Christinne Muschi / The Globe and Mail

Sébastien and Sofia are in their thirties with three children aged 10, 7 and 5. Sébastien works in education, Sofia returned to university to obtain a graduate degree. Their family income is approximately $ 200,000 per year. It will increase once Sofia starts working full time.

“So far Sofia and I have been very careful with our money,” writes Sebastien in an email. “We avoided debt and we managed our investments well,” he says. “Our decisions are rarely based on money and almost always on our values, our life goals and the kind of education we want to provide our children.” The Montreal couple plan to move to a larger apartment over the next few years to make more room for their family. They want to give their children the opportunity to attend private high school if they want to. Private schools in Quebec cost about $ 7,000 per year. They also want to help with their higher education.

An unexpected opportunity presented itself in the midst of these tidy plans: Sebastien and his brother were asked if they would like to buy the family chalet, a small three-season place that needs extensive rebuilding. “It’s been in the family for three generations, writes Sébastien. After the renovation, each family would spend time at the cottage and rent it out when they weren’t around to help cover expenses.

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Can they do this without compromising their other goals? Sébastien asks. If so, how should they finance the purchase and renovation?

“We’re not too worried about retirement, but more concerned about when the kids will go to high school,” he writes.

We asked Matthew Ardrey, Vice President, Portfolio Manager and Financial Planner at TriDelta Financial in Toronto, to look into Sebastien and Sofia’s situation.

What the expert says

If they decide to buy and renovate the family cottage, Sebastien and Sofia will share the cost with Sebastien’s brother 50/50 and expect the total amount to be $ 550,000, which Sebastien and Sofia would pay. $ 275,000, says Mr. Ardrey. To pay for the purchase and the reconstruction, they have three options: Sébastien and Sofia could sell securities and pay cash for their share; together, the partners could get a mortgage on the cottage at 2.39 percent; or Sébastien’s brother could borrow on his condo at 1.05%, the two partners being responsible for the loan.

“The sale of securities will result in capital gains and loss of investment income,” said Mr. Ardrey. “It would only make sense if they could set it up as a Smith Maneuver, making the loan interest tax deductible,” he says. (If they sell securities to pay for the cottage and then borrow to restore the investments, then the interest on the debt would be tax deductible.) They should compare the cost of capital gains taxes to the resulting tax savings. deductible interest. Payments.

Mortgage financing is probably the best option, according to the planner. “The cost of debt today is very low, and as long as they can exceed the cost of debt with their returns on their investment, it is the preferable choice.” Their mortgage payments would be around $ 11,680 per year.

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Although the interest rate would be lower than borrowing against the brother’s condo, they should try to avoid mixing business with family, Mr. Ardrey says. “If for some reason their financial situation gets worse, their brother should not pay the consequences. “

In his forecast, Mr. Ardrey assumes they can get a mortgage for 80 percent of the value. The remaining capital will come from Sofia’s portfolio as its income is lower and the tax consequences of capital gains will be lower.

Besides the cost of the mortgage, Sebastien and Sofia predict that the net effect on their budget will be an increase in expenses of about $ 1,200 per year, as they plan to rent the cottage part-time to cover some of the costs. Plus, having it will reduce other vacation costs.

Forecasts assume Sebastian and Sofia will move to a larger apartment in 2023, increasing their rent from around $ 1,500 to $ 3,000 per month.

Their biggest spending year shows an increase of $ 26,500 with higher rents, mortgage payments for private high schools and cottages, Mr. Ardrey said. “That being said, with the increase in Sofia’s income, their annual excess savings remain in the range of $ 25,000 to $ 30,000,” says the planner. “So there is a significant amount of cushion to meet these additional expenses.”

Sébastien and Sofia are saving $ 625 per month in a registered education savings plan for their children’s higher education. Assuming a cost of $ 15,000 per year, including living expenses, for post-secondary education (lower due to lower tuition fees in Quebec), they would be able to cover all undergraduate degrees. for their first two children and two-thirds of the cost for their third child. He assumes that any shortfall is covered by Sébastien and Sofia on their personal investments.

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Sofia and Sebastien make their maximum annual contributions to their tax-free savings accounts and save an additional $ 6,000 per year in the Sofia Registered Retirement Savings Plan. Sébastien also contributes $ 920 per month to his defined benefit pension plan at work. “They note a surplus of about $ 49,500 per year on their questionnaire,” says Ardrey. They have already saved $ 27,000 at the end of August. Thus, any excess is assumed to be saved.

“As their income increases and expenses like private schools end, their surplus increases dramatically and so we assume their annual savings do the same,” says the planner.

Sébastien and Sofia plan to retire at age 65, when they receive full Canada Pension Plan and Old Age Security benefits. Sébastien’s pension will pay him $ 60,280 per year, indexed to inflation. Their retirement spending goal is $ 80,000 per year after tax.

Their current asset allocation is 4 percent cash, 4 percent fixed income, 11 percent preferred stock, and 81 percent stock, which in turn is divided to 47 percent at Canada, 41 percent in the United States and 12 percent in international and emerging markets. This portfolio has had a historic return of 5.03 percent. They invest using stocks and exchange traded funds, which keeps costs down, so the planner assumes an average investment cost of 0.25%.

“In retirement, we assume they need to make their portfolios more conservative to avoid the volatility inherent in their current makeup,” said Mr. Ardrey. “We are assuming that they switch to a 60/40 equity / fixed income portfolio, which reduces their returns to an all-time low of 3.84 percent.”

Sebastien and Sofia can easily reach their retirement goal, according to the planner. “In fact, they could more than double their spending and still have funds. “

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Client situation

The people: Sébastien, 38 years old; Sofia, 39 years old; and their three children

The problem: Can they afford to buy and renovate the family chalet in partnership with Sébastien’s brother without compromising their other goals? How should they finance it?

The plan: Take out a mortgage to finance 80 percent of their share of the cottage, selling securities in Sofia’s portfolio to pay off the rest. Continue to save their substantial surplus.

The reward : All goals achieved

Monthly net income: $ 12,600

Assets: In cash $ 14,500; its shares $ 401,455; its shares $ 146,000; his TFSA $ 130,765; his TFSA $ 135,670; his RRSP $ 120,345; his RRSP $ 96,990; estimated present value of his DB pension $ 157,500; RESP $ 85,000. Total: $ 1.29 million

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Monthly expenses: Rent $ 1,540; home insurance $ 40; electricity $ 30; car rental $ 200; other transportation $ 140; groceries $ 900; child care $ 420; clothing $ 200; gifts, charity $ 200; vacation, travel $ 500; meals, drinks, entertainment $ 380; personal care $ 20; sports, hobbies $ 500; subscriptions $ 20; dentists, pharmacy $ 20; health, dental insurance $ 70; life, disability $ 90; communications $ 145; RRSP $ 500; RESP $ 625; TFSA $ 1,000; his pension plan $ 920. Total: $ 8,460. The excess of $ 4,140 goes to the non-registered savings account.

Liabilities: Nothing

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Some details can be changed to protect the privacy of those profiled.

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Benjamin Steele

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