I became a daddy about six months ago and I love the little girl.  She’s my “pride and joy” as the saying goes.

She has two sets of grandparents.  Two are in the Greater Toronto Area, and two live up in a city called Sudbury which is about a 4.5 hour drive away.  Obviously there could be a few issues with the latter coming to visit her often.

Both sets of grandparents are fantastic and Baby K is lucky to have them in her life.  The Sudbury ones however, are pretty much at their retirement age and want to spend more time with Baby K and helping us out.  Which brings me to the point of this post.

When you think of how a lot of people retire, you might picture living in a big city or semi-big city, selling off your house when you hit that magic age and moving to a small ercity.  This move lets you purchase a much more affordable home in a small quiet town or by a lake somewhere (definitely not in the Muskoka’s … unless you had a multi-million dollar home beforehand) and still have quite a bit of money leftover to use to as retirement money.

For example, you might sell your home that’s completely paid for in Toronto for $500,000 and move to Bracebridge and buy a home for $120,000 and have $380,000 (minus any taxes you may pay if applicable) leftover for retirement! Not too shabby.

Ahh but you see my “in-laws” are doing things a little backwards.  They’re moving from a small town where their house is worth about $120,000 to a big city and retiring in the big city to be closer to their family.

If you haven’t seen where the problem is yet, I’ll illustrate a little further.  They’re both retiring, so they’ll have their old age pension and Canada Pension Plan payments for the two of them.  That’s not too bad, about $1700 a month.  They also have RSP’s of $100,000 and if you add in their house that just sold, that gives them about $220,000 to play with after they retire.  Living off this amount of money is definitely no problem, but if they do it the wrong way their money will run out probably before they do.

If you do the math, and they pay themselves say about $1000 a month from that $220,000, their money will be gone in a little over 18 years.  That’ll make them about 80-82 years old.
To make things worse, when they first spoke of moving down they got in their head that it would be a great idea to buy a place down here for about $250,000.  Though they could make this work with the amount of money they have, we didn’t want them to have the burden of  mortgage payments until they are so old they can’t brush their own teeth (or dentures as the case may be).  So we convinced them to rent down here at about $900-$1000 a month in a decent neighbourhood.  They can move anywhere they’d like and not have the stress of paying off a mortgage.

Now that their house has sold in Sudbury they are gearing up for coming down by April.  My father-in-law is in a bit of a panic mode right now about what to do with the money they’re going to receive for the house.  He wants to put it in a 2-year GIC and earn 2.5% on the money.  We’ve told him to wait before he does anything because my sister-in-law and I are going to chat about their possibilities.

The way I see it, they have three or four choices.  Choice A involves them putting their money away into extremely low-risk investments like GIC’s or Canadian Saving Bonds (CSB’s).  These pay little to no interest and your money is locked away for a set of time.  They’ll make some money but not enough to replenish what is being taken out and instead of the $220,000 being gone in 18 years, it might last about 20-21 years.

Choice B has them invest their money into a managed portfolio by a bank such as RBC.  Royal Bank says they’ll earn about 5% on their money, though they did this type of investment before and got burned.  How did they get burned?  Well, the portfolio they had focused on financial stocks.  During this last recession in 2008-2009, many Canadian bank stocks fell by 50% though they have since rebounded and weren’t nearly as adversely affected by the economic turmoil as the banks in the United States.  So they’re a little hesitant about putting their money into this option.   Also they don’t like the idea of bank fees eating into money made from this option.

Choice C has them put their money into dividend-producing stocks.  While this might sound like a good option,  my in-laws are almost 65 years old.  They’re still subject to possible downturns in the market, and the average 3% dividend yield isn’t really going to work for them either.  On top of that, they don’t want to wait for 20 years for the stocks to potentially be worth a lot more.

Choice D is my favourite for his particular scenario.  I had first thought that he might want to look into purchasing real estate with his money and living off the cash flow.  He could hire some property managers and then he wouldn’t have to do a lot of work with the property.  After thinking about it though, I realize that in reality my in-laws are getting to the point where they just want to relax and enjoy life and not worry about buying and selling real estate or having to find property managers.

So back to Choice D.  After looking at them myself, I thought about Real Estate Investment Trusts.  Not picking only one REIT, but instead putting about $150,000 of their money into 2-4 REIT’s equally.  The in-laws can use the remaining $70,000 of their money and invest in a GIC or CSB if they’d like some security.  But by putting $150,000 into a REIT, they’ll earn $1125 a month in distributions.  Distributions are taxed at a lower rate than regular income, and the income will cover off any rent they might pay here in Toronto.  Better yet, their money will still possibly grow by 3% per year (‘ish) and will be able to leave that money in the REIT without ever having to touch it.   With the $1700 a month from government money they’re looking at a income of $2825 per month.  For a retired couple with no debt that’s plenty to live on — even in Toronto.

So I’ve picked two REIT’s for them to look at and am investigating more.  I’m looking at Skyline’s REIT and League Assets Canadian REIT.  By putting their money into more than one REIT they ensure that even if one fails, the chances are unlikely it’ll happen to all of them at the same time.

If my in-laws follow my advice they could lose money.  It’s definitely possible.  But real estate has always proven to be a way to wealth for hundreds of years and I doubt it’s going to stop in my lifetime.  The chances are more likely, however, they will earn enough income to never have to touch their initial investment.  And if they earn approximately  3%  on the capital sitting in the REIT, the initial $150,000 will be worth $300,000 in 24 years rather than being used up in 20 (the rule of 72 at work — divide 72 by the interest rate on your money and you get the number of years it’ll take your money to double).

Later this week I’m meeting up with my sister-in-law to talk to her about my ideas.  I’m keeping my fingers crossed that she agrees with me that if they don’t take at least a little risk they’ll run out of money eventually.  If they listen to me the chances are more likely that it won’t.

Wish me luck!