With a stable job as an environmental engineer and a $100,000 gift from her father, Kamala naturally wants to buy a first home. She's 34, single, and has no plans to marry and have children.
But she lives in Vancouver, where a modest condominium apartment will set her back about $390,000.
"I'm wondering if both owning a condo and saving enough for retirement are possible with the gift from Dad," she writes in an e-mail. She also wonders whether she should withdraw money from her registered retirement savings plan to help toward the down payment.
Complicating Kamala's decision-making is her plan to go to graduate school in six or seven years to train for a completely different career in which she will be a self-employed professional with no company benefits or pension plan. Tuition will cost about $60,000 over two years but she figures she can earn $35,000 over the two years working part-time.
When she leaves her current employer six or seven years hence, she will be entitled to a small pension at age 65 - about $10,300 a year.
"Can I do it all?" she asks.
We asked Eric Davis, a financial adviser at TD Waterhouse Canada Inc. in Kamloops, B.C., to look at Kamala's situation.
What the Expert Says
Kamala might be able to afford a $390,000 condo but it would be tight, Mr. Davis says. He suggests she take advantage of the federal home buyer's plan, which allows first-time buyers to withdraw up to $25,000 from their RRSP without having to pay tax and pay it back over 15 years, resulting in a monthly payment of $139.
That, plus the gift from her father, would give her a down payment of $125,000, leaving her with a $265,000 mortgage loan. With a five-year mortgage rate of 3.6 per cent and a 30-year amortization (which would leave her debt-free by the time she retires), Kamala's payments would be about $1,200 a month, plus condo fees of $250 and taxes of $125 (after the B.C. homeowner grant), for a total of $1,575.
The $1,575 in monthly costs are only a little more than she would have to pay if she moved from her tiny apartment to a larger one, which she would like to do. She pays $725 for rent now and has a monthly cash flow surplus of about $940.
Kamala might want to look at the federal government's Lifelong Learning Plan, in which she could withdraw up to $20,000 from her RRSP for educational costs. The money would have to be paid back over 10 years, for a monthly payment of $167.
Kamala also wonders whether her investments are suitable. The planner suggests she hold the $25,000 earmarked for a down payment in short-term, easily cashable investments. The balance should be invested for long-term growth, 80 per cent in stocks or other equity-type investments and 20 per cent in bonds or other fixed income securities.
These categories could be further subdivided as her holdings grow between Canadian and international equities (dividend, value, growth, resources and emerging markets) and global, corporate and high-yield bonds.
As for retirement, that is still off in the future. Kamala's retirement income goal of $35,000 a year after tax is "easily achievable," Mr. Davis says. The Canada Pension Plan and Old Age Security will provide about $17,000 and are indexed to inflation, he notes. Her annual pension from her existing employer will add another $10,300.
"Since [income]taxes would be less than $5,000, she would need an annual income of $40,000 before taxes," he says. The balance would come from her RRSP. He bases his assumption on an RRSP of $87,000 (assuming she uses $25,000 for a down payment), an inflation rate of 2 per cent, a pre-retirement rate of return on investments of 6 per cent a year and a post-retirement rate of 4 per cent.
To achieve this goal, Kamala would have to contribute about $640 a month indexed to inflation to her RRSP. Since she is already contributing considerably more, she "could retire sooner or with a higher income," Mr. Davis concludes. A final word of caution: Given the high cost of buying in Vancouver, "there is not much wiggle room" if she encounters any problems or finds new items to add to her wish list, he says.
Special to The Globe and Mail
Client situation
The person: Kamala, 34
The problem: Determining whether she can afford to buy a Vancouver condo, eventually go back to school and still save for retirement.
The plan: Buy the condo, take advantage of the government's home buyers' plan to help with the down payment, and continue to contribute to her RRSP.
The payoff: A first home and, longer term, a well-paying career in an entirely new field with money left over for retirement.
Monthly net income: $5,290.
Assets: Bank accounts $15,420; Canada Savings Bonds $100; RRSP $80,000; RSP with employer $32,000; tax-free savings account $5,070; employer pension plan $2,405. Total: $134,995.
Monthly disbursements: RRSP contributions $1,385; employer pension plan $200; groceries, drinks and eating out $605; clothing $185; medical, drugs, dental $290; rent $725; tenant insurance $32; hydro $16; telecom, cable $152; miscellaneous $55; vacations $185; entertainment, subscriptions $120; auto, transit expenses $95; donations $40; gifts $100; recreation $90; personal care $105. Total: $4,380. Surplus: $940.
Liabilities: None