COUPLE PLAN FOR $60,000 WEDDING, $1.4M HOME ‘AS SOON AS POSSIBLE, AS BIG AS POSSIBLE’
Downsize intended house, establish tfsas, add to rrsps, estimate future retirement income
In Toronto, a couple we’ll call Harry, 30, and ruth, 29, plan to marry in the near future. each has a successful career, Harry in financial services, ruth in transportation management. Their hope: spend $60,000 on their engagement, wedding and honeymoon, then buy a $1.4-million house. It seems like a lot, even for a couple with combined gross salaries of $18,900 a month, but it can work. Harry and ruth have four condos with $524,000 total equity. With that level of financial muscle, Harry and ruth figure they can afford to move up to a suburban house and retire when Harry is 60.
“We plan to use our current savings, $50,000, to pay for the cost of the engagement and marriage,” ruth says. “We recognize that the Toronto housing market is insanely hot, so we would like to buy a detached home as soon as possible, as big as possible. We plan to sell three of our four condos to come up with a combined $400,000 cash down payment. We’d keep the fourth for its rental income.”
family finance asked Guil Perreault, a financial planner with G. Perreault financial Inc. in Winnipeg, to work with Harry and ruth. The goal — assess the workability of their plans and the implication of those plans for the future, including having a family and, of course, accumulating assets for retirement.
“The plan could work, but it’s hinged on good times, not adversities,” Perreault says.
WHERE THE MONEY IS
risk is embedded in their present asset allocation. Assets other than property are $59,700 in RRSPS and $50,000 cash. real estate is nearly 7/8 of their total net worth. It is a huge bet on the prosperity of housing in one geographic market. Harry and ruth know it, but they discount the chance that the market could falter. It is an Achilles heel that needs a fix.
first, cut spending on the wedding and honeymoon, ring, engagement, etc. Perreault advises. “Getting into debt is not what dreams are made of,” he says. Putting all of their $50,000 cash into upfront marriage costs is unwise: Cost overruns are common when making a wedding memorable, so reining in spending plans is prudent. budget to spend less, Perreault urges.
Next — the big house. Neither can use the rrSP Home buyer’s Plan as each already owns a home. They will need outside financing. A conventional mortgage on a $1.4-million house requires a $280,000 down payment. Then come provincial land transfer tax, about $24,475, and the city land transfer tax, $23,725, plus legal fees and moving costs. All that could make the upfront cost of the house approach $400,000.
They can get that cash out of the sale of their own residences to avoid paying capital gains tax. Then they can sell one more condo, preferably the least profitable.
Harry and ruth’s personal residences have $204,000 equity and $160,000 equity, respectively, totalling $364,000 before selling and moving costs, legal fees, etc. If they sell Harry’s rental condo, which barely breaks even after mortgage costs, condo fees and property taxes, they will have another $70,000 before fees and sales costs. The total equity harvested would be $434,000. That’s the money they need to get the mortgage for the big house and to pay related costs, but that leaves nothing for unexpected costs. If ruth can sell the units herself, she could save what she estimates would be $43,000 in commissions. but there would be a capital-gains tax on the third condo, which is a revenue property. feasible it is, but risky too.
It would be better to aim for a $1.2-million house, Perreault advises. The 20-per-cent down payment would be $240,000. There would be a cash balance from sale of the condos of perhaps $194,000 from which to pay land transfer taxes of about five per cent on the new house, $60,000, legal fees and so on. They could use the balance of about $100,000 for the costs of their next step — starting a family.
CHILDREN
The average cost of raising a child to age 18 and departure from the home for university has recently been estimated at $243,000. federal subsidies such as the $160 universal Child Care benefit reduce the bill.
Were ruth to have a child, she could receive employment Insurance benefits for a maximum of $524 a week for 51 weeks, Perreault estimates, leaving a shortfall of $44,752 to the couple’s annual income. If ruth does expect a child, then $82,000 could be transferred from savings enhanced by liquidating three condos: $41,000 could go to each partner’s tax-free savings account. Neither has a TFSA at present.
TFSAS are flexible, in that money can go in or be taken out without a tax consequence. Given their substantial space and the likely income shortfall during ruth’s maternity leave, it is an appropriate instrument, Perreault says.
RETIREMENT
retirement is a long way off for Harry and ruth, but it needs to be addressed. Harry’s company provides no defined benefit pension plan. ruth’s employer does have a db plan, but predicting what it may pay three decades hence is difficult. Assuming that she remains employed, that her salary remains $72,000 gross in 2015 dollars, that she works another 30 years, for a total tenure of 35 years, and that the plan pays two per cent of best five years of salary, she would have a $43,200 annual benefit.
The couple’s present rrSPs total $59,700: $1,000 goes to Harry’s plan each month and $500 to ruth’s. Given that Harry’s present marginal tax rate is 48 per cent compared to ruth’s 33 per cent, Harry should make all the contributions. Harry has $82,000 of rrSP room. If he can find or accumulate $43,000 over a year or two, and put it into his rrSP, he would get a tax refund of $21,000. If Harry and ruth add $1,500 a month to their rrSPs after adding $43,000 to Harry’s account and obtain a three-percent return after inflation, then in 30 years when Harry is 60 and ruth 59, they would have a balance of $1,131,300 in their rrSPs.
If the account were to maintain three per cent growth and be paid out over the next 36 years so all income is expended at ruth’s age 95, it would sustain a payout of $50,300 in 2015 dollars. Thus when Harry is 60 and ruth 59, they would have total income of $93,500 before tax. Add CPP for each at 65 of a projected $12,780 in 2015 dollars for total income of $119,060 and two OAS benefits at age 67 for each at present rates of $6,840 per person per year, and they would have about $132,740 gross income, plus any rental income from the remaining condo, perhaps $20,000 a year after the mortgage is paid off. If their total pretax income is $152,740 and they split eligible pension income, paying an average tax rate of 20 per cent, they could have disposable income of about $10,200 a month. even in Toronto, that ought to buy a pleasant retirement, Perreault says.