So your home is paid off and you are ready to kick back and start enjoying more free time?
You want your money working for you and you're wondering how much yearly income you would get if you invested some or all your money into GICs or a high yield Dividend preferred share?
If this is you keep reading. And if you're not quite there yet in terms of retirement, what we outline below is still a great exercise for any student or adult who want to learn more about how their money can work for them.
IMPORTANT: The numbers below have been provided by industry professionals at the time of publication. That said, we highly recommend you talk to your own personal financial planner before making any final and all important financial decisions. Ready? Let's go!
1. MONTHLY LIVING: First ask yourself this question - how much do I need to live per month?
a. Include all your costs per year and break them down by month, including travel and give yourself an extra buffer for unexpected emergencies. Its also really important you plan for some inflation of about 2% per year. Costs will go up, they always do.
Monthly Expenses Example:
- Mortgage if any remaining balance
- Car Maintenance - oil change, repair
- Utilities - Electric, Gas, Hydro
- Phone, Internet, Security Systems, Cable, Netflix, Spotify etc.
- Property Taxes
- Loans or any debts
- Food - groceries
- Entertainment - Dinners, Concerts, Shows, Golf
- Home Maintenance - Yearly
- Medical Expenses - Dental, Medicine, Health Care
- Buffer for the unknown
2. MONTHLY EXPENSES: Put all the above together to calculate your monthly expenses.
NOTE: Some of the elements you'll need to divide by 12 as you won't be spending on them each month.
3. INCOME - How much is still coming in per month?
Even if you're retired there may still be some hobbies or investments that are paying you monthly. And lets not forget about pensions income. Be sure to add them into your calculations.
4. PUT IT ALL TOGETHER: I have calculated my EXPENSES AND INCOME and I know the approximate amount of money I need to live per month (Steps 1,2,3 above). What are my options?
GREAT - Here are 4 Retirement Income Options:
Assumption: In the examples below we're assuming you are selling your $700,000 home and as mentioned you have no mortgage. Adjust as needed for your home value and any debt that might be outstanding.
Scenario 1 = Sell home at $700k and buy townhouse or condo
- $300,000 for townhouse or condo
- $400,000 to invest:
a. Invest = 35% in GIC’s – todays 5 year GIC rate is 2.85% (Rates as of Feb 2018)
i. Tax Implications = This GIC income is interest income and will be taxed at 20.1%
b. Invest = 65% in rate reset preferred shares – average dividend yield is 4.75% (Rates as Feb 2018) i. Tax Implications = This is dividend income and you will pay little to no tax based on your income level and the dividend tax credit.
- RESULT = This scenario will produce about $15,000 of AFTER TAX income per year
- RISK = Medium: You'll be investing 65% in equity and there will be volatility in the market.
Scenario 2 = Sell home at $700k and buy townhouse or condo
- $300,000 for townhouse or condo
- $400,000 to invest:
a. Invest = 100% in GIC’s – todays 5 year GIC rate is 2.85% (note: GIC rates as of Feb 2018)
i. Tax Implications = This GIC income is interest income and will be taxed at 20.1%
- RESULT = This scenario will produce about $9,000 of AFTER TAX income per year
- RISK = ZERO: You'll be investing 100% in GICs which will be guaranteed by the bank.
New Assumption: Lets assume you already own property elsewhere that you can move into. Say a summer home or cottage that you want to retire in. So lets invest all your money into GICs and preferred shares.
Scenario 3 = Sell home at $700k and invest all 700k
- $700,000 to invest:
a. Invest = 35% in GIC’s – todays 5 year GIC rate is 2.85% (Rates as of Feb 2018)
i. Tax Implications = This GIC income is interest income and will be taxed at 20.1%
b. Invest = 65% in rate reset preferred shares – average dividend yield is 4.75% (Rates as Feb 2018) i. Tax Implications = This is dividend income and you will pay little to no tax based on your income level and the dividend tax credit.
- RESULT = This scenario will produce about $27,000 of AFTER TAX income per year
- RISK = MEDIUM: You'll be investing 65% in equity and there will be volatility in the market.
Scenario 4 Sell home = $700k and invest all 700k
- $700,000 to invest:
a. Invest = 100% in GIC’s – todays 5 year GIC rate is 2.85% (note: GIC rates as of Feb 2018)
i. Tax Implications = This GIC income is interest income and will be taxed at 20.1%
- RESULT = This scenario will produce about $16,000 of AFTER TAX income per year
- RISK = ZERO: You'll be investing 100% in GICs which will be guaranteed by the bank.
Not Moving Assumption: Say you don't want to move! What if you stay in your home for 5 more years before downsizing? You then have the option of something called a reverse Mortgage.
Scenario 5 - Don't Sell home for 5 years. Reverse Mortgage
- Value of Home 700k
- Take $100,000 out on the house via a reverse mortgage
- This would give you $1670.00 per month. (~$1200.00 to them and ~$470.00 to mortgage)
- In 5 years or less you sell the house, and pay the ~$85,000 left on the mortgage).
If your health is in good standing the banks may be willing do do this all over again. Do one more 5 year mortgage if they so desired (health was good), but payments and principle would take a bigger hit.
I hope this helped give you some insights on what your money might be worth if it's something you've been considering. Again, make sure you talk to a professional financial advisor before making any big decision.
If you want more info - Check this out 40 pages of personal finance snapshot for retirement, via the Financial Post to provide some other great ideas to plan for future. http://business.financialpost.com/category/personal-finance/family-finance
Thanks again and don't forget to subscribe to our blog and share this with your friends.