At the age of 46, Camille has a couple of money-related goals that she would like to achieve in the next few years: taking a year-long sabbatical from work to travel and buying a larger condo.
Camille works for the government and will be entitled to a defined benefit pension when she retires from work in 10 years or so. She is single with no debt, but she has financial obligations to her family.
“With no one else to rely on, and the potential need to help my parents financially as they get older, I am unsure if I can take on the risk of not working for a year,” Camille writes in an e-mail. “I would therefore really appreciate some advice as to whether my goals are realistic.”
As well as some savings, Camille has a one-bedroom condo apartment valued at $270,000.
We asked Graham Hubert, a financial planner at Henderson Partners LLP in Oakville, Ont., to look at Camille’s situation.
What the expert says
Camille is fortunate to have a defined-benefit pension plan that is projected to provide her with an annual pension of $68,880 a year in future dollars when she retires at the age of 57, Mr. Hubert says. In addition, Camille is entitled to an annual bridge pension in the amount of $10,400 a year from retirement until the age of 65, when she will begin receiving Canada Pension Plan and Old Age Security benefits.
Camille estimates the cost of helping out her parents will be about $3,600 in 2019, $6,000 in 2020 and $12,000 a year thereafter, the planner says. Camille wants to be prepared to assist her family financially for at least 10 years.
Camille also wants a bigger condo. She is looking to buy next year with a purchase price of $400,000. She plans to rent out her existing condo. To make this plan work, she would need to get rental income of $1,000 a month net of all expenses – property tax, mortgage interest, repair and maintenance and tax on the rental income, Mr. Hubert says. Any shortfall – and there could well be one – would have to come from her nonregistered savings.
Camille has a benefit at work that allows her to earn 80 per cent of her current salary for four years and take the fifth year off with 80 per cent of her salary.
If Camille decides to take the planned sabbatical, she can still reach her retirement goal, but she will need to take up to $23,000 a year over the five years she is at 80-per-cent salary from her nonregistered portfolio to cover the deficit created by the reduction in income, Mr. Hubert says.
When it comes to financing the new home purchase in 2020, Camille could leverage the equity in her existing condo to help with the purchase, the planner says. That is, she can borrow against her existing condo, which is mortgage-free, to help finance the new one.
If she is able to borrow up to 80 per cent of the value of her condo, or $216,000, and uses all $122,000 of her available cash for the down payment, she will have a total of $338,000. Assuming a purchase price of $400,000, she will only need to finance the remaining $62,000. She could do this with a mortgage on her new property.
Assuming an average annual interest rate of 3.5 per cent amortized over 10 years, the monthly payment would be about $613, so the loan would be paid off by the time Camille retires from work.
As for the home-equity loan in the amount of $216,000 against the existing condo, Camille can amortize it over 25 years. Using a 3.5-per-cent interest rate, it would cost about $1,079 a month, which would be covered in part by the rental income from her existing condo, Mr. Hubert says.
“By combining these borrowing strategies, Camille can comfortably purchase a new property costing $400,000 as long as she continues to rent out her existing condo for at least $12,000 a year in net after-tax rental income,” the planner says. Any shortfall would have to come from her savings, starting with her nonregistered investment account.
According to the planner’s assumptions, Camille’s monthly lifestyle expenses and investment savings would remain at $5,485, but would now include a monthly debt obligation of $1,692 with net rental income of $1,000 a month after tax.
“To further accommodate these strategies, Camille should ensure that she has six months’ of expenses, including amounts needed to help her parents, in an emergency fund at all times,” the planner says.
After she returns from sabbatical, during which time she will have to draw from her savings, “Camille will be in a good position to support her parents financially in the years leading up to her retirement,” Mr. Hubert says. He points to her monthly surplus of $793, or about $9,500 a year.
Camille should then review her asset allocation in her nonregistered and registered portfolios to ensure she is maximizing the potential returns and tax efficiency, he adds. In her nonregistered portfolio, Camille is currently invested 100 per cent in fixed-income securities earning interest income. She can achieve better tax efficiency and potential for growth by having dividend-paying investments in her nonregistered portfolio and fixed-income holdings in her registered retirement savings plan and tax-free savings accounts, where investments grow tax-free.
“Camille should be comforted in the fact that her defined benefit pension will cover her lifestyle expenses in retirement,” Mr. Hubert says. She will have surplus cash flow at the age of 65 when she begins to withdraw income from her RRSP/registered retirement income fund and collect Canada Pension Plan and Old Age Security benefits. Her OAS benefits will be clawed back in part because of her over all income in retirement, the planner says.
Camille should use the surplus cash flow first to contribute to her TFSA, then to pay down the balance on her home-equity loan. Any remaining surplus could go to her nonregistered investment account. In the event she needs additional cash flow in the next few years to reach her objectives, she could draw on her nonregistered savings and cash, or on her TFSA.
In sum, Camille can cover cash-flow shortfalls from her nonregistered portfolio, and if need be, from her TFSA, in the years before she retires. When she retires, her pension covers her lifestyle needs. By then, the mortgage on her principal residence is paid off. She begins collecting government benefits at 65 and also begins making mandatory minimum withdrawals from her RRSP, which she converts to an RRIF. She has surplus cash flow that she can use to replenish her TFSA and nonregistered savings. Her plan works, leaving her principal residence, rental condo and whatever remains of her savings to her estate.
The person: Camille, 46
The problem: Whether she can buy a larger condo and take a year off given her financial responsibilities to her family.
The plan: Purchase a larger place by borrowing against her existing condo for the down payment. Maintain an emergency fund for unexpected life events.
The payoff: Reaching her goals while having the assurance that her family will be taken care of.
Monthly net income: $6,278
Assets: Condo $270,000; RRSPs $151,426; TFSA $86,831; nonregistered savings $145,449; cash $122,185; estimated present value of her defined-benefit pension $705,000. Total: $1.48-million.
Monthly distributions: Condo fees $425; property taxes $245; property insurance $25; utilities $35; car, insurance, gas, parking and maintenance $280; groceries $250; clothing $100; gifts $350; charitable giving $1,000; travel $250; entertainment and dining out $250; personal care, sports and hobbies $450; health care and insurance $95; cell and internet $95; other $225; RRSP contributions $450; TFSA $500; pension plan contributions $460. Total: $5,485. Monthly surplus: $793
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Editor’s note: A previous version of this article stated that if Camille borrows against her existing condo, which is mortgage-free, to help finance the purchase of a new one, the mortgage interest will be tax deductible because it is tied to an income-earning asset - her existing condo, which she plans to rent out. In fact, this strategy could be disallowed by the Canada Revenue Agency because the borrowed money was for a use not directly tied to the income-producing property. The CRA reviews interest deductibility on a case-by-case basis.