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Jennifer, 33, wants to save up a down payment for a condo and, longer term, save enough so she can retire from full-time work early if she chooses to.

Rafal Gerszak/Globe and Mail

At 33, Jennifer has two main financial goals: to save up a down payment for a condo and, longer term, to save enough so she can retire from full-time work early if she chooses to.

She’s a contract editor based in Toronto whose income comes in big chunks a couple of times a year and ranges from $60,000 to $120,000 before expenses. Because she is self-employed, she has no company pension. “The shelf life in my industry is quite short, so I’d like to be in a position where I don’t have to work full time after 55,” Jennifer writes in an e-mail.

“I usually earn a year’s income all at once but then have no idea when my next contract will come,” Jennifer adds. “This plays a major role in how I approach my investments.” The challenge is how to put this money to work short-term before her taxes and other expenses come due.

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“I’ve been trying to figure out how to structure this so that the money is not sitting in my chequing account – but so that it’s still available if I have a lull between contracts.”

Her retirement spending goal is $40,000 a year after tax.

We asked Tom Feigs, a financial planner at Money Coaches Canada in Calgary, to look at Jennifer’s situation.

What the expert says

Jennifer is living well below her means, so she is able to save a substantial sum in a good year, Mr. Feigs notes. She should continue to save patiently until she can put down at least 20 per cent on a condo purchase to avoid Canada Mortgage and Housing Corp. fees and keep her mortgage payments manageable, he says.

Jennifer could take advantage of the federal Home Buyers’ Plan, which allows first-time buyers to borrow up to $25,000 from their registered retirement savings plan (RRSP) without paying tax to use toward a down payment. The funds can be paid back to the RRSP over 15 years.

Mind you, this saving could take some time given that the average condo price in Toronto, where she lives now, is more than $500,000. Even with 20 per cent down, it’s doubtful Jennifer could qualify for such a large mortgage, the planner says. Big mortgage payments would also limit her ability to save for retirement.

“Given Jennifer’s circumstances and desire to quit working full time by age 55, she would have to be careful how much is allocated for home ownership,” Mr. Feigs says. “At current interest rates, anything above a $180,000 mortgage would cut too much into retirement savings.” She would be servicing a mortgage and saving for retirement for the next 22 years, he notes. Her cash flow would get tighter if and when interest rates rise.

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“This exercise of retirement goals versus current lifestyle is a key balance point that Jennifer must consider before committing to home ownership,” the planner says.

Jennifer could consider going farther afield. If she could find a unit within commuting distance of the city, she could have a place of her own and still meet her early retirement goal, the planner says.

To illustrate, Mr. Feigs assumes she buys a condo in two years for $230,000, with $50,000 down and a mortgage of $180,000 at 3.5 per cent. She upgrades to a $320,000 condo 10 years later using funds drawn from her tax-free savings account (TFSA). “I would also be comfortable with a $250,000 starter condo with a $70,000 down payment because Jennifer could vary her part-time income after age 55 to make up this $20,000 savings adjustment.” Jennifer could move up or delay her initial condo purchase depending on real estate market conditions.

The planner assumes a rate of return on investments of 5 per cent a year after fees, which gradually goes down as Jennifer approaches the age of 55 and begins to invest more conservatively. He assumes an inflation rate of 2 per cent a year and that Jennifer lives to be 100. While Jennifer’s income is variable, the planner assumes she earns $82,000 a year, increasing each year by 2 per cent until the age of 55. If her income is less, savings will have to be decreased; if more, savings can be increased.

After she buys the condo, Jennifer’s retirement savings are expected to drop from $31,000 annually to $28,000 – still an “exceptionally strong” rate, Mr. Feigs says. She will no longer be saving for a down payment. The planner suggests Jennifer continue to deposit $24,000 a year into her RRSP until her contribution room carried forward (more than $40,000) is used up, and the maximum allowed thereafter. The balance should go to her TFSA.

The planner recommends Jennifer start Canada Pension Plan (CPP) and Old Age Security (OAS) benefits at 65 rather than taking CPP earlier. “This serves to create higher lifetime income for basic spending.” At this pace of saving, Jennifer should be able to reach her goal – or at least come close. At 55, she will have a net worth of $1.5-million, including her condo, and her mortgage will be paid off. She will be able to sustain an after-tax lifestyle of $35,000 a year (in today’s dollars), short of her goal of $40,000. “With a few years of part-time income added in, Jennifer will easily close this small gap,” Mr. Feigs says.

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Jennifer wants her money to earn something while it’s waiting in her bank account, the planner notes. He recommends she open an EQ Savings Plus Account and have her pay deposited directly into this account. This income-only account should be separate from her personal chequing account. “This way, she can pay herself a regular monthly lifestyle amount into her personal chequing account.” EQ Bank is currently offering an interest rate of 2.3 per cent a year on deposits with no minimum balance, he says.

For self-employed people such as Jennifer, the planner suggests a separate tax and HST remittance account to hold funds for instalment payments and year-end taxes. “Another EQ Savings Plus Account would be ideal.” Each time she receives income, Jennifer should calculate 30 per cent to be transferred to this tax account.

The biggest risk to Jennifer’s forecast is long-term disability, the planner says. While she has some group benefits, the disability insurance does not extend beyond 52 weeks. He suggests she consult an insurance expert about the possibility of getting long-term disability insurance.

Client situation

The person: Jennifer, 33

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The problem: To buy a place of her own and be financially solid at the age of 55 so she can work part-time if she chooses to.

The plan: Consider a condo within commuting distance of the city to keep costs down. Maximize RRSP contributions and continue current savings.

The payoff: Greater confidence in her path to financial freedom.

Monthly net income: $5,563 (variable)

Assets: Bank accounts $57,043; RRSP $27,550; TFSA $55,500. Total $140,093

Monthly outlays: Rent $1,115; cellphone $48; electricity $170; health care $455; disability insurance $130; transit $146; bike repairs $5; groceries $200; entertainment, dining, lunches $150; clothing, shoes $100; gifts $50; charity $39; sports $200; vacation/travel $200; professional dues $55; RRSP $2,000; TFSA $500. Total: $5,563

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Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

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