Skip to main content
Complete Olympic Games coverage at your fingertips
Your inside track on the Olympic Games
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Complete Olympic Games coverage at your fingertips
Your inside track onthe Olympics Games
$1.99
per week
for 24 weeks
// //

Jeff McIntosh/The Globe and Mail

Ruth and Ken are wondering how much they might have to pay for a house if they move back to Toronto, where they have family, in five years.

In the meantime, they are living in a rented apartment in Western Canada with their two young children saving as much money as they can for a down payment. Ruth is on parental leave but plans to return to work in September. When she does, they'll be bringing in $240,000 a year between them, plus bonuses. Ken is 41, Ruth is 35.

They wonder, too, how to invest the money they are saving and whether they will be able to pay off the Toronto-area house by age 65.

Story continues below advertisement

"I feel like we're pretty good savers, but we started late and are not that great at investing," Ruth writes in an e-mail. "We really have no idea if we're on the right track." They assume they will be making less money in Toronto. Their goal is for Ken to retire at age 65 and Ruth at age 60 with $97,000 in after-tax income, of which $20,000 is for travel.

Their financial planning is complicated by the fact that Ruth is an American citizen. Both have work RRSPs and employee share purchase plans to which their employers contribute. Ruth does not have a tax-free savings account because it is not recognized under U.S. tax law.

We asked Jason Pereira, a partner and financial planner at Woodgate Financial Inc. & IPC Securities Corp. in Toronto, to look at Ruth and Ken's situation. Mr. Pereira holds the certified financial planning (CFP) designation, among others.

What the expert says

When they buy, they should put the house in Ken's name, Mr. Pereira says. As it stands, much of the down payment money is Ruth's. However, under U.S. tax law, she can transfer no more than $148,000 to Ken.

"The last two points combine to create an issue," the planner says. American citizens have to pay capital gains tax on the growth in value of a principal residence if the growth is greater than $500,000 (U.S.). The planner suggests Ruth gift $148,000 to Ken and then use her remaining non-registered savings to pay for family expenses while Ken saves his income for the down payment. "The idea is to have Ken holding effectively all of the cash when it comes time to buy the house so that it can be bought in his name," Mr. Pereira says.

The money for the down payment should be held in cash, a high-interest savings account or a short-term bond, the planner says. "Anything else introduces risk to the plan that could see them suffering market losses that take years to recover from."

Story continues below advertisement

After preparing his forecasts of the couple's income and expenses, the planner recommends they buy a house in the Greater Toronto Area that costs no more than $800,000 currently. He assumes the price will rise by 2 per cent a year on average, in line with inflation to $865,945 by the time they buy it in the first half of 2022. By then, they will have saved a down payment of $443,125. Land transfer tax for first time buyers in the suburbs near Toronto, plus other closing costs, will be about $10,000.

A $432,820 mortgage at an estimated 5 per cent a year for five years will cost them $720 a week ($37,440 a year), Mr. Pereira estimates. Weekly payments will result in the lowest interest expense over time. Property taxes, maintenance and utilities are estimated to add $21,000 a year. They will need to renew in five years and again in 10 years. At each renewal, they should extend the amortization to the original 25 years. In 10 years, for example, they will have to extend the mortgage amortization to meet the looming costs of car replacement and the children's university, he says.

"They will also have to increase debt, through a home-equity line of credit (HELOC), in certain years to deal with the shortfalls." Once the children are out of school, they can shorten the mortgage amortization to 10 years. "Payments will continue for the first nine years of retirement."

Ken and Ruth should maximize their RRSP savings every year, the planner says. Additional funds could be used to contribute to the registered education savings plan for their children, make extra mortgage payments or pay down their HELOC.

The planner assumes Ken retires at age 65 and Ruth at age 60. By then, Ruth will have about $2.9-million in her registered plans (RRSP and defined contribution pension plan), while Ken will have $2.2-million, for a combined nest egg of $5.2-million.

In their first full year of retirement (2041), when he is age 66 and she is 61, they will have a combined income of $41,630, $30,400 from CPP and $11,230 in Old Age Security. With inflation, their expenses, including mortgage ($42,450) and income taxes ($66,940), will have risen to $281,010, so they will have to draw $239,380 from their savings. The draw will vary over the years, falling after the mortgage is paid off. By 2075, when she is age 95, their savings will have shrunk to $2.1-million, Mr. Pereira calculates.

Story continues below advertisement

They will meet their retirement spending goal but they will have to carry their mortgage into retirement, the planner says.

Mr. Pereira assumes an average annual rate of return on their investments of 7.2 per cent while they are still working – their questionnaire indicates they have a high risk tolerance – and 5.6 per cent after they have retired. The money they save for the down payment earns only basic interest.

The minimum return they need to make their plan work to age 95 is 5.5 per cent a year, or 3.5 per cent after subtracting inflation. They could improve their position by buying a less-expensive house, or increasing their savings during their working years, Mr. Pereira says.

++++++++++

Client situation

The people: Ken, 41, Ruth, 35, and their two young children

Story continues below advertisement

The problem: How much will they need to save to buy a house in suburban Toronto in five years?

The plan: Save up the down payment in Ken's name so they are not subject to U.S. tax laws. Keep the money in safe, short-term investments.

The payoff: Financial security

Monthly after-tax cash flow: $9,765 (reflects RRSP and DC pension plan contributions)

Assets: Her cash and short term investments $168,405; his cash and short term investments $21,000; her RRSP and DC pension plan $255,190; his RRSP, TFSA and DC pension plan $245,500; RESP $12,000. Total: $702,095

Monthly disbursements: Rent $1,800; utilities $150; home insurance $50; heating $250; car insurance $180; fuel, maintenance $250; parking, transit $250; grocery store $850; child care $800; clothing $475; gifts, charity $300; vacation, travel $1,000; other discretionary $500; dining, drinks, entertainment $850; grooming $150; sports, hobbies $200; other personal $400; health, dental insurance $50; telecom, TV, Internet $220; RRSPs $1,000; RESP $440; TFSA $500. Total: $10,665

Story continues below advertisement

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

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

Rob Carrick discusses the uptick in phishing and "smshing" scams and what you need to do to protect yourself against them.
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies