After running a successful business, the O’Sullivan’s want to gradually scale down their involvement before selling, and spend their winters in Arizona. Is this couple on track to meet their retirement goals?

Family Profile

Jerry (55) and Monica (53) O’Sullivan are self-employed. They live in Sarnia, Ontario. They own a home worth $700,000 with a $390,000 mortgage, and a free-and-clear cottage worth $550,000.

They have three children, 24, 19, and 16. The O’Sullivan’s are covering the bulk of their children’s current and future secondary education costs.

Related: Managing proceeds from a rental property sale

Within the next two years, they plan to hire someone to manage the business on a day-to-day basis and only be involved in overseeing. They expect to sell the business after five years, either to an independent buyer or turn it over to one of their children.

Current Assets:

  • Home worth $700,000 (with $390,000 mortgage)
  • Cottage worth $550,000
  • RRSPs – $500,000
  • TFSAs – $26,000 each
  • Non-registered investments in a holding company – $600,000
  • Savings account – $50,000
  • Business valued at $700,000
  • RESP – $110,000

Their investments are a mix of dividend paying stocks plus ETFs in a 70% stock / 30% fixed income mix.

Goals:

  1. Semi-retire in two years.
  2. Fully retire in five years with an annual after-tax income of $80,000.
  3. Spend 6 months in Arizona and the rest of the year in Canada.
  4. Cover their children’s education costs (6 years).

The O’Sullivan’s wonder what steps they can take over the next 2 years to solidify their plan of a comfortable retirement.

Financial Plan

The couple wants to reduce their involvement in their business prior to selling and start living their retirement dream. They will eventually receive government benefits, but the bulk of their income will come from the business sales proceeds and investments. Here’s what they can do:

Develop a succession plan for the business

Selling a business they’ve spent years developing is a difficult decision. Advance planning for the sale is important. Many businesses are too dependent on their owners. They must build a management team to make the business sustainable without their presence and enable them to exit on their own terms.

Related: Succession planning

The O’Sullivan’s should meet with their accountant and ask him to review their tax situation. The tax consequences can be huge without proper planning, even if transferring ownership within the family.

They also need to get a realistic up-to-date appraisal of the business to see if it will fetch the money they need to retire.

Sell current home and cottage

The O’Sullivan’s are considering selling their current home and the cottage to purchase a smaller home in Sarnia for $500,000 and a winter home in Arizona for $200,000. The couple believes they will net approximately $100,000 from the sales, which they will invest in an ETF portfolio.

A couple can no longer claim two properties as principal residences. They may only designate one residence between them. They need to speak to their accountant about the best way to treat the capital gains (for either property) for tax purposes. It may reduce the net amount they expect to get.

Wintering in Arizona

When purchasing property in the U.S. it’s important to get the advice of a sales agent and lawyer experienced in out-of-country home purchases. Changing U.S. income and estate tax rules, especially if they plan to rent their home in the off-season, can be especially complex. The proper income tax forms must be completed to avoid double taxation.

If they plan to stay in the U.S. for more than 4 months they must fill out a “Closer Connection Exemption Statement” form for stays up to 183 days.

Related: Snowbirds – What you need to know

Be mindful of Ontario Health Coverage that states residents must be physically present for 153 days of the year for coverage.

Retirement income

Jerry and Monica will receive $100,000 annually in dividend income from their business when they semi-retire. Once the business is sold they want an after-tax income of $80,000 in today’s dollars. Most of this income will come from their savings. CPP and OAS will start at age 65.

They will need a total savings of approximately $2.6 million to realize this income in retirement based on an investment return of 4%.

Funds in the holding company can provide tax efficient income with regular dividends plus investment withdrawals are taxed as capital gains (as are other non-registered investments). RRSP and RRIF withdrawals are taxed as regular income.

Create a tax-efficient withdrawal plan.

Final thoughts

It is imperative to consult with competent, experienced professionals when selling a company and buying foreign property. This avoids costly misconceptions and unnecessary expenses.

Related: Have you considered a permanent retirement overseas?

For the next few years the O’Sullivan’s must take steps to increase their investment portfolio by contributing as much as possible to reach the desired goal. Otherwise, they may need to keep the business for a few more years. Even so, they are well on their way to a comfortable retirement.

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