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(Chris Bolin for The Globe and Mail)
(Chris Bolin for The Globe and Mail)

Financial Facelift

Family quandary: Renovate … or pack up and move? Add to ...

Yves and Michelle are 42 with two children, ages 4 and 5, and their own very demanding consulting business.

They have a home in a good Alberta neighbourhood that they figure needs half-a-million dollars worth of renovating. Alternatively, they are mulling selling it and moving to a more expensive house downtown. But can they afford to?

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Will renovating or upgrading their home jeopardize their desire to quit the business when they are 55 – 13 years from now? They are saving mightily to this end, but if they upgrade, most of their savings will go to repaying a mortgage. Although he is paid well, Yves dislikes the field in which he works – one that keeps him away from home for weeks on end.

“If husband ain’t happy, ain’t nobody happy!” Michelle writes in an e-mail. She could pick up some part-time work when the children are older, but Yves prefers that she continue to help him with the business. “Some part of us will always wonder if we couldn’t have made a different choice, possibly a complete life change and attempt to get out of the rat race,” Michelle writes.

Would waiting a few more years to buy a bigger house change the picture that much? “Does it pay to wait? Perhaps we can’t afford it at all. Should we do a much less significant renovation, say $150,000, and call it done?”

We asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto to look at Yves and Michelle’s situation.

What the expert says

Whether Yves and Michelle decide on early retirement or a big renovation, they will need to bring in more money to make their dreams come true.

Working against their wish to upgrade their home is their desire to retire early from a very stressful business with an after-tax, indexed spending budget of $80,000 a year – year in and year out for 35 years or more, depending on how long they live. While they have considerable savings, they would have to add substantially to them to achieve this goal, Mr. Baldwin says.

Because of business deductions, Yves and Michelle may not qualify for the maximum annual contribution to their RRSPs of $23,000 each, Mr. Baldwin notes. “To qualify for this level, they would need to have earnings of $127,800 each from their company.” Instead, he assumes they each contribute $10,000 a year to their RRSPs and continue to make the maximum contribution to their tax-free savings accounts.

To achieve their retirement spending goal, they would need to save an additional $35,577 a year for 13 years, indexed to inflation, the planner calculates. He assumes a return on investment of 5 per cent a year and an inflation rate of 2 per cent, for a “real” or inflation-adjusted return of 3 per cent a year on average.

At age 55, they would have $1,032,000 in their taxable portfolio, $1,031,000 in their RRSPs and $250,000 in their TFSAs, for total investment assets of just over $2,300,000. By then, inflation will have lifted their $80,000 budget to $124,000 a year. By the time they are 75, that same $80,000 lifestyle will cost $160,000. Their savings will carry them through to age 90, at which time they would still have their house to fall back on, as well as their government benefits.

As for the house, any dramatic improvements would require them to earn still more, Mr. Baldwin says, “so here they face the trade-off of working much harder to achieve early retirement as well as pay for a larger house.” By staying where they are, they could gradually work at improving their current property “while at the same time striving to maintain the asset accumulation needed to help them target financial independence in retirement.”

Their business does have some risks. It is focused on one industry. As well, it requires that they both work at it. “Sickness or injury to either could derail their plans,” Mr. Baldwin says. He suggests they make sure they have good disability insurance coverage.

Yves and Michelle might want to consider another option: retiring from the stressful work at 55 and earning less through part-time or contract work. “Above all, they have choices and the financial flexibility and earnings potential to make things happen.”

_________________

CLIENT SITUATION

The people

Yves and Michelle, 42, and their children, ages 4 and 5.

The problem

Can they afford to renovate or buy a new, more expensive home and still retire early?

The plan

Earn and save more money and consider settling for a less-expensive and gradual renovation. Consider working part-time after they quit the business they are in now.

The payoff

The financial freedom to retire early from the stressful work that neither of them likes.

Client situation

Monthly net income

$7,528 (variable)

Assets

Bank accounts $50,000; term deposits $50,000; stocks $50,000; other $150,000; TFSAs $30,000; RRSPs $200,000 (his), $150,000 (hers); house $750,000. Total: $1.43-million

Monthly disbursements

Housing expenses $430; transportation $225; groceries $800; clothing $200; line of credit $500; sports, hobbies, club membership $200; dining out, entertainment $300; health, dental insurance $330; telecommunications, cable $290; RRSPs $1,500; RESPs $500; other savings $1,500. Total: $6,775 (No provision for gifts or vacation and travel.)

Liabilities

Business line of credit $173,000 (tax deductible).

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