Chad and Cheryl are saving to buy their first home sometime in the next three years, but they're not sure they can afford the type of house they would prefer. Prices in the city where they live are high.
"We are struggling with how much house we can afford," Chad writes in an e-mail. "We don't want to buy and then move again shortly after."
As renters, they are enjoying a carefree, downtown lifestyle, "two young professionals with limited expenses and good jobs," Chad writes.
But the prospect of big life changes over the next several years is creating uncertainty. They plan to have a couple children. As well, Cheryl might have the opportunity to buy into the accounting firm where she works, which would increase her income substantially – but would cost as well.
Chad is 29, Cheryl is 27. Together they earn $157,000 a year before tax.
"Should we continue renting in the downtown core where though rent is high, we can walk to work and don't own a car?" Chad asks. "Should we look to buy a house in the city or is that not an option?"
Both of their families would likely be able to provide limited help with a down payment, Chad writes. They would settle for a semi-detached house with two bedrooms.
Long term, Chad, who has a government pension, wants to retire at age 55. When Chad retires, Cheryl plans to begin working part-time. But that's a long way off.
We asked Matthew Ardrey, a certified financial planner (CFP) and manager of financial planning at T.E. Wealth in Toronto, to look at Chad and Cheryl's situation.
What the expert says
Buying the wrong house can be an expensive mistake, Mr. Ardrey says. He suggests Cheryl and Chad talk to their banker to get a better understanding of what they can afford, and a real estate broker to get a sense of what they would like in a house.
The average price for a semi-detached house in the city is more than $620,000, the planner says. In his calculations, that is what he assumes Chad and Cheryl pay. He adds 5 per cent or $31,075 for costs such as land transfer taxes, legal fees, moving costs and furnishings. The couple put 25 per cent down, using up most of their cash and investments but leaving their registered savings intact.
Mr. Ardrey's calculations assume Cheryl and Chad have two children, one in seven years and one in nine years. Child-care costs add to their expenses.
"With all these additional costs hanging over their heads, Chad and Cheryl have a financial ace up their sleeves," the planner says. Cheryl's earnings could rise fourfold if she becomes a partner, which the planner assumes she does in five years. This would leave them with a surplus of $160,000 a year on average, the number being lower in the early years and higher in the later. Mr. Ardrey assumes they spend half of the surplus and save the other half in a non-registered account.
When Chad retires in 26 years at the age of 55, he will get a pension of $26,160 a year plus a bridge benefit to age 65 of another $10,132 a year. Thanks to their substantial savings, they easily meet their retirement spending goal of $115,000 a year after tax in today's dollars, leaving them plenty of money to travel and help their children financially.
"Though all seems rosy, there is a substantial risk in their plan," Mr. Ardrey says. Cheryl may not become a partner. In this alternative forecast, Chad and Cheryl cease contributions to their tax-free savings accounts and registered retirement savings plans once they have a mortgage. RRSP savings resume only after the mortgage is paid off. There are no non-registered savings.
Their forecast cash flow in retirement drops to about $74,000 a year, far short of their target.
The couple face a second risk as well: death or disability of either spouse. Mr. Ardrey suggests they get an independent review of their insurance needs, which may go beyond whatever insurance they may have at work. As well, neither has a will or power of attorney.
On the investment front, Chad and Cheryl are using low-cost index funds and their portfolio is well balanced, the planner says. As their investments grow, "they may want to mix in some active management using the services of an investment counsellor," Mr. Ardrey says.
The people: Chad, 29, and Cheryl, 27.
The problem: Figuring out how much they can afford to spend on their first home.
The plan: Check with a banker and a real estate broker first. Be careful about buying based on an anticipated jump in future income that may not happen.
The payoff: Achieving their goal of being financially independent when he reaches age 55.
Monthly net income: $10,325
Assets: Cash and short-term investments (his) $32,370, (hers) $112,510; his stocks $19,680; his mutual funds $2,910; her mutual funds $34,860; his TFSA $31,650; her TFSA $37,555; his RRSP $53,420; her RRSP $38,155; estimated present value of his pension plan $35,825. Total: $398,935
Monthly disbursements: Rent $1,700; heating $50; transportation $150; grocery store $350, clothing, dry cleaning $325; gifts $175; charitable $70; vacation, travel $500; other discretionary $200; dining, drinks, entertainment $550; grooming $80; club memberships $50; sports, hobbies $50; other personal discretionary $200; dentists, drugstore $125; health insurance $50; cellphone $80; Internet $45; RRSPs $1,155; mutual funds $750; TFSAs $1,000; his pension plan contributions $335; professional association $60. Total: $8,050 Surplus: $2,275 (going to down payment).
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