When his grandchildren are playing in the tree house or gathering for a holiday dinner in the home he has spent decades refurbishing, Paul* hates the thought of moving away. A widower in good health, he is just about to celebrate his 65th birthday and retire from a small manufacturing company. Paul looks forward to many more years of watching his family grow and thrive.
Paul has determined he will need $68,000 per year in after-tax income to maintain his lifestyle once he retires. Though Paul’s employer never offered a pension plan, he has been saving diligently. After being introduced to Manulife One a few years back, Paul has been able to focus on retiring debt and contributing to his registered retirement savings plan (RRSP). Paul’s investments now total $1,200,000; his home is free and clear, and worth about $500,000 on the current market.
But when Paul looks at projections, he worries that he will have exhausted nearly all his savings by age 80. “Downsize”, several well-meaning friends have suggested. So, Paul has found a bungalow worth $300,000 and hopes that by selling up and moving on, he might make another $320,000 to invest in a non-registered portfolio.
Wisely, Paul has shared his plans with an advisor before making a move. Turns out he can stay put, and at age 90 enjoy a net worth over $230,000 higher than if he moved into the bungalow. How? His advisor has factored in realty, legal, and moving costs, applicable taxes, plus taking a tax-free withdrawal of $20,000 per year from Paul’s Manulife One account beginning at age 80. Look what happens in each scenario:
Clearly Paul’s investment assets would be less than if he downsized, but his present home would be worth much more. Even assuming Paul never paid any interest and the debt in his Manulife One account reached $309,000, he would be able to stay longer in the home he loves and with a net worth that’s $233,000 higher than if he downsized. The small drawback is that he would leave $40,000 less in his estate if he died at age 90.
*The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard.
**For illustration purposes only: assumed rate of return on the portfolio is 6%, Manulife One interest rate is 4%, inflation and growth in value of both properties is 2% annually. The marginal tax rate averages 29% per annum, and drops to 19% when Paul begins drawing on his Manulife One account. Applicable taxes vary by province.
Manulife One products are offered through referral. Leverage Borrowing to invest is not suitable for everyone. You should be fully aware of the risks and benefits associated with using borrowed money to invest since losses as well as gains may be magnified.
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