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PAUL DARROW for the (GLOBE AND MAIL)
PAUL DARROW for the (GLOBE AND MAIL)

FINANCIAL FACELIFT

Can she afford to take summers off and also buy a house? Add to ...

Leanna is 43 and single again with shared custody of her two children, ages 6 and 8.

She has a government job and a good pension, but she takes five weeks off without pay each summer – in addition to her vacation – to spend with the children. This leaves her with gross income of roughly $88,000 a year, a number that will rise to $97,000 a year (in today’s dollars) when she goes back full time.

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Leanna expects to get $112,000 soon from the sale of the family home and wonders whether she can afford to buy a house in the Halifax area for herself and the children in the next couple of years.

Prices in her neighbourhood range from $275,000 to $350,000. She will also need a new car in the next year or so.

“Can I afford both of these and continue to take five weeks unpaid leave each year?” Leanna asks in an e-mail. “And what should I do with the down payment until then?”

She hopes to retire at age 60, at which point she will be entitled to a pension of $4,430 a month, plus a bridge benefit of $890 a month, which falls away when she begins collecting Canada Pension Plan benefits at age 65.

We asked Barbara Garbens, president of B L Garbens Associates Inc., to look at Leanna’s situation.

What the expert says

Ms. Garbens prepared three difference forecasts for Leanna. In the base plan, Leanna buys a $300,000 home in the summer of 2015. She retires at age 60.

“In this scenario, Leanna’s capital runs out in 2054 (age 83), at which time she will have to sell her home to free up capital for future living costs,” Ms. Garbens says.

In the second forecast, Leanna buys a house for the same price at the same time but continues to work until she is 65.

“Her capital lasts until 2061 (age 90) before she has to think about freeing up the value of her home,” the planner says.

In the third example, Leanna puts off buying the home until 2020 and retires at age 60. “Her capital lasts beyond mortality and no home sale is contemplated,” Ms. Garbens says.

The planner goes with the base plan. The plans assume an average annual return on investment of 3 per cent for registered savings, 5 per cent for non-registered investments and an inflation rate of 3 per cent.

(Ms. Garbens also assumes Leanna returns to work full-time at the end of August, 2020.)

Leanna will use the $112,000 she gets as part of her settlement for a down payment on a new home and a car. Because she will need the money within the next 18 months, the planner suggests Leanna keep it in a high-interest savings account or a short-term guaranteed investment certificate.

Looking beyond the home purchase, Ms. Garbens says Leanna will have surplus income during her working years despite the mortgage, day care and higher education costs.

“I suggest that she consider a combination of making additional payments toward her mortgage and also continue to contribute to her tax-free savings account,” Ms. Garbens says. “I would maximize the TFSA first, and then throw whatever else she has as a surplus toward the mortgage payment.”

If the TFSA is to form part of Leanna’s long-term savings, she should invest the money in a combination of fixed-income and equities, possibly through exchange-traded funds that charge low management expense ratios, the planner adds.

Once Leanna has contributed as much as possible to the TFSA and paid off the mortgage, she can start making contributions to a registered retirement savings plan to take advantage of the tax deduction.

Looking still further into the future, Ms. Garbens says Leanna will have to start thinking about selling her home when she is in her 80s, at which point it would be worth about $650,000, assuming price growth of 2 per cent a year.

Her annual expenses will have risen to about $98,000, while her pension income, CPP and Old Age Security will total about $109,000 pre-tax.

“Once tax is taken out of the equation, there is an approximate shortfall of about $17,000 a year,” she says. “If the house is not sold, this shortfall will continue.”

As the years go by, though, Leanna can review her expenses periodically to see whether she can cut back.

Client situation

The people

Leanna, 43, and her two children, 6 and 8.

The problem

Determining whether Leanna can afford to buy a house without having to give up her unpaid time off with the children in the summer.

The plan

Buy the house even though it may have to be sold when she is older to maintain her standard of living.

The payoff

A stable home for Leanna and the children to get on with the next stage of their lives.

Monthly net income

$5,265

Assets

Cash from settlement $112,000; estimated present value of DB pension plan $439,175; TFSA $17,145; RESPs $52,000. Total: $620,320

Monthly disbursements

Rent $825; other housing $220; transportation $380; groceries, drinks, dining out, entertainment $620; clothes, gifts, pets, grooming $300; telecom, Internet $125; sports, club memberships $305; charitable $40; vacation $300; life insurance $85; child care $225; summer camp $165; RESP $210; pension plan contributions $610. Total: $4,410. Surplus: $855

Liabilities

None

Read more from Financial Facelift.

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Some details may be changed to protect the privacy of the persons profiled.

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