Declan is 35 and earns $125,000 a year working remotely.Christinne Muschi/The Globe and Mail
Declan is 35 and earns $125,000 a year working remotely. “Where I reside is not an issue,” he writes in an e-mail. He’s thinking of selling or renting his Montreal-area condo and moving to Southern Ontario to be closer to his parents.
The catch is that homes in Southern Ontario are more expensive than his $475,000 condo. He has Hamilton, Cambridge or even London under consideration.
“I have been thinking of retaining my Montreal condo as an investment property, but I don’t know whether this makes sense financially,” he writes. Saving for retirement is also on his mind. “My employer does not provide a pension.”
His questions: “How do I save for retirement and should I retain my existing condo?”
Declan’s goal is to retire in 30 years with $80,000 a year after tax, “although I’m not sure what a good target is to aim for or how this would be achieved,” he writes. “How much of a home can I afford if I move back near my parents and if I were to sell my condo,” he asks.
We asked Jason Heath, a certified financial planner at Objective Financial Partners Inc. in Toronto, to look at Declan’s situation.
What the Expert Says
Declan has done a great job of living below his means, Mr. Heath says. “He is on track to be debt-free before long. In fact, he could use his $115,000 tax-free savings account to pay off his $75,000 mortgage right now.”
Declan figures his condo is worth $475,000 and that he could rent it out for $2,000 a month. Condo fees, property taxes and insurance total about $600 a month. Property management might cost about $200 a month. “So, he could have $1,200 per month of net rental income, ignoring the mortgage, or $14,400 per year,” the planner says. That would be about 3 per cent of the $475,000 value. “That 3-per-cent net income is almost like the dividend an investor might receive from owning a stock.”
If the property appreciates by 3 per cent a year – “a more reasonable growth rate than Montreal and many other cities have seen over the past 10 years” – Declan’s annualized return could be about 6 per cent in total, the planner says. That is comparable to what he could earn investing in stocks, and also to the interest rate he would pay right now on a new mortgage on a second property.
“One could debate the real estate growth rate, stock return expectations, or the interest rate assumption, but the point is, it may not make a huge difference in the long run if he keeps or sells the condo,” Mr. Heath says.
The decision should be based in part on the type of property Declan wants to purchase in Ontario, the planner says. If he wants to buy a townhouse or a detached house, it may be helpful to have the extra funds. “In fact, he may need the condo proceeds.”
Based on his $125,000 income and using most of his $115,000 TFSA for a down payment, he may only be able to afford a home for $600,000 or so. “A $100,000 down payment on a $600,000 home is pretty close to the 20-per-cent down payment he would need to avoid Canada Mortgage and Housing Corp. insurance, so perhaps a 20-per-cent down payment should be a target.”
Declan could probably buy a condo in the Hamilton area within that budget, the planner says, but semi-detached and townhouses are selling for closer to $700,000 and detached homes are well over $800,000, according to Canadian Real Estate Association data. Declan may also need a car if he moves, which would add to his expenses.
Another consideration is simplicity. “There are drawbacks to being a landlord, such as tenant problems or turnover, property repairs, and hiring a property manager, especially when you are an out-of-town landlord.”
Despite his relatively high income, Declan has not yet opened a registered retirement savings plan, Mr. Heath notes. “He is in a 47-per-cent marginal tax bracket, so he could save nearly 50 cents on his first dollar of RRSP deductions,” he says. “Especially given one of his goals is starting to plan for retirement, RRSP contributions seem to be a good tool for him.”
Based on the data provided, and assuming a return to 2-per-cent inflation and a 5-per-cent investment return for his stock portfolio, Declan should be able to comfortably retire at the age of 55, Mr. Heath says. That’s based on retirement spending of $48,000 a year in today’s dollars, or about $70,000 at 55. This would be about $85,000 a year at 65, a bit higher than Declan’s estimate of $80,000. Declan is already saving quite a bit and once his mortgage is paid off, he will have an extra $1,000 a month he can invest.
“Even if he retired at 55, he would likely be able to live off investment income in retirement and see his investments grow slightly even on an inflation-adjusted basis,” he says.
A note of caution: “I am skeptical about his expenses though, which are estimated at less than $3,000 per month, excluding his mortgage payment,” the planner says. That seems low. “If we inflate them to $4,000 per month, he can still retire comfortably at age 55,” Mr. Heath says.
Based on these assumptions, Mr. Heath projects that Declan could retire with about $1.75-million of investments and see those investments rise to about $2.5-million by 95. (Putting those values into today’s dollars, adjusted for inflation, the balances are estimated at about $1.2-million and $750,000, respectively.) “But so much can change for someone like Declan at his age and stage,” says Mr. Heath. “The point is the current trajectory looks great.”
Declan can certainly afford to move to Southern Ontario even if it means taking on a bigger mortgage, the planner says. “If we assume that Declan sells his condo and spends an extra $300,000 on a property in Ontario, funded with a $300,000 increase in his mortgage, he would still be able to comfortably retire a few years later, by age 60.”
Assuming $4,000 of monthly expenses in addition to his increased mortgage payments, he can probably accumulate about $1.5-million in investments by 60 and maintain that balance more or less throughout retirement.
Client Situation
The Person: Declan, 35.
The Problem: How much house can he afford if he moves Southern Ontario from Montreal? Should he sell his condo or rent it out? What can he do to prepare financially for his eventual retirement from work?
The Plan: Selling or renting the condo wouldn’t make much difference financially but it might be simpler to just sell it and use the proceeds toward a new home. Save for retirement by contributing regularly to an RRSP.
The Payoff: Financial security.
Monthly net income: $6,725.
Assets: Tax-free savings account $115,000; residence $475,000. Total: $590,000.
Monthly outlays: Mortgage $915; condo fees $290; property tax $210; utilities $60; home insurance $45; maintenance $50; garden $10; transit $50; groceries $300; clothing $100; gifts $50; vacation, travel $150; dining out $650; personal care $100; club membership $15; entertainment $50; pets $150; sports, hobbies $100; subscriptions $50; dentists $25; communications $195; miscellaneous expenses $1,350. Total: $4,915. Surplus $1,810.
Liabilities: Mortgage $75,000.
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Some details may be changed to protect the privacy of the persons profiled.
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