Low income senior eyes house sale as retirement cash

But her other assets are modest and depleting quickly. Her Registered Retirement Savings Plan has just $3,000 remaining. Her Tax Free Savings Account has $32,000. She has no workplace pension or other investments.

Her monthly expenses are $2,195. To meet those, she spends $1,240 a month she receives from Canada Pension Plan and Old Age Security and has been withdrawing $955 a month from her Registered Retirement Savings Plan, and when that is gone, she’ll use money in her TFSA.

Mary knows she must tap into her home’s equity to find more money for her retirement income. But what’s the best way to achieve that?

The Star asked Clay Gillespie, financial advisor and managing director at Vancouver-based Rogers Group Financial, to help Mary.

Gillespie doesn’t see how Mary can afford to stay in her house. Mary pays $180 a month towards the mortgage but assuming a three per cent interest rate, it would take her more than 15 years to pay off the property. And that doesn’t take into account when interest rates eventually rise, he notes.

While a reverse mortgage is an option, it’s not one he recommends because it is very costly. He suggests Mary downsize to a small condo. “A condo will allow her to live in a lower maintenance living arrangement,” he says. Assuming eight per cent for realtor commissions and closing costs and paying off her remaining mortgage balance, Gillespie estimates that Mary would receive about $525,000 from the sale of her home.

She could then spend about $350,000 on a condo. Now mortgage free, she would gain an extra $2,000 a year.

From there, Mary has a few options about what to do with the remaining $175,000 from her home proceeds. Option one is investing the money in a non-registered account. Every year, she should transfer $5,500 from this account to her TFSA. Returns in a TFSA grow tax-free and, more importantly, withdrawals won’t impact her government benefits.

Since Mary is a senior and more risk averse, the portfolio should have more conservative investments than equities. Gillespie recommends a diversified balanced portfolio approach.

He also suggests that Mary consistently put three years worth of withdrawals (approximately $30,000) into a cash reserve consisting of a money market fund and a laddered one- and two-year Guaranteed Investment Certificates.

“Doing this helps to take out the volatility of equity-based investments,” Gillespie says. “So unless a stock market decline lasts longer than three years, she should not be forced to take an income from her investments while they are declining in value.”With her laddered GICs, CPP and OAS income, Mary should be able to generate the income she needs until age 95.

Gillespie advises that Mary secure a home equity line of credit on her condo for any unforeseen emergency expenses, condo assessments or to purchase a vehicle when she is ready.

The second option is to buy a $175,000 single-life annuity guaranteed for a period of seven years. “This would pay her $915 a month the longer of seven years or for the rest of her life,” Gillespie says. “This would be a suitable option if she does not want to take any stock market risk and wants a guaranteed paycheque for life.”

Finally, since Mary has a household income below $50,000 and she is over 65 years old, she could explore Toronto’s Property Tax Increase Deferral Program and Water Rebate Program to help lower her expenses.

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If you’re interested in a free makeover by our financial planning experts, contact financial writer and editor Deanne Gage at deannegage@gmail.com .

Makeover facts

The client: Mary, 67

The problem: The single retiree has more house equity than she has income to meet her expenses.

The advice: Sell the house and downsize to a condo. Use the remaining house proceeds to set up a non-registered account or buy an annuity, which could provide income for life.