Jackson is 38 and single with a good job in the Ontario public service. He rents a condo apartment in downtown Toronto for $1,800 a month and would very much like to buy a similar unit. Condos in his neighbourhood sell in the $500,000 range.
With a salary of $82,690 a year, he wonders if home ownership is within his reach – a question on the minds of many young, single folk who don't have the benefit of buying with a partner.
His short-term goal: To continue to save money for a down payment. He has about $17,000 so far. His long-term goal: To buy a condo in downtown Toronto.
"Buying versus renting: Which one is a better option given my personal situation?" Jackson asks in an e-mail. Looking further ahead, "given my current job comes with a defined-benefit pension, should I stop contributing to my registered retirement savings plan?"
Jackson doesn't have a set retirement cash-flow goal. "I want to maintain my current standard of living [and] continue living in downtown Toronto, dining out and so on."
We asked Marc Henein, a financial planner and investment adviser at ScotiaMcLeod in Mississauga, to look at Jackson's situation.
What the expert says
Jackson is making $5,225 a month after tax and mandatory withdrawals, Mr. Henein says. He is spending about $4,000.
If Jackson were to buy a condo like the one he is renting, he would pay in the range of $500,000. Assuming a mortgage rate of 3 per cent and a 25-year amortization, his monthly mortgage cost would be $1,700. Condominium fees would add another $500 a month or more.
"Buying the condo would effectively cost Jackson more money out of pocket than the rent being charged," the planner says. "Therefore, he is better off to continue to rent." While Jackson will miss out on the potential future price growth of a condo, "the real estate market in Toronto is arguably due for a correction," Mr. Henein adds.
Currently, Jackson has $17,000 in a savings account. "Instead of earmarking this for a down payment, I would view this as a rainy-day account to cover emergency expenses," the planner says. A down payment should be at least 25 per cent of the purchase price – in Jackson's case that would be $125,000 – to avoid paying expensive mortgage insurance fees, Mr. Henein says. "I would suggest he look to maximize his TFSA and RRSP savings with the target of an early retirement." Jackson plans to retire at age 60.
After he retires from work, Jackson would like to continue to maintain his standard of living, the planner says. Without the savings and pension contributions, he is spending about $3,000 a month on his core living expenses alone. That does not include discretionary spending.
"Jackson is fortunate to work for the provincial government and is paying into a defined-benefit pension plan," Mr. Henein says. "Jackson will qualify for about 75 per cent of Canada Pension Plan and Old Age Security benefits, given he will have lived in Canada for 35 years by the time he turns 60," he says. He came to Canada in 2001.
The combined amount of CPP and OAS (at age 67) would be about $900 a month. The defined-benefit pension should pay out about $2,400 a month at age 65.
"When we factor in 3-per-cent inflation, the $3,000 a month Jackson is currently spending effectively grows to $6,000 a month by the time he is 65," the planner says. Thus only half of his retirement expenses will be covered by a combination of his pension plan, CPP and OAS.
"Jackson will need to save about $600,000 to bridge the gap required to fund his lifestyle expenses" when he retires, Mr. Henein says. Assuming he draws 5 per cent annually from that pool of money, he will have enough to maintain his standard of living.
Currently, Jackson has $150,460 in combined savings between his RRSP and TFSA. If he focuses on maximizing both contributions each year and makes an average rate of return of 5 per cent annually until age 60, he will hit the $600,000 goal, the planner says. "Both the RRSP and TFSA should be invested in a balanced, conservative way given that he needs a slow, consistent rate of return."
Jackson is on the right path and his goals are reasonable for his budget, Mr. Henein says.
"I would not recommend potentially derailing his retirement objective by tying up capital in a condo purchase," he adds. "Given that Jackson needs to build a pool of assets outside of his pension to fund his retirement, I believe that should be his top priority."
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Client situation
The person: Jackson, 38
The problem: Can he afford to buy a condo like the one he is renting now?
The plan: Forget about the condo. Continue renting and saving for retirement, if he hopes to maintain his lifestyle when he is no longer working.
The payoff: The ability to live comfortably for as long as he wants in the heart of the big city.
Monthly net income: $5,225
Assets: Savings account $17,000; TFSA $39,160; RRSP $111,300; estimated present value of his defined-benefit pension plan $150,000. Total: $317,460
Monthly disbursements: Rent, home insurance, hydro $1,875; groceries $100; dining out $700; telecom, TV, Internet $170; TFSA $460; RRSP $250; pension plan $530; discretionary $1,135 (travel, gifts, charity). Total: $5,220
Liabilities: None
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