Should this retired Toronto couple buy or rent?

The situation

Torontonians Jonah and Yaelle Goldstein,* both 75, love their stately Lawrence Park home. But, it’s become too much work to maintain.

With its four bedrooms, five bathrooms and expansive backyard, the house was great for entertaining clients, friends and family when the couple was actively working as real estate agents. Now that the Goldsteins travel frequently, and their three adult kids live across North and South America, the space is impractical.

They’re social butterflies and don’t want to leave city life altogether. They’re considering a few well-appointed condos close to the subway in case they need to give up their drivers’ licences. One-bedrooms ask for between $500,000 and $650,000, while rent, all-in, ranges from $2,000 to $2,500 per month.

They’ve also heard great things about a retirement community close to golf and vineyards in Ancaster, Ont., where some of their friends have moved. They’d get a bungalow for $350,000, while renting a large two-bedroom condo would be $1,450 per month.

As former real estate agents, they know their house can easily net north of $1.5 million. As for other assets, their annuitized registered retirement income funds (RRIFs) provide $3,500 per month in pre-tax income. They also have $250,000 worth of non-registered investments sitting in balanced mutual funds.

The couple’s financial goals are to live comfortably for the rest of their lives, with whatever’s left going to their kids and grandkids. They have paid-up $250,000 life insurance policies on each other, and modest long-term care insurance, so they feel secure and are willing to take risk with their investments if it means more for their heirs. Save for minor age-related ailments, they have no notable health problems, and both sets of their parents lived until their early 90s.

Should the Goldsteins buy or rent their next property?

*Note: The people described in this article are hypothetical. Any resemblance to real persons, living or dead, is purely coincidental.

Rent or buy?

Musselman: If they were looking at buying, they may have more control over where they’re going to live. A landlord can decide they don’t want to rent anymore and they’d have to move. At their age, [that’s] harder. That would be a pro for buying.

The benefit of renting, though, would be that it would give them flexibility as their needs change and they needed to move; say they want independent living now, but later on want to move to a retirement home.

The experts

Mounir El-Ayari,

director, wealth management, El-Ayari Wealth Management Group, Richardson GMP, Toronto

Susannah Musselman,

vice-president, financial planning specialist, RBC Wealth Management, Toronto

David O’Leary,

associate, Eden Valley Partners, Manulife Securities, Toronto

But they seem to be healthy and they want to be close to the TTC, so purchasing probably makes more sense. Financially, they’re fine. They could look for a condo with a guest suite [for] when the children visit.

El-Ayari: Based on their profile and age, I thought there were more advantages to renting. Their current house is a lot of maintenance. It seems they want to streamline their financial affairs, keep things relatively simple and have money for the kids at some point.

Home prices are at record highs in the Toronto housing market, and renting is a simple solution, especially since it’s not permanent. If they decide they want to buy a home, they would have that option after a year. Given their age, housing market conditions, [and the fact that] they didn’t want to have much upkeep, everything seemed to point toward renting a condo near the subway, and there’s plenty of choice.

Rent would be around $2,000 to $2,500, maybe $3,000. Their annuity payment from their RRIF would cover rent, and they would have plenty of money to spend on things like travel. They do have kids around the world.

O’Leary: It would obviously depend on your expectations for real estate prices going forward. Given that they’re real estate agents, they probably have a pretty clear idea of the pros and cons of buying versus renting.

This is also an area where financial advisors can have a conflict of interest. Telling your clients to sell their home, invest the proceeds and rent is obviously a benefit to an advisor who is paid a percentage of client assets. It’d be important to be up front with the client, saying, “I’m happy to help you walk through the pros and cons of each of these things, but it’s a personal decision. And, just so you’re aware, if you end up selling a home and investing the proceeds, that’s something I’m going to directly benefit from.”

El-Ayari: Yes, it would be totally up to them. This is really a lifestyle choice, not so much a financial choice, because they are in good shape. Musselman: If the clients need access to their capital during their lifetime, renting definitely is something they should consider. They have CPP and Old Age Security, a pretty good amount that will help. With their RRIF, I would be concerned that they’ve annuitized it, and the $3,500 is a fixed amount, so the purchasing value of that is going to decline over time with inflation. El-Ayari: It’s really important to go through the financial planning process. That $3,500 might have to be revisited if they require more income than they anticipated. Their second goal, possibly, is to leave the kids money. They may want to gift money to the kids while they’re still alive, so they can see the kids enjoy some of the money.

Location, location

Musselman: They seem to have their social circle in Toronto, and being in Toronto they’ll be closer to the city’s healthcare. They were concerned that later on they might not be able to drive, which is a relevant concern.

El-Ayari: It would be a tough decision if they have friends and a golf community in Ancaster but they also have friends in Toronto. The hardest decision would be deciding where to live. Once they figure that out, they can fine-tune whether to rent or buy, or what to do going forward.

They may end up living in Toronto for a couple of years and then moving. They might need some flexibility. It gets complicated if they can’t drive. I’m not sure what the transportation is like in Ancaster.

O’Leary: They could try renting in Ancaster as well, to see if they like living there, and then decide whether they want to buy.

What to do with a lump sum?

O’Leary: Number one, you have to talk to them about their goals. For instance, do they have legacy goals? How much do they want to leave? Do they have causes that they want to support? Estate planning could become a big issue for them right now. The questions facing the financial advisor here are more along those lines, rather than should they buy or rent.

Musselman: Definitely. Do they want to leave a legacy for a charity, and go through tax- efficient ways to structure that? Do they want to gift right now during their lifetimes, or leave it at the end?

It’s a good time for them to speak to their kids about what everybody wants. They’re all over North and South America, and getting everyone together is probably not that common, so it’s important to get started on that conversation.

Setting goals

O’Leary: Hitting retirement is not an easy shift. Sometimes people set their goals pretty low and don’t realize what options are available. It’s entirely possible they could create a family foundation if charitable giving was important to them. A donor- advised fund would allow them to give to charitable causes. It goes into an investment pool, those investments produce a rate of return, and then you can donate the returns on the investments to charitable causes every year.

If you put aside $100,000, and you earn 5% that year, you’ve got $5,000 for giving, and you can decide as a family which charities you want to support. Most people would say, “Oh, we don’t have enough money to create a foundation, it takes millions of dollars.” That’s not true.

Musselman: Some clients already have scenarios in mind, like, “When I sell my house I want to help my children out with their house purchases, or weddings, so I might be giving them $100,000 each.” They’re spending the proceeds from the house. That’s their choice, but we run projections and say, “OK, this seems reasonable,” or, “You may run into some cash flow difficulties later on.” It’s up to them, but we want to show the projections. I’ve met clients who sold their house and used part of the proceeds to help their children. Sometimes it’s hard to get it back.

Investments

O’Leary: Their ability to take risk is constrained, to some degree, because they are going to be drawing income from their capital throughout retirement. As a starting point, you’re probably leaning toward some sort of balanced income or income portfolio, emphasizing high-quality, conservative investments.

They don’t need to take risk. They’ve got a big portfolio and, sure, they’d like to take more risk if it means leaving more money to their heirs, but it wouldn’t be prudent or responsible if they took on substantially more risk.

El-Ayari: Everybody has a different definition of risk. For them, it might mean having everything in fixed income products with 5% in stocks. For someone else, it might mean having 90% in stocks.

Tax efficiencies

Musselman: If there’s going to be an equity component, we want to look at high-quality, dividend-yielding stocks, because there’s a better tax advantage for dividends versus interest from a GIC. They don’t seem to have a TFSA, so I would suggest they maximize that, which is $52,000 each to catch up for previous years, and then $5,500 per year going forward.

They can split their income with the pension income coming from the RRIF. At $3,500, it comes out to about $42,000 a year, and with the pension income split it is $21,000.

For maximum CPP and Old Age Security, they’ll each get about $20,000 a year. Add that $20,000 to the $21,000, and their individual income will be about $41,000 each, so they’re in a pretty good tax rate. They’re not going to experience any Old Age Security clawback, which starts at $74,788.

O’Leary: They’ve got $250,000 in a balanced portfolio. If they have substantial unrealized capital gains on any of their positions, they could conceivably have tens of thousands or hundreds of thousands of dollars in unrealized capital gains. That’s something they could tie into charitable giving. You can gift a stock to the charity as-is, and you are exempt from paying any capital gains on the position.

Musselman: They could put a larger lump sum into a charitable gift fund, and they wouldn’t have to pay capital gains tax on the gains after transferring it in. They also get a tax receipt for the entire amount.

Insurance

O’Leary: They might also review the insurance contract with an advisor. It says they have paid-up $250,000 coverage. If they don’t need any coverage at this point, they could gift the policy to a charity.

Musselman: We don’t know whether there’s already been gifting to the children. Their estate plan might need to consider equalizing that. We’ve met some clients who need to help out certain children more than others. There’s a lot to consider, like [do] they want their children to be stewards of their wealth and pass it on to the next generation.