want to hold it, “we would recommend selling it prior to collecting Old Age Security, the planner says. This would help prevent or limit any OAS clawback.

Client Situation

The People: Lucas, 59, Reena, 57, and their two children, 25 and 27.

The Problem: Can they afford to retire next year with $100,000 after tax spending and still be able to help their children with property to the tune of $250,000?

The Plan: Rather than buying a duplex for the children to live in and pay rent to the parents, consider giving or lending the children $250,000 to buy the duplex themselves so that it would be their principal residence.

The Payoff: Goals achieved.

Monthly net income: $14,725.

Assets: Cash $40,000; Lucas’s company stock $377,000; joint non-registered investment portfolio $1,208,000; his TFSA $101,000; her TFSA $87,000; his RRSP $50,000; her RRSP $290,000; residence $650,000; rental property $396,000. Total: $3.2-million.

Estimated present value of his defined benefit pension $713,000; estimated present value of her DB pension $200,000. Estimates supplied by Lucas and Reena. This is what someone with no pension would have to save to generate the same income.

Monthly outlays: Property tax $280; water, sewer, garbage $60; home insurance $100; electricity $110; heating $80; maintenance $300; garden $100; car insurance $250; other transportation $460; groceries $1,000; clothing $300; charity $125; vacation, travel $800; dining, drinks, entertainment $995; sports, hobbies $40; health care covered by employers; phones, TV, internet $345; RRSP $550; TFSAs $1,165; non-registered savings $5,000. Total: $12,060. Surplus of $2,660 goes to unallocated spending including occasional big-ticket items.

Liabilities: Rental property mortgage $221,000 at 4.64 per cent.

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Some details may be changed to protect the privacy of the persons profiled.