By DIANNE MALEY
Special to The Globe and Mail
Saturday, August 10, 2019
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 there after, 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 non-registered 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 non-registered 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. The interest on this loan will be tax deductible because it is tied to an incomeearning asset.
"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.
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 non-registered 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 non-registered 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 Old Age Security 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 non-registered investment account. In the event she needs additional cash flow in the next few years to reach her objectives, she could draw on her non-registered savings and cash or on her TFSA.
In sum, Camille can cover cash-flow shortfalls from her non-registered 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 non-registered savings.
Her plan works, leaving her principal residence, rental condo and whatever remains of her savings to her estate.
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