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How parents can help their adult children buy a house- ask a Vancouver mortgage broker

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Where there’s a will, there’s a way for parents to help their adult children buy a house.

That’s will as in last will and testament. In the kind of extremely expensive real estate market we have in many cities, maybe what your adult children need is a sweetheart deal from Mom and Dad. Maybe pass the house down in your will, or sell it at a bargain price to a son or daughter.

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Graham Williams, partner at the accounting firm Stern Cohen, doesn’t think much of this latter idea. “We can’t remember a case where we recommended a client sell their home to their adult children,” he wrote in e-mail. “We hate to disappoint the many millennials out there who are currently priced out of the housing market, but from an accountant’s perspective it might not be a financially sound solution.”

One of Mr. Williams’s objections is that you’re wasting the biggest opportunity of your lifetime to make a big investing gain tax-free. A house, as long as it’s a principal residence, can be sold without having to pay tax. This is an especially important detail if your home has doubled or tripled in value in the decades you’ve owned it.

Another objection from Mr. Williams is that parents often need to maximize the proceeds from selling their home in order to downsize to a condo and perhaps have some money left over. One further objection is the family dissension that can be created when parents offer a sweetheart deal on the family home to one child and not others.

But, if you were so inclined, is it possible to help an adult child deke around high house prices by selling her the family home at a below-market price? Mr. Williams said the answer is yes, while offering up an alternative: Sell the house on the open market, downsize and then use some of the leftover money (if any) as a gift to the children. “There’s no gifting tax in Canada, so you can give cash to your kids – as much as you want,” he said in an interview.

Alternatively, if you do help your kids with a down payment for a house, consider designating the money as an interest-free mortgage that must be repaid when the home is sold (you can always forgive the loan if you want). Mr. Williams suggests consulting a family lawyer on this. The goal is that your gift won’t be considered matrimonial property if your adult child divorces his or her spouse.

This measure also gives parents some control if their adult kids unwisely sell their house to move up to something more expensive. “Basically, it means that if they sell the house, your kids have to pay you back the money you gave them,” Mr. Williams said.

Another thought: Pass your house down to your adult children in your will. Mr. Williams said a house would be considered as sold at fair market value on the death of the owner if willed to children directly or as beneficiaries of the estate. Even so, a home that is a principal residence would be exempt from tax in this situation.

Probate fees – they’re charged by provincial governments and cover the cost of validating a will – are likely to be triggered when including a home in a will, said Lucinda Main, a trust and estate lawyer with Beard Winter LLP. Probate fees are nominal in some provinces, but Ms. Main said in Ontario they would amount to $7,000 on a $500,000 house.

This explains probate-avoidance manoeuvres such as adding an adult child’s name on the title of a home. Ms. Main said an arrangement called joint ownership with right of survivorship is commonly used with spouses so that if one partner dies, the house automatically transfers to the other without probate. In turn, the surviving spouse might put her daughter jointly on title. The goal: A seamless transfer of the house to the daughter on the parent’s death, with no probate fees charged on the value of the house.

Ms. Main said she’s not a huge fan of parents and adult children owning a home jointly because of the potential complications. If parents want to sell or mortgage the house, they need the consent of their children. Also, the house could get caught in bankruptcy proceedings or a marriage breakup involving the children.

Adding one child on the title of your house presents fairness issues as well, Ms. Main said. “If you have one child on the title of a property, how do you deal with the other children? Do you try and equalize things in the will?”

Finding a way to transfer a house from parents to adult children is tricky for sure. But then, so is affording a home in today’s extremely expensive market.

Follow Rob Carrick on Twitter: @rcarrick

Five signs you are ready to take the home-buying plunge

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It may seem obvious, with today’s low interest rates, high rents and a strong housing market: If you’ve got the money, buy now.

But how to know when you are truly ready to make the leap?

Not everyone who would like to buy is actually prepared, financially and emotionally. Real estate experts have recognized signs that indicate when someone is, and meeting those criteria can make the difference between frustration and success.

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You’re taking financial steps

The first sign, of course, is the financial foundation upon which a potential buyer can build.

“If they have already started saving toward a down payment, that is a great sign,” said Jeffrey Baker, a real estate agent with Sutton Group in Montreal. “They have either been saving aggressively over a certain length of time and given themselves a target for the amount that will be their down payment. Or they will have had a meeting with a financial adviser or bank, who has shown them the amount they can realistically spend.”

They also should meet with a mortgage broker and gain pre-approval. Although, as Austin Keitner of Keller Williams Realty in Toronto pointed out, “pre-approval doesn’t mean they’re actually looking at your credit rating but asking questions about your income, expenses and getting to know your ratios a little bit.”

A buyer may not get the final approval if his or her credit rating is not up to snuff. But, nonetheless, “if they don’t have that done by the time they are talking to me, I encourage them to do that. Especially in this market, you want to be ready. You want to be able to act fast,” Mr. Keitner said.

You are plotting your spending

Ability to budget is key. “A well-educated first-time buyer needs to know their budgets to know where they stand,” said Russell Westcott, vice-president of Vancouver-based Real Estate Investment Network.

The move itself as well as the fees and taxes and the costs of properly maintaining a house can add considerable amounts to the down-payment and mortgage. Apartment dwellers might not think about these expenses. Whether it’s a lawn mower or a new roof, Mr. Westcott said, “they have to figure out how much their housing expenses are going to be.”

Does the new house need renovations? “As a general rule, renovation projects will take three times longer than you thought they would,” Mr. Baker said, “and cost at least twice as much as you had budgeted.”

You know what you want

Is it a condo, a townhouse or a big, fully detached home? You should decide that before you start browsing the listings.

“Until you have looked at your budget, and talked to your mortgage broker, you can’t really even determine what type of property you should be looking at,” Mr. Westcott said. “And, does it fit with your lifestyle?”

Knowing the neighbourhood where you want to be is another part of that process. It may be trendy or offer great views, but does it mean a longer commute to work, for example, or have the services – schools, supermarkets and transport links – you need?

“The buyer should ideally know what community they want to be in,” said Mr. Keitner, who has on occasion been asked by clients whether they can lease a property for a year, instead of buying it outright, to see whether it’s the right fit for them.

Otherwise, your location choice might come back to bite. “If you end up leaving the house after a couple of years, you’re going to lose money on it,” he said. “Because after your moving costs, legal costs and so on, its sale is not going to compensate you through market growth.”

You know what you actually need

For Mr. Westcott, the fourth sign that new home buyers are ready to make a serious commitment is when they have “put the focus on what they need, not what they want. Three bedrooms, two bathrooms and an attached garage – those are needs,” he said. “A want would be high-end fixtures, granite countertops or a wine cellar.”

Would-be buyers are sometimes seduced by the “bling,” he added, “and all of a sudden the budget gets thrown out the window.”

Conversely, ignoring properties that meet all your needs but not your whims will only make the already complicated process of buying a new home more challenging.

You have tempered your expectations

The final sign you are ready to take the big step is when you realize that, as Mr. Keitner put it, “there is no such thing as a perfect house. I’ve never really seen a eureka moment where it’s, ‘Oh my God, this is the place where I need to live.’” Rather, he said, the home you buy and make your own becomes the home you love.

“You have to be prepared, as a first-time homebuyer, to temper your expectations,” Mr. Westcott agreed. “You are not going to get what you want and, if you are young, you’re not going to get the style and the quality of living that your parents have.”

What’s more, Mr. Keitner said, “there’s a risk that if people don’t act on properties that they can make work, prices continue to go up. So a decision based on emotion, rather than practicalities, can cost tens of thousands of dollars.”

However, losing a home that, in retrospect, would have been the right buy is also part of the education of home buying.

“My experience with first-time buyers,” Mr. Baker said, “is that they have to live the experience of a place getting away from them to realize that sometimes the market won’t wait for them.”

Buying your first house is probably one of the most difficult decisions you will ever make. But understanding the signs of the well-prepared homebuyer will go a long way in ensuring that it’s the right one.

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Pockets of risk in Canada’s condo market but don’t expect a crash, Conference Board report says

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Pockets of risk continue to exist in the condominium markets of Toronto and Vancouver, but a broad-based downturn is unlikely, according to the latest Conference Board of Canada condo report commissioned by Genworth Canada.

Genworth is the largest private mortgage insurer in Canada.

Toronto’s condo market is expected to “cool slightly but avoid the collapse many fear due to healthy population growth, a solid economy and the desirability of downtown living,” the report says.

Vancouver’s condominium market is recovering along with the overall resale market, although slowing offshore demand “threatens to expose to area’s poor housing affordability.”

Robin Wiebe, senior economist at the conference board’s Centre for Municipal Studies, and co-author of the summer report, said “strong” underlying economic factors would help most condominium markets experience a soft landing.

Increases in average household incomes, for example, would help to keep mortgage costs affordable despite expected modest price gains over the next two years in all eight cities studied in the report.

“Continued growth in immigration, affordability pressures in major cities, and aging baby-boomers looking to downsize are all factors that support continued demand for condominiums in urban centres,” Genworth said in a statement.

Canadian housing to start showing signs of easing over next two years, says CMHC

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OTTAWA — Canada’s housing market may start showing some signs of easing over the next two years as new construction begins to slow and sale prices climb down slightly, according to the latest forecast by the Canada Mortgage and Housing Corp.

The national housing agency is forecasting housing starts in Canada to range between 179,600 and 189,900 units in 2014 on an annual basis, dropping to a range of between 163,000 and 203,200 units in 2015.

“Recent trends have shown an increase in housing starts, which is broadly supported by demographic fundamentals,” said Bob Dugan, chief economist at CMHC.

“However, our latest forecast calls for starts to edge lower as builders are expected to reduce inventories instead of focusing on new construction,” Dugan said Wednesday.

The third quarter outlook also says that Multiple Listing Service sales are expected to range between 450,800 and 482,700 units in 2014, with an average price of between $394,700 and $405,700.

In 2015, the CMHC says Multiple Listing Service sales are expected to range from 455,800 to 502,900 units, with and average price of $396,500 to $416,900.

“It certainly seems like the soft landing picture is unfolding,” said Benjamin Reitzes, a senior economist with the Bank of Montreal.

“Housing has remained resilient despite continuous calls for prices to collapse, or sales to collapse or condos to collapse. Sales have remained consistently strong and you’ve also seen construction remain consistently strong pretty much to everyone’s surprise.”

Sales should begin to slow down next year as interest rates begin to rise, which will lead to construction slowing down as well, he said.

Construction is currently at about 200,000 units on an annual basis, Reitzes said, but should go down to between 180,000 and 190,000 to avoid oversupply.

When it comes to pricing, he added, a lot depends on what market home buyers are in.

“You have a hot market in Toronto, a solid market in Vancouver and a very hot market in Calgary. Those are the areas that are really driving price gains throughout the country,” he said.

In its forecast, the CMHC said housing starts in the Prairies are projected to increase to 52,900 units in 2014 before moderating to 50,800 in 2015, as net migration to that part of the country is expected to decline from the record achieved in 2013, as is employment growth.

Ontario housing activity will regain momentum through the course of 2014 before easing later in 2015, with housing starts in that province ranging between 50,900 and 63,300 units over the next two years.

Quebec housing starts are expected to amount to 38,400 units in 2014 and 38,700 units in 2015, as moderate economic and employment growth will hold back demand for existing and new homes.

In Atlantic Canada, housing starts are expected to decline close to 14% in 2014 and a further 3% in 2015, amid a slowdown in economic growth.

Earlier this week, CMHC said in its monthly update that housing starts increased to a seasonally adjusted annual pace of 200,098 in July, a slight increase from 198,665 in June.

It was the fifth consecutive monthly increase in new housing construction, with gains in urban starts were concentrated in Ontario and Atlantic Canada, while the Prairie provinces and Quebec all recorded declines. There were also modest decreases in British Columbia.

On Wednesday, the Teranet National Bank National Composite House Price Index reported home prices were also up in July, rising 1.1% from the previous month and exceeding the historical average for July. The index measures price changes for repeat sales of single-family homes.

A separate condo report commissioned by Genworth Canada, also out Wednesday, found that population, economic and employment growth all point to a stabilizing of the Canadian condominium market, suggesting that while pockets of higher risk still exist in Toronto and Vancouver, a broad-based downturn is unlikely.

Canadian home prices rose in July by more than usual: Teranet

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TORONTO — Canadian resale home prices rose in July and the pace of 12-month price appreciation accelerated, the Teranet-National Bank Composite House Price Index showed on Wednesday, adding to strong housing starts this summer to signal a market that continues to be robust.

The index, which measures price changes for repeat sales of single-family homes, showed national home prices rose 1.1% from June, exceeding the historical average for July.

Prices were up 4.9% from a year earlier, a pickup from June’s 4.4% price gain.

The price increases, on top of strong housing starts data released earlier this week, have surprised economists who have been calling for a slowdown in Canada’s long housing boom.

Canada escaped the U.S. housing crash that accompanied the 2008-09 financial crisis, and home prices have risen sharply, if not steadily, over the past five years despite moves by the federal government to tighten mortgage lending rules.

A separate report on Wednesday from Canada Mortgage and Housing Corp (CMHC), the federal housing agency, predicted a gradual slowing for the market as buyers mop up excess supply before builders start new projects.

“Recent trends have shown an increase in housing starts, which is broadly supported by demographic fundamentals,” CMHC Chief Economist Bob Dugan said in the report. “However, our latest forecast calls for starts to edge lower as builders are expected to reduce inventories instead of focusing on new construction.”

The CMHC said housing starts will be in a range of 179,600 and 189,900 in 2014, with a point forecast, or most likely outcome, of 184,800 units, down from 187,923 units in 2013. That is up from CMHC’s May estimate of 181,100 units.

The agency said there will be 163,000 to 203,200 units started in 2015, with a point forecast of 183,100 units, also an upwardly revised forecast.

The CMHC forecast for the average price calls for a 4.5% gain to C$399,800 ($366,084) in 2014 and a further 1.8% gain to C$406,800 in 2015.

The Teranet data showed prices rose in July from the month before in 10 out of 11 cities, led by a 3.5% gain in Victoria, a 2.0% gain in Ottawa and a 1.8% gain in Toronto.

Prices were down 0.1% in Winnipeg.

Year-over-year price gains were seen in seven of the 11 cities surveyed.

Compared with a year earlier, prices were up 8.2% in Calgary, 3.7% in Edmonton, 7.1% in Hamilton, 1.5% in Montreal, 6.6% in Toronto, 6.1% in Vancouver and 2.5% in Victoria.

Prices compared with a year earlier were down 1.2% in Halifax, 0.1% in Ottawa, 1.2% in Quebec City and 0.1% in Winnipeg.

© Thomson Reuters 2014

Canada’s housing market on course for soft landing, says CMHC – Ask a Vancouver Mortgage broker

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OTTAWA — After consistently bucking predictions that a slowing trend was just around the corner, Canada’s housing market is now showing signs that it is, indeed, headed for a soft landing.

Both prices and construction are still rising, but the pace of construction is expected to taper off over the next two years as homebuyers increasingly turn their attention to excess supply in the market.

Housing starts should total between 179,600 and 189,900 units this year, and possibly increase by as much as 203,200 units in 2015 before building activity begins to ease, according to Canada Mortgage and Housing Corp.

“Recent trends have shown an increase in housing starts, which is broadly supported by demographic fundamentals,” Bob Dugan, CMHC’s chief economist, said Wednesday.

“However, our latest forecast calls for starts to edge lower as builders are expected to reduce inventories instead of focusing on new construction.”

Wednesday’s housing outlook for 2014-15 follows a CMHC report earlier this week that showed only a modest increase in housing starts between June and July, with the agency saying it “continues to expect a soft landing for the new home construction market in Canada.”

The federal mortgage-insurance agency also expects sales to range from 450,800 and 482,700 units in 2014, and between 455,800 to 502,900 units next year. Prices will average $394,700 to $405,700 this year and between $396,500 and $416,900 in 2015.

That works out to an average price increase of 4.5% this year and 1.8% in 2015.

Meanwhile, a separate report Wednesday showed Canadian home prices picked up last month.

The Teranet-National Bank price index rose 4.9% in July from the same month a year earlier, compared to a 4.4% annual rise in June, according to the index, which tracks repeat sales of single-family homes.

On a month-over-month basis, the index increased 1.1% from June.

Calgary led year-over-year gains with a 8.2% jump in house prices, followed by Hamilton with 7.1%, Toronto at 6.6% and Vancouver rising 6.1%.

Benjamin Reitzes, senior economist at BMO Capital Markets, said a soft landing is unlikely to really take hold until interest rates start rising, which many analysts expect will be in mid-2015.

“When that happens, then you’re going to see the housing market roll over a bit and things slow down on the pricing front, on the sales front and on the construction front,” he said.

“But there’s nothing to make us believe that a crash or any kind of significant correction is coming broadly to the market.”

Unlike in the United States, Canada’s housing market has so far avoided a correction. In fact, the housing sector in this country has shown surprising resilience — even as the overall economy struggles to maintain growth.

But given record-low mortgage rates in this country, there have been concerns about the amount of debt that homebuyers are taking on — prompting the federal government to progressively tighten lending rules since the 2008-09 recession.

Still, Finance Minister Joe Oliver also expects a soft landing for the housing market. “We’re aware, of course, that prices keep moving up in a somewhat more moderate way,” he said Tuesday.

“We know that part of the reason for this is low interest rates,” he told reporters ahead of a two-day meeting with private-sector economists and business leaders in Wakefield, Quebec. “We’re monitoring the market carefully but [we] are not alarmed by what we see.”

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Couple in 50s dreams of a holiday home in the sun – Consult with a Vancouver Mortgage Broker

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Lana and Zack’s story is an increasingly familiar one: people in their 50s with well paid but stressful jobs who can barely wait to leave the work force. He is 51, she is 50. They own their house outright and have no debt.

“We are eagerly working toward what we hope will be early retirement,” Lana writes in an e-mail. “We are healthy and take good care of ourselves, but our jobs are very stressful,” she adds. He’s in education, she’s in health care. “So in three to six years, we would like to leave our present jobs behind and move on to the next stage of life.”

The “next stage” they aspire to includes travelling and “living the good life,” spending two or three months each year in a warmer climate. Zack may look for a part-time job.

Luckily for them, they both have defined benefit pension plans.

Zack and Lana have two children, 22 and 25. They’d like to help the younger one through university. Apart from that, their main concern is to save as much as possible in the next five years so they can buy a place down south.

We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Lana and Zack’s situation.

What the expert says

In preparing his forecast, Mr. McShane assumes Zack retires in June, 2019, and Lana in September, 2018, with lifestyle expenses of about $83,000 a year. The planner allows $30,000 every five years for vehicle replacement starting in 2020. Zack will get a pension of $7,056 a month ($84,672 a year) to age 65, including a bridge benefit that will end when he turns 65 and starts collecting Canada Pension Plan benefits. From then on, his pension will be $5,687 a month, partly indexed to inflation.

Lana will get a pension of $2,982 a month ($35,784) to age 65, falling to $2,405 after she begins collecting CPP benefits.

The planner includes $20,000 a year for four years of university education, plus $200,000 for Lana and Zack to buy a vacation home in five years. He assumes a rate of return on investments of 4.5 per cent a year and an inflation rate of 2 per cent.

His conclusion: Yes, they can retire early and enjoy a comfortable lifestyle.

“Pension splitting at retirement will lower combined taxes payable and preserve Old Age Security benefits that will start at age 67,” Mr. McShane says.

Yes, too, to the vacation property. They can pay for it by setting aside cash flow surpluses over the next five years. Over and above contributions to their tax-free savings accounts, Zack and Lana should be able to save up about $150,000. The money for the second property “could be invested within their non-registered account,” the planner says.

Lana could use up her $29,268 in RRSP room and then withdraw the money when they retire for the balance of the property payment, he says. Or they could tap the funds in their TFSAs.

When they buy the second home, their costs will rise. Mr. McShane has not factored this into his analysis, but notes that they do have a growing surplus of capital, and couples typically spend less in their later years.

Zack and Lana also wonder how they should structure their investment portfolio. For their short-term goal of buying a vacation home, preservation of capital should be paramount, he says.

“A portfolio in cash in the form of a daily-interest account, a short-term bond ladder and a small portion in equities is prudent,” Mr. McShane says. If they will be paying U.S. dollars for the second home, they could consider investments denominated in greenbacks, he adds.

As for their long-term goal of saving for retirement, Zack and Lana should take full advantage of their unused TFSA room. “Their RRSPs and TFSAs should focus on equities given the guaranteed nature of their pensions,” Mr. McShane says. When they quit working, their pensions and benefits will more than cover their recurring expenses. “Therefore, their RRSPs and TFSAs should be viewed as longer-term money that is designed to provide additional funds for non-recurring expenses.”

He suggests they avoid holding U.S. dividend-paying stocks inside their TFSAs because there is a non-recoverable withholding tax on the dividend. “Instead, these should be held inside their RRSPs,” he says.

A portion of the registered portfolio may be needed to fund the vacation property and should therefore be invested for the short term.

***

Client Situation

The people: Lana, 50, Zack, 51, and their two children, 22 and 25.

The problem: Can they take early retirement and buy a place down south without sacrificing their lifestyle or financial security?

The plan: Save for the vacation home over the next five years, retire as planned, take advantage of pension splitting and invest their long-term savings mainly in stocks.

The payoff: A road map to a worry-free retirement.

Monthly net income: $13,680

Assets: Cash in bank $11,000; his TFSA $32,000; her TFSA $7,500; his RRSP $39,500; her RRSP $30,300; RESP $27,355; residence $450,000. Total: $597,655.

Monthly expenditures: Property taxes $290; insurance $85; utilities $270; garden $135; Internet $210; food $1,030; clothing $820; personal care $130; life, disability insurance $255; miscellaneous personal $40; entertainment, dining $460; clubs $50; hobbies $80; gifts $240; charitable $75, miscellaneous discretionary $375; travel, vacation $1,390; auto insurance $180; maintenance $175; fuel, oil $425; miscellaneous transportation $200; pension contributions $1,950. Total: $8,865.

Liabilities: None

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com Some details may be changed to protect the privacy of the persons profiled.

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Consider a trust fund for your kids even if you’re not rich – Consult with a Vancouver Mortgage Broker

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Money-losing rental and layoff put retirement at risk for couple in their 50s – Consult with a Vancouver Mortgage Broker

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Situation: Layoff and inability to find a new job plus a money-losing rental property jeopardize couple’s retirement

Strategy: Either get a new job to subsidize the rental or sell it to balance budget. Tidy up cluttered investment portfolio to reduce fees and duplicaton

At their ages of 55 and 51, Dan and Martha, have hit a series of bumps in their road to retirement. A construction manager for a large company, Dan brings home $5,250 a month. Martha, a metallurgist, was laid off from her job last year. Her employment insurance payments, $1,900 a month, just expired. She has been unable to find work in her field.  They are spending $6,127 a month to sustain their way of life, eroding savings they will need for retirement.

Not only has their take-home income shriveled to half of what it was a year ago, they have an investment property purchased in 2012 that generates rental income insufficient to cover its mortgage and line of credit. On top of that, their two children, each in the early 20s, are in university. Their RESP has $37,000, which should be sufficient for the kids’ first degrees, for the elder child, 23, is in his last year of undergraduate studies. After that, unless the couple’s fortunes change, the kids will have to earn or borrow whatever funds they need for additional tuition or second degrees.

“I may have to work part-time to support our younger child, now in the second year of university,” Martha says. “With my layoff and the money-losing rental house, how much do I have to earn to sustain our way of life?  We still have a lot of costs with our children living at home.”

They are in a vise now, but if Dan and Martha cut expenses, stop subsidizing their money-losing rental property and cut investment costs, they will be able to have a secure retirement.

Family Finance asked Benoit Poliquin, a financial planner and chief investment officer of Exponent Investment Management Inc. in Ottawa, to work with Dan and Martha. His view assumes that Martha does not go back to work. To make their budget balance, they will have to free up $2,180 each month. In the alternative, if Martha can earn $2,500 to $2,800 a month before tax, then she can subsidize the real estate investment. However, given that the rental house is not paying its way, the simpler course is just to sell it and end the cash drain, he suggests.

The budget problem

Financing the rental property with a mortgage and line of credit costs $2,180 a month. Property tax is $300 a month. Total costs are $2,480 and that does not include any reserve for maintenance. Yet the monthly rent the property generates is just $1,400. The total loss is therefore $1,080 a month, $12,960 a year. That amounts to 20% of Dan’s take home income.

If the mortgage, with a 25-year amortization, and line of credit are broken down into debt service cost separate from repaying capital, the numbers look better. On that basis, the rent, which is being paid by a friend of the family, covers all interest. The remainder of the payments support rising equity.

In time, the property may appreciate enough through rising equity from payments and a bull market to catch up to the loan balance. But this is speculative.  There is no guarantee that property prices will rise sufficiently to cover the debt at the time Dan and Martha want to sell. Moreover, the rental property subsidy means the couple cannot make regular contributions to their RRSPs or TFSAs.

With the rental house eliminated, the family budget will be $3,650 a month. When their children establish their own lives and incomes, the family’s $500 a month bill for running three cars will drop. Dan and Martha will be able to save perhaps $1,000 a month.

Retirement income

Dan and Martha have a complex portfolio. Their RRSP, TFSA and other accounts add up to $759,300. If they shed the rental property add $12,000 a year for 10 years to these various savings and obtain a 3% return after inflation, then the portfolio will have a value of $1,162,000 on the eve of their retirement. If paid out on an annuity model which expends all income and capital in the next 30 years, they would have annual income of $57,550 before tax, Mr. Poliquin estimates.

Dan should get an annual CPP benefit of $12,460 in 2014 dollars. He will also have an annual job pension of $21,332. Martha should receive Canada Pension Plan benefits of $10,740 a year at her age 65 and both will get Old Age Security of $6,704 at their respective ages of 65 and 67. At that point, their retirement income should add up to $115,220 a year. If eligible pensions are split, they should have a 20% tax rate. That will give them about $7,700 a month in retirement income, far more than they have now.

They might do even better if they rationalize their various portfolios.  They have 50 positions in various mutual funds, ETFs and individual stocks. There is duplication in funds which hold similar assets. There are high-cost funds as well as low-cost ETFs. Most of all, there is a management problem, for tracking four dozen stocks, bonds and indices is challenging at the least.  Martha is an active investor in her own right. It would be helpful to reduce the number of holdings and cut fees, Mr. Poliquin says. A fee reduction of just 1.5% would add $11,400 to the annual return of the portfolio.

A restructured and simpler portfolio able to provide income and a health measure of asset stability would have about 70% stocks and 30% bonds. The usual rule is to match the bond allocation to age, but with bond yields low and the probability that the three-decade-old bull bond cycle will end within a few years, cutting back on bonds in favour of stocks able to pace inflation makes sense, Mr. Poliquin says.

Eight to 10 assets, including exchange traded stock and bond funds, perhaps in new variations such as equally weighted stocks that eliminate the winner’s curse of recent high fliers taking up too much space could cover stocks while bond funds that overweight investment grade mid-term corporate issues that have some resistance to rising interest rates would be appropriate as a counterweight to the equities, Mr. Poliquin suggests. The couple could also use a professional portfolio manager for perhaps 1.0% of the value of assets under management.

“This couple has done everything right,” Mr. Poliquin says. “Their problems are Martha’s layoff and the cost of carrying their rental property.   Martha could add income from another job to keep the rental unit afloat, but that would be working to subsidize a bad investment. The alternative, which I favour, is to sell it and increase the security of their retirement cash flow. The decision is theirs, of course.”

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