Albert and Anna are professionals in their mid-30s earning a combined $248,000 a year before tax. They have a toddler and hope to have at least one more child.
They wish they could spend more time with their daughter, “but alas, due to the demands of our professional careers, it is difficult, and we find ourselves living for the weekend, as I’m sure many hard-working, well-meaning parents do,” Albert writes in an e-mail.
They’re keen travellers and have talked over the years about “how great it would be if we could travel the world indefinitely, with money as no object, no work encumbrances and with children by our side,” he adds. The birth of their first child “has inspired us to continue on the path to financial freedom. We want to quit working as quickly as possible,” Albert writes. Age 45 would be ideal.
Neither has a company pension, although Anna will be eligible to invest in a company stock purchase plan after she has been in the job one year.
They own three rental properties, as well as their Toronto-area residence, all mortgaged. They also invest in blue-chip stocks that pay a steadily rising stream of dividends. The idea is to have investments that will rise in line with inflation, generate a tax-efficient income stream of $100,000 a year when they retire and that they can leave to their children when they die.
Their question: Should they sell the rentals and shift to purely financial investments? Or should they stick with the real estate and maybe add a Florida property?
We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management in Ottawa, to look at Anna and Albert’s situation.
What the expert says
At this stage of their lives, such a high net worth is unusual, Mr. McShane says. Anna and Albert’s lifestyle expenses are about $60,000 a year before child care and excluding debt service charges, he notes. Their retirement income goal of $100,000 a year after tax would allow for significantly more travel and leisure spending.
“Obviously, striving to achieve this income goal with such an early retirement is quite a stretch,” the planner says. Based on his calculations, their investment capital and the equity in their rental properties would be depleted by age 80. If they lowered their spending target to $75,000 a year after tax, though, they should be able to achieve their goal, Mr. McShane says.
His calculations assume an average annual rate of return on investments of 5 per cent a year and 2 per cent inflation. The planner further assumes university education costs for their daughter of $20,000 a year for four years.
“If they have more children, their family expenses will increase in many areas,” he says. “This will [affect] their retirement goal.”
Selling the rental properties and investing the proceeds “is a very big decision,” Mr. McShane says. They would face a capital gain of $665,000 on their property portfolio at a time when they are both in a high tax bracket. “There would be a much lower tax hit if the properties are disposed of at retirement.”
Original Article: Should this professional couple stick to real estate investments?