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Seven years ago, after working and backpacking overseas, Daria returned to Ottawa, where she got a sales job paying $31,000 a year.
From that modest start she has managed to save more than $40,000.
Now 38 years old, single and with a big rent hike looming, Daria wants to buy a home of her own so her living costs are lower when she retires. Her parents will lend her $15,000 for a down payment on a modest condominium apartment. Her mortgage broker says she can afford to pay in the $150,000 to $160,000 range. And she recently got a raise in pay.
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While not a lavish spender, Daria says she'd like to be able to enjoy "a few of the finer things and small vacations or trips" when she retires. But she has no pension beyond what she will get from the government and wonders: "Can I afford to buy a home and still be able to eat in retirement?"
Or will she put everything into the purchase of a condo only to find she has to sell it when she most needs the lower living costs?
If she buys now, Daria will be 63 by the time she pays off a 25-year mortgage, "much too late to be able to put much away for retirement," she says in an e-mail.
"Am I better off putting a lot more money into retirement savings and continuing to rent?"
We asked Ayaz Sunderji, an investment adviser at Vancity/Credential Asset Management in Vancouver, to look at Daria's situation.
What our Expert Says
Daria can do both, but it will be tight, Mr. Sunderji says, noting she will have to watch her spending closely unless she can generate more income.
Daria has been doing all the right things, adding monthly to her RRSP and setting aside money in the new tax-free savings account, he says. She has budgeted for her expenses and managed to stay out of debt.
If she buys, she will have less money to put toward her retirement goal, Mr. Sunderji notes. But if she continues to rent, her housing costs will bite deeply into her income in retirement.
The key is for Daria to have her mortgage paid off in full by the time she retires, he says. Any setbacks along the way - a job loss or illness - would ruin her plans.
"With the mortgage fully paid off by the start of her retirement, it will free up some cash flow to do the things she would like to, such as taking trips," Mr. Sunderji says. She will still be paying property taxes and condo fees, but they will likely be lower than the cost of renting, he adds.
Daria points out that she is facing a big rent increase anyway - to as much as $896 a month from $640 - because her building is being renovated. Even so, a condo would cost her substantially more - at least $1,270 a month, Mr. Sunderji says.
That's based on a purchase price of about $155,000, a mortgage principal of $142,290, including CMHC fees for a high-ratio loan, a 25-year amortization, a five-year mortgage rate of 4.15 per cent and a down payment of $15,500. The $1,270 also includes property taxes, condo maintenance fees, home insurance, lights, heat and cable.
Daria may get a better rate if she chooses a lower-cost, variable rate mortgage. If she does, she might still want to base her monthly payments on the higher, five-year fixed mortgage rate, Mr. Sunderji says. That way, if interest rates rise, they will not wreck her budget. If they don't, she will be able to pay off her mortgage loan faster.
Daria is setting aside $11,000 of her current savings to cover closing costs and upgrades to her new condo.
So will Daria have enough money, or will she be "broke, cold and starving?" as she asks in an exchange with the planner.
Let's look at the numbers. Mr. Sunderji says people generally aim for 70 per cent of their after-tax income in retirement because their expenses drop.
Seventy per cent of Daria'current salary would be about $20,500 after tax in today's dollars, or, allowing for inflation, about $35,000 when she retires at 65. By then her RRSP will have grown to $332,781, her TFSA to $95,577 and her non-registered holdings to $19,625 (assuming no further non-registered investments).
Mr. Sunderji estimates about $4,909 of her income during her first year of retirement would come from CPP (on the low side because she was out of the work force for a while), $9,308 from Old Age Security, $3,888 from investment income and $16,847 from drawing on her non-registered holdings, for a total of $34,952. After that, she would begin drawing on her RRSP and TFSA.
He assumes an inflation rate of 3 per cent, a pre-retirement return on Daria's RRSP and non-registered investments of 5 per cent (falling to 4 per cent when she retires and shifts to more conservative, fixed-income holdings) and a 4-per-cent return on the money in her TFSA, to 3 per cent after she retires.
Her RRSP contributions of $300 a month and TFSA contributions of $100 a month are assumed to rise by 3 per cent a year, in line with inflation.
As the years pass and her savings are depleted, Daria will have to rethink her situation. Mr. Sunderji estimates she will have enough money to last her to age 89.
"With no other savings, Daria may have to consider either selling her home or using her home equity to supplement her retirement income," he concludes.
How to buy a home and save for retirement too
Stay within budget and make sure the mortgage is paid off before retiring
Lower living costs after she retires at age 65 than she would have if she continued to rent
Monthly net income:
Mutual funds and GICs in RRSP $20,300; dividend paying stocks $9,600; TFSA $5,000; savings account $6,000
Rent $640; telephone $25; Internet $5; hydro $22; tenant's insurance $24; yoga class $36; charitable donations $50; RRSP contribution $300; living costs (food, clothing, discretionary) $480; saving for vacations and large purchases $200; health expenses (dental, prescriptions) $120; TFSA $100; other cash flow (to help pay for higher housing costs) $361. Total $2,363.