Jacqueline shares the experience of countless thirty-somethings with middling income living on their own in a big city: It’s crushingly expensive. No wonder she’s feeling a tad apprehensive.
“I make a decent salary, live within my means, and try to save as much as I can for retirement,” Jacqueline writes in an e-mail. “But living in the most expensive city in Canada has made me nervous that I am not fully prepared.” She grosses $75,000 a year working as a hair stylist and has no pension plan or company benefits. She’s 39 years old.
Jacqueline was able to buy a 660-square-foot Vancouver condo two years ago thanks to a $100,000 inheritance – and a 35-year mortgage. Fortunately, her family has been supportive, coming forward with two $10,000 gifts that she used to pay down the mortgage, which now stands at about $230,000. But the condo roof had to be fixed, and her share was $9,000, which bit into her tax-free savings account.
She invests her registered savings – a remarkable 28 per cent of her net income – conservatively in guaranteed investment certificates and medium to low-risk mutual funds, adding to the latter to better balance her portfolio, she writes. She has a seven-year-old car that she drives very little because she works close to home.
“I want to know what I could do to be smarter with my future,” Jacqueline writes. “I plan to work until I am 65.”
We asked Kurt Rosentreter, a chartered accountant, certified financial planner and a senior financial adviser at Manulife Securities Inc. in Toronto, to look at Jacqueline’s situation.
What the expert says
First off, Jacqueline should shorten the amortization of her mortgage so that it is paid in full by the time she retires, Mr. Rosentreter says. If she cut the amortization to 25 years, she’d be debt-free at about 63. That assumes a mortgage balance of $230,000, an average mortgage interest rate of 5 per cent – more than she is paying now – and payments of $680 every two weeks, a jump of about $270 a month.
Unsure of how much money she will need when she retires, Jacqueline asked what it would take to maintain her current lifestyle. In short, a lot, especially if she is still saddled with mortgage payments.
If she does pay off the mortgage before she retires, her cash flow needs will fall to the $32,000 range in retirement because she will no longer be contributing to her RRSP and TFSA. That $32,000 will have risen to about $55,000 after tax in 26 years, assuming an inflation rate of 2 per cent a year. That would be about $72,000 before tax. From that Mr. Rosentreter deducts Canada Pension Plan and Old Age Security payments, which will have risen to $27,000 combined by then. That leaves about $45,000 a year that Jacqueline would need to draw from her savings.
To achieve that, she would have to start retirement with a base of $825,000, Mr. Rosentreter concludes. His calculations assume a 4-per-cent return on investment to age 100.
To reach that goal, and given her existing RRSP of $45,130, she would need to save at least $15,795 a year.
“Currently her savings are on track to exceed this level – a conservative cushion in case there are some years she cannot afford to save to her goal or she does not achieve the average rate of return.”
Her tax-free savings account is reserved for emergencies such as job loss or unexpected condo expenses, and her short-term savings are used for the two extra mortgage payments that result from paying bi-weekly.
Jacqueline is a prodigious saver, but the planner wonders whether her savings rate is sustainable – and whether she will actually earn an average of 4 per cent on her investments year in and year out.
To enhance her savings, pay down the mortgage more quickly and perhaps enable her to retire earlier, Mr. Rosentreter offers some suggestions. Jacqueline says she doesn’t drive her car often. She might consider selling it and renting out her parking space, which she says would fetch $200 a month. She would also save $215 a month on car maintenance, insurance and gasoline. She could quit the gym and work out at home, saving $93 a month. Finally, she may want to take a look at her discretionary spending.
“Perhaps she should create a budget and track these expenditures to create a greater awareness of how she spends money,” the planner says.
How a person with no company pension can pay off the mortgage and save for retirement in Canada's most expensive city with income of $75,000 a year.
Shorten mortgage amortization from 35 years to 25 years so it will be paid off before she retires at 65, save as much as possible and scale down expectations of retirement income.
An easing of her concerns about financial security in retirement.
Monthly net income
$4,400 salary plus $430 tips. Total: $4,830
Cash in the bank $2,000; RRSP mutual funds $16,383; RRSP GICs $28,746; TFSA $4,795; home $356,000. Total: $407,924
Groceries and dining out $350; clothing $200; personal $100, maintenance fees $283, mortgage $1,205; property tax $36; condo insurance $32; hydro $30; telephone, cable, Internet $120; cellphone $85; house repairs $50; vacation $150; entertainment $100; vehicle insurance, maintenance $200; gasoline $15; gifts $100; medical $55; YMCA $93; charitable donations $50; life insurance $50; TFSA $416; mutual funds $930; short-term savings $150. Total: $4,800
Special to The Globe and Mail
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