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-Justin Tang/The Globe and Mail

Wesley and Eva are just months away from paying off their mortgage and are wondering whether they can afford to move up to a larger home in the same neighbourhood.

He is 37, she is 39. They have two children, ages 5 and 7.

Together, they bring in more than $220,000 a year, he as a civil servant, she as an executive with a non-profit organization. Both have defined-benefit pension plans.

"While we are very happy in our smallish townhome in a great neighbourhood, we are wondering if we are able to afford to move to a larger home in the next five years to accommodate our growing children without compromising our ability to rent a summer cottage and/or travel during the summer months," Wesley writes in an e-mail.

They value their home at $420,000. A larger one would cost about $650,000. "If we make the house upgrade, we'll be right back into long, mortgage-paying years," Wesley writes.

They also want to help with their children's higher education and ensure they have a down payment for a first home. They are also eyeing early retirement.

We asked Matthew Ardrey, manager of financial planning at T.E. Wealth in Toronto, to look at Eva and Wesley's situation. T.E. Wealth is a fee-only financial planning firm.

What the expert says

Wesley and Eva are about to achieve the enviable goal of being mortgage-free by age 40, Mr. Ardrey says. "Now they must decide between a larger house and keeping the lifestyle they enjoy."

When they retire (at age 55), Wesley and Eva plan to spend $85,000 a year after tax in today's dollars. By the time Wesley retires in 2033, this amount will inflate to $121,400.

The planner has assumed another $12,000 a year, in current dollars, for increased travel spending to age 85 and a gift of $25,000 for each child at age 25. The average annual return on investments is estimated to be 5 per cent and the inflation rate is 2 per cent.

The couple asked for two scenarios, one where they stay put and one where they buy a larger home.

If they stay and pay off their mortgage this year, this would free up $27,600 in cash flow annually, or $2,300 a month. They would use this to catch up with their tax-free savings account contributions and to cover a $20,000 pension buy-back debt for Eva to catch up on pension payments she had missed. The planner assumes they continue to save in their TFSAs until age 72.

By 2018, they will need to buy a new car, which will reduce the extra cash flow to $1,700 a month. They'll continue to save this amount until they quit working.

"In this scenario, they can reach their retirement goal," the planner says. Indeed, if they decided to leave only the real estate for their heirs, they would be able to spend $91,875 a year in current dollars.

In the second scenario, they buy the new house for $650,000. After all the costs involved in buying and selling, they would have a mortgage of $283,500, which would be paid off near the end of 2027.

"With the same mortgage payments, this will leave their budget unchanged and offer no ability for additional saving," the planner says. He assumes they continue to make their annual RRSP contributions of $4,800 for Wesley and $3,200 for Eva until retirement, and TFSA savings of $4,800 each until 2038. After this point, they will need to draw on their TFSAs to help fund their spending.

"Based on these assumptions, they fall short of their retirement goal," Mr. Ardrey says. They run out of capital in 2058, when Wesley is 80. "If they wanted to keep all of the other factors the same, they would need to reduce their spending to $78,500 a year or increase savings by $8,700 a year," he adds.

Or they could simply work longer. "This has the double effect of increasing the number of years they save and reducing the number of years they spend."

Wesley's pension at age 55 will be $57,750 a year, plus a bridge of $10,050 until age 65, indexed to inflation. Eva has two pensions, one from a previous job. The first will pay $43,200, plus a bridge of $4,800 until age 65, not indexed to inflation. Eva's second pension, at age 60, would pay $21,012 plus a bridge of $3,523 until age 65, indexed to inflation.

Mr. Ardrey assumes both will receive full Canada Pension Plan benefits at age 65 but their Old Age Security benefits will be clawed back.

"Often, major decisions such as these come with an opportunity cost," the planner says. "Purchasing a larger home will not completely disrupt their retirement plans, but will likely cause them to make some tweaks and changes to the initial targets."


Client situation

The people: Wesley, 37, Eva, 39, and their children, 5 and 7

The problem: Can they afford to move up to a larger home without having to cut back on summer travel and cottage rental?

The plan: Two situations are compared, one where they have more than enough, one where they would have to cut back or work a little longer. It's up to them.

The payoff: An awareness of the tradeoffs involved in their goals.

Monthly net income: $12,950

Assets: Cash $4,000; stocks $8,150; her TFSA $20,000; his TFSA $13,000; her RRSP $87,000; his RRSP $90,000; estimated present value of her pension plans $414,000; of his pension plan $342,000; RESP $55,000; residence $420,000. Total: $1.45-million

Monthly disbursements: Mortgage $2,300; property tax $335; maintenance and repairs $400; cleaning $250; utilities, insurance $370; transportation $320; groceries $1,300; child care $750; clothing $425; gifts, charitable $115; vacation, travel $835; other discretionary $250; dining, drinks, entertainment $820; grooming, sports and hobbies, other personal $330; dentists, drugstore $160; life, health, disability insurance $330; telecom, TV, Internet $205; RRSPs $665; RESP $415; TFSAs $800; pension-plan contributions $1,570. Total: $12,945

Liabilities: Mortgage $7,000 at 2.34 per cent

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