JENNIFER ROBERTS/The Globe and Mail
Simone and Paul enjoy city life. They have good jobs, high and rising income and a starter home in the suburbs. What they really want, though, is a charming old Victorian house in a more central location.
"We love Toronto, the restaurants, the culture, and the architecture," Simone writes in an e-mail. "Our dream is to buy an old Toronto home that needs a lot of love and slowly fix it up and live in it until we're old," she adds.
"But how does a young family, even with two well-paying jobs, get into such a house?" she asks. "They always seem to be out of our price range." He is in the professions, she is in sales. Together, they earn more than $300,000. The kind of house they want would cost $1.2-million, including all renovations.
Last year, they had their first child. They are planning to have a second one in the next year or two, which will necessitate another maternity leave.
Paul is 32, Simone 31. Looking beyond the dream home, their longer-term goal is to retire early.
They wonder whether they should buy now, before prices rise, or wait until they have a larger down payment. Will buying the house prevent them from retiring at 55 with a budget of $100,000 a year after tax?
Paul has a defined benefit pension plan that will stand him in good stead if he continues with his current employer until he retires. Simone has a defined contribution pension plan to which both she and her employer contribute.
We asked Marc Henein, an investment adviser and financial planner at ScotiaMcLeod in Toronto, to look at Paul and Simone's situation.
What the expert says
Simone and Paul are eager to buy their dream home, but doing so is likely to compromise their ability to retire early, the adviser says. At the couple's request, the adviser assumed no big jump in their income.
No doubt they have money to spare: Their lifestyle expenses are $7,000 a month plus $3,200 in mortgage payments. Their net income is $14,200, so they have $4,000 a month to put toward a larger home.
They have $350,000 of equity in their current home. If they were to sell and put the proceeds into a home worth $1.2-million, their mortgage payment would rise to about $4,500 a month (assuming a 25-year amortization and a 4-per-cent mortgage rate).
By the time the mortgage comes up for renewal in five years, interest rates could be substantially higher than they are now, the adviser says. By then, their principal would be down to $738,000. If mortgage rates soar to 8 per cent, for example, their monthly payment would rise to $5,600.
Longer term, they'd have to make some extra payments to ensure the mortgage was paid off before they retired. "Being debt free heading into a retirement is a must," Mr. Henein says.
In addition to moving costs, the more expensive home would have higher property taxes and operating expenses – all this while Simone is planning another maternity leave in one or two years. "Their expenses with the new house would not be sustainable on Paul's income alone," the adviser says. If Paul and Simone decide to trade up now, they should first build an emergency fund to cover at least six months of expenses, or $60,000. The money could be kept in a high-interest savings account.
"While waiting another six to 12 months before purchasing this home may be frustrating, it will ensure they have a material amount of liquid savings on hand to cover the incidental expenses that will come up," he says.
Next, the adviser looks at the longer term goal. When and whether Paul and Simone are able to retire with a $100,000 budget depends greatly on when their mortgage is paid off and they can shift their emphasis to savings. If they stay put, they could have their current $150,000 mortgage repaid within four years. If they buy the larger house, it could take them the full 25 years to pay off their $850,000 mortgage.
"If they don't move, they can retire at age 53," Mr. Henein says. In four years when their mortgage is paid off, the money they are now putting there could go to savings instead. "If they do move, they will likely not be able to retire prior to 62." The adviser's calculations assume a return on investments of 5 per cent and an inflation rate of 3 per cent.
Possibly tilting the balance in favour of the dream home are Paul's defined benefit pension plan and the possibility of a substantial increase in income over the next few years.
"Perhaps the most important retirement planning advice Paul can receive is to remain with his employer for his entire career to maximize his pension plan," the adviser says. Simone should take full advantage of her defined contribution pension plan, and if she has any room left over, contribute to an RRSP.
Client Situation
The people
Paul, 32, Simone, 31, and their 10-month-old child.
The problem
Figuring out if they can buy their dream home, expand their family and still retire at 55.
The plan
Weigh the alternatives carefully because their goals may well be mutually exclusive. Consider waiting a while to buy the new house and realize moving up may mean they have to work longer. They may also be vulnerable to rising interest rates.
The payoff
The confidence that comes with making an informed decision.
Monthly net income
$14,200
Assets
House $500,000; commuted value of Paul's DB pension plan $298,974; his RRSP $30,773; her DC pension plan $64,190; her RRSP $25,000. Total: $918,937
Monthly expenditures
Mortgage $3,200; child care $1,600; Simone's car payment $640; utilities $250; telecom, Internet, TV $300; property tax $200; groceries $450; insurance $100; maintenance $210; baby costs $200; clothes $600; personal grooming $200; dining out, entertainment $500; recreation, sports $400; travel $850; gifts, charity $500. Total: $10,200 Savings capacity: $4,000
Liabilities
Mortgage $152,000; Simone's car loan (tax deductible) $18,000. Total: $170,000
Special to The Globe and Mail
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