Sarah and Steve have interesting jobs and a mortgage-free home in the B.C. Interior. Steve, who’s in the science field, has a government pension that would provide a good chunk of their retirement income if he worked into his 60s.
Steve is 52, Sarah is 49.
They feel they are at a “transition point.” With their mortgage paid off and no children to worry about, they are thinking of “shifting the last phase of our working life into overseas development work,” Sarah writes in an e-mail.
“We did some international volunteer public health work for two years and are planning to find similar work overseas in the next couple of years,” she adds.
“In preparation, we are planning a renovation to our home so that we have a suite that can be rented out while we are working outside of Canada,” Sarah writes.
That way, they would still have use of the main house when they return to Canada on vacation “and eventually retire.”
They wonder about the wisdom of their home renovation plan, which will cost between $100,000 and $140,000. They also wonder how best to prepare for retirement. They hope to hang up their hats in 2025 with an after-tax spending target of $66,000 a year. “We need to figure out what kind of foundation we need to put in place that will allow us some flexibility but also a secure retirement,” Sarah writes.
We asked Ian Black, a fee-only financial planner at Macdonald, Shymko Co. Ltd. in Vancouver, to look at Steve and Sarah’s situation.
What the expert says
To add a suite to their home, Sarah and Steve will have to borrow money, Mr. Black notes. In his analysis, he has them spending $120,000.
“They should be aware their house may not increase in value by the same amount.”
While they have about $87,000 in cash and investments, spending the entire amount would use up any liquidity they have for emergencies. Mr. Black suggests the couple use $20,000 to $30,000 of their cash and borrow the balance for their renovation.
“Debt repayment should be a priority.”
With a savings capacity of $2,400 a month, the debt could be repaid in four years. If they quit their jobs and head overseas before the debt is repaid, it could affect their long-term financial goals, he notes.
To illustrate what Steve and Sarah would give up if they quit working, Mr. Black draws a comparison based on their pension statements. If they were to stay at their current jobs, they could achieve retirement income of $76,600 a year before tax.
Steve could retire at age 62 and begin drawing a pension of $2,488 a month before tax. He would also get a pension plan bridge benefit of about $700 a month to age 65. He would begin collecting $1,007 a month in Canada Pension Plan benefits at 64 and $552 of Old Age Security benefits at age 67.
Sarah would get $876 a month in pension from her previous employer starting at age 55. She would also get a pension plan bridge benefit of $238 a month starting at age 55 and stopping at age 65. She would get $934 in CPP benefits at age 65 and $552 a month in OAS benefits at age 67.
Alternatively, if they leave their jobs now to work overseas and Steve doesn’t contribute further to his pension plan, they could still achieve their target spending of $66,000 a year, Mr. Black says. Steve would begin collecting a pension of $1,537 a month at age 62, plus a bridge benefit to age 65 of $404. However, his CPP may be reduced for the years outside Canada during which there was no contribution. OAS benefits would be the same as in the previous calculation.
For Sarah, the numbers would all be the same as in the previous calculation because she is no longer contributing to a pension plan.
It is likely the couple will be able to stash away some money for retirement between now and when they retire, the planner says.
“If we assume they can save $1,000 per month, their pre-tax cash flow could be $76,000 a year,” or $66,000 after tax.
“The shortfalls in the earlier years are made up from non-registered savings and RRSP withdrawals,” Mr. Black says.
“The uncertainty arises as to how the anticipated debt will be repaid,” he adds. “If they go ahead with the renovations, they will take on about $100,000 of debt. Then they leave Canada to work overseas at unknown incomes.”
When they return to Canada, it is unlikely they will return to their current jobs, he says.
“What will they earn upon their return to Canada? How does the debt get repaid and how long will it take?”
Ideally, whatever money they borrow will be repaid before they embark on their overseas careers.
Steve, 52, and Sarah, 49
Can they afford to renovate their home, leave their jobs and work overseas without jeopardizing their long-term financial security?
If they decide to go ahead with the renovation, they should borrow most of the money so they don’t deplete their emergency fund. Pay off the loan as quickly as possible.
Thanks to their pensions, they may well be able to achieve their goals.
Monthly net income
Sarah’s cash $28,423; Steve’s cash $11,443; term deposits $23,650; stocks $25,452; her RRSP $42,217; his RRSP $67,380; residence $480,000; estimated present value of his pension $404,000 (indexed); estimated PV of her pension $175,000 (non-indexed). Total: $1.26-million
Housing $785; transportation $305; groceries $800; clothing $220; car loan $390; gifts, charitable $235; vacation $875; electronics $85; sports, hobbies $500; grooming $165; dining, entertainment $520; other $85; medical/dental $110; telecom, etc. $375; accounting fees $50; professional association $90; pension plan, group benefits $960. Total: $6,550.
Car loan $4,700
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