Couple wants bigger house — will they have to sacrifice their retirement to get it?
Acouple we’ll call Geoff and Margie, ages 54 and 39, live in Alberta. Both work for government institutions and have defined-benefit pensions that limit what they can save in RRSPS. They are raising a two-year-old son. They bring home $10,500 per month from their combined salaries, which seems like a good after-tax income, but the reality is that it barely pays for many years of postgraduate study and the income that had to be postponed while they got their Phds. As a result, they feel left behind. They drive an older car with an estimated value of $8,000. In mid-life, their net worth is $607,200, approximately half of which is the $295,000 equity they hold in their $590,000 condo. They would like to buy a $900,000 house, but even that move would be restrained by their mortgage. They worry that spending now could cripple their retirement, which could start in as little as six years.
To sort out what they can do for a move-up house while maintaining retirement plans, Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C. to work with the couple. In his view, they can have their house and the larger space it would provide even though their savings in RRSPS, TFSAS and cash amounts to $294,300 plus their son’s $9,900 RESP. It’s not much for a couple in middle age.
THE COST OF A BIGGER HOME
The planning problem is complicated by their 15-year age difference and the resulting need to save for the likelihood that Margie will outlive Geoff by a decade or more. On their side for buying a house is the current house price decline in Alberta’s sullen home market. It affects their condo, too, but the price drop in the more expensive house is bigger. They would have to draw on savings for the move up, but as Moran points out, they will have substantial defined-benefit pensions when they retire.
They have $9,900 in their son’s RESP. Geoff and Margie contribute $150 per month. If they raise that to $208 per month and attract the Canada Education Savings Grant of the lesser of $500 or 20 per cent of contributions to a limit of $7,200, then in 15 years when the CEG ends, their son will have $72,000, enough for a first and perhaps a second degree at any Alberta university if he lives at home.
There is no doubt that cashing in much or all of their savings to buy the new house would impact their retirements, but Geoff could, if necessary, work to 70 and Margie into her mid-50s. At issue is the cost of the upgrade.
If they take their present home equity of $295,000, add $136,400 TFSA savings and $70,000 of their cash, they would have $501,400. They would need to borrow $398,600. Assuming interest at 2.5 per cent, they could pay $2,520 per month over 16 years to Geoff’s age 70. At two per cent even for 20 years, they’d have to pay $2,015 per month. It’s doable on their present income and projected retirement incomes. Of course, incursions into savings to pay down the mortgage or to make a larger down payment for the house would cut money for retirement, but with two defined-benefit pensions, they could tolerate that.
RETIREMENT INCOME
When Geoff is 70, he will have a $2,700 monthly pension indexed to 60 per cent of the Alberta cost of living. At 57, Margie will get $2,600 plus a bridge of $750 per month to 65. Each will get full Old Age Security in the amount of $7,500 per year. Geoff will probably work to age 70, so he should defer the start of OAS to age 71 with a bonus of 36 per cent, pushing his OAS to $10,200 and avoiding most of the OAS clawback which currently begins at $79,845. He may have some clawback loss to age 73 because of the two year lookback for this tax, but it would be relatively minor, Moran says. Margie can take her pension at 55 with a $9,000 bridge to age 65.
With these numbers, their pensions would have two stages: 1) when Geoff is 65 and then 2) when Margie is 65.
We do not know if the couple will raid their RRSPS for their new house purchase. We’ll take a middle ground and assume they do not take money out, but that they add no further funds. In that case, their $75,900 of RRSP assets growing at three per cent per year after inflation would become $121,818 in 16 years when Geoff is 70. That sum would generate $5,670 per year for the following 35 years to Margie’s age 88.
PENSIONS IN STAGES
Assuming that the couple retires when Geoff is 70 and Margie is 55, they would have his $18,000 annual pension from a previous job, $32,400 from his present job, his $18,461 enhanced CPP, $10,200 from OAS deferred for five years plus Margie’s $40,200 work pension at 55 and $5,670 from RRSPS. Added up, that’s a total of $124,931 before tax. After splits of eligible income and 20 per cent average tax, they would have $8,330 to spend each month.
After Margie starts drawing her own OAS and CPP at age 65, they would lose her $9,000 pension bridge that ends at 65, add her OAS of $7,500 per year plus her CPP of $13,000 for total income of $136,431. After 21 per cent average tax, they would have $8,980 to spend each month.
Buying a house and adding nothing to TFSAS after the house purchase will still make possible retirement incomes totalling $8,000 or more after tax. With no mortgage payments after Geoff’s age 70, no further RRSP, RESP, or other savings, nor child care costs, they would have about $3,800 of monthly expenses. Their retirement would be amply supported by pensions and savings.
THE PLANNING PROBLEM IS COMPLICATED BY THEIR 15-YEAR AGE DIFFERENCE.