-Dave Chan/The Globe and Mail
Lena and Louis have good jobs and manage their money well. She is 38, he is 39. They have two children, ages 1 and 3.
Lena is in the Canadian Armed Forces, while Louis works as a manager. Like many parents, they are eager to buy a vacation retreat while their children are small, but they still have a while to go until their mortgage and car loans are paid off. Should they wait or buy the cottage now?
Louis and Lena are paying an extra $1,500 a month on their mortgage on their home in Southern Ontario and hope to have it paid off in three or four years. As well, they are saving for their children's higher education. Although they have some cash and savings, they would have to borrow to buy the cottage.
Longer term, their goals include paying off the vacation property mortgage in turn, increasing their retirement savings and travelling more. They hope to retire in their mid to late 50s with $60,000 a year after tax.
"Can we afford to purchase a cottage for about $250,000 in the next two to four years and still afford our retirement goals?" Lena writes in an e-mail.
"Should the cottage purchase be delayed until after the house mortgage is completely paid off and the kids are out of daycare?" she asks.
Lena will qualify for a full government pension when she retires but Louis has no work pension plan.
We asked Keith Copping, a financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Louis and Lena's situation. Macdonald Shymko is a fee-only financial planner.
What the expert says
With payments of $3,150 a month, Lena and Louis will have their $127,000 mortgage paid off in 3.5 years, Mr. Copping says. Their $33,500 in car loans will be paid off in 3.8 years. By 2018, their mortgage and car loans will be paid in full. They will be 42 and 43.
"Their expenses will be reduced by $3,885 a month (mortgage, car loans, extra mortgage payments), plus their child-care costs will be falling as the children reach school age," the planner notes.
By waiting to buy a cottage, their monthly outlays will be $4,000 to $5,000 lower, enabling them to absorb the financing costs, estimated at $2,057 a month (based on a $250,000 loan with a 13-year amortization) plus maintenance and other costs associated with a second property, Mr. Copping says.
If they were to buy a cottage now, "the extra cost will stretch the budget and result in a longer time frame to pay off the home mortgage, as well as reduced savings," Mr. Copping says. "Better to pay off the current debt first," he adds.
They have a monthly surplus of about $820, which they have been using for tax-free savings account contributions and extra loan payments.
Lena and Louis also wonder how the cottage purchase will affect their retirement spending goal.
"With 20 years' service to date, Lena can qualify for a full pension at age 54," the planner notes. She plans to work to at least age 55.
Mr. Copping estimates her pension at $75,600 a year, falling to $66,480 a year at age 65, when her pension will be reduced by her Canada Pension Plan benefit.
"Assuming they save $15,000 a year (RRSPs and TFSAs) for the next 17 years until Lena is age 55, their combined RRSP and TFSA savings of $219,200 could grow to about $900,000, assuming a 5 per cent return."
Their savings, plus Lena's pension, their CPP benefits at age 65 and their Old Age Security benefits at age 67, should allow them to "achieve their retirement goal with a healthy surplus," the planner says. Altogether, their income sources could approach $100,000 a year, before tax.
They should continue to contribute to Louis's registered retirement savings plan and their tax-free savings accounts when possible, he says. This would give them the flexibility to respond to unexpected events and perhaps help their children, who will still be fairly young when their parents retire. As well, Lena and Louis could draw on their savings while they are waiting to collect their CPP and OAS benefits.
They could use some of the cash they have in the bank to fund higher RRSP contributions for Louis so he could take advantage of his unused contribution room, the planner says. This should give him tax savings in the range of 33 to 39 per cent, he adds.
Lena and Louis should aim to be debt free by the time Lena retires at age 55, Mr. Copping says.
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Client situation:
The people: Lena, 38, Louis, 39, and their two children, 1 and 3.
The problem: How soon can they afford to buy a cottage?
The plan: Wait until their home mortgage and car loans are paid off, likely in 2018, to buy the cottage. Aim to have the cottage loan paid off before they quit working.
The payoff: They can avoid a potential cash squeeze and have greater financial flexibility.
Monthly net income: $11,700
Assets Home $555,000; her TFSA $24,000; his TFSA $25,300; her RRSP $90,600; his RRSP $79,300; RESP $11,780; cash $19,000; present value of her pension plan: $644,655. Total: $1.45-million
Monthly disbursements Mortgage $3,150; property tax $400; home insurance $130; maintenance $200; utilities $320; transportation $440; grocery store $600; clothing $20; phones $125; cable/Internet $160; child care $1,700; dining, drinks, entertainment, club membership $390; travel, vacation $400; life insurance $20; car loans $735; RESP $490; gifts, charitable $200; RRSPs $800; employee pension plan $600. Total: $10,880 Surplus $820
Liabilities: Mortgage $127,000 at 3.55 per cent; car loans $33,500. Total: $160,500
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