Laurence* would like to see things more clearly. If it were a tunnel, a direction would be given and one day it would appear at the end. Laurence finds himself instead at a crossroads shrouded in dense fog.
“My income has been seriously reduced in recent years to be available for my mother, who died last November,” relates the 54-year-old woman.
Laurence hosted her mother for three years in her house on the outskirts of Montreal.
His home has since become too big. She lives there alone with her teenage daughter, who is finishing her fourth year of secondary school, “100% in my care”.
Big dilemmas
“I am faced with great dilemmas,” she said.
I’m tired of managing this big house and its attendant tasks. I would like to put it on sale in the summer of 2025… or not. I am confused.
Laurence
By applying a factor of 1.5 to the municipal assessment, she estimates its value at approximately $525,000.
His share of his mother’s inheritance will allow him to pay off the mortgage balance and repay the few debts accumulated over the past three and a half years.
“I estimate that there will be $40,000 left from the estate that I can use or invest. »
Should she sell the house, invest $400,000 by retirement “expecting a return of 8% per year”?
So, should you buy smaller or rent?
“I know that because of the rent, it could be expensive! », she exclaims.
Would it be better to rent out the house for around $3,000 a month while she rents a smaller place herself?
Intertwined with this is another objective: “I would like to retire at the maximum age of 63, if possible earlier. »
To answer this question, two pieces of data are essential: your income and your budget.
Both are uncertain at the moment.
Laurence works for herself in home support and support services, for an income of approximately $30,000 per year before tax.
Is it enough to pay your expenses, which would allow your cost of living to be approximated? “No, I should earn $46,000 net according to my actual budget,” she replies. I am looking for regular employment on the labor market, I do not earn enough as a self-employed worker. This suited me while I was a caregiver for my mother and needed flexibility. »
“I’m asking for a salary around $55,000 or $60,000,” she continues, “but I don’t even know if that’s in the current market. »
She poses the problem differently: “Would a salary of $70,000 be appropriate for my goal? »
Another budgetary parameter: the end of her daughter’s secondary education, in a year, will eliminate the $6,000 costs of private school. For her post-secondary studies, the student will be able to count on an RESP of nearly $40,000.
She adds another piece to the puzzle: “I would like to travel with my daughter once a year between now and retirement. Does budgeting $4000 seem correct to me? »
Then another.
“I am currently paying $350,000 for term life insurance at a cost of $432 per year. It will end soon. Should I renew it? I suspect the premium will be much higher. »
This is where another deadline intersects this foggy crossroads: by its 55e birthday, the 54-year-old could cash out the value of a defined benefit pension plan with a former employer, where she had worked until 2014.
Before August 20, 2024, she must choose between a non-indexed annuity of $1,124 per month paid starting at age 65 and a transfer of $140,510 into a locked-in retirement savings vehicle.
“Would it be wise to leave the money there to receive the annuity later, or would it be beneficial to withdraw it and invest it myself? »
In short, she is in the fog.
“How do I do it, please?” I have several thoughts to make and I’m getting lost. »
* Although the case highlighted in this section is real, the first names used are fictitious.
NUMBERS
Laurence, 54 years old
Current independent income: $30,000
Expected income in a new job: between $55,000 and $70,000
Currently in RRSP: $57,000
TFSA: $0 (but she plans to contribute $40,000 from an inheritance)
Daughter’s RESP: $40,000
Defined benefit pension plan
Annuity of $1,124/month, non-indexed, from age 65
QPP retirement pension planned at age 65
$1125/month
Property
Approximate value: $525,000
Mortgage balance paid shortly with inheritance
Municipal taxes: $2948
School taxes: $332
ADVICE
Although in the fog, Laurence is heading in the right direction, immediately notes Mélanie Beauvais, financial planner at Bachand Lafleur consulting group.
The itinerary needs to be adjusted, but Laurence “seems to have seen it and is taking charge to make the necessary adjustments,” she says.
PHOTO CHARLES WILLIAM PELLETIER, ARCHIVES SPECIAL COLLABORATION
Mélanie Beauvais, financial planner
Let’s settle the peripheral issues first.
Life insurance
In response to Laurence’s questions, the planner kept the life insurance premium in the budget.
“I didn’t think too hard to find out exactly how much we needed and whether the insurance amount was too high,” she comments. But with a child who is still 100% dependent, I would have difficulty canceling the insurance completely and not renewing it. »
The yield
Laurence mentioned a return of 8% for his savings. “A return of 8%, that means that I have a very aggressive profile,” notes Mélanie Beauvais, without being able to comment on our reader’s true risk tolerance.
By respecting the projection standards of the Institute of Financial Planning, “I cannot achieve an 8% return, unless I am 100% in emerging equities,” she notes.
In its calculations, it instead retained the return of a balanced portfolio, i.e. 3.7%, net of management fees.
Retirement pension
Should Laurence keep the life annuity from her old pension plan or cash in the accumulated value to invest it herself?
Mélanie Beauvais posed the problem as follows: what return should Laurence obtain on the accumulated value so that at age 85 (her life expectancy), the two options are equivalent?
“You need to have a return of 5% per year,” she calculates. That means I have a lot of exposure to stocks. Does she have this risk tolerance? »
For a target of 90 years, the return should be around 5.25% per year.
As part of retirement planning, Mélanie Beauvais assumes that Laurence’s savings should allow her to reach 96 years old. Under these conditions, it is more reasonable – and more reassuring – to count on the guaranteed annuity for life.
This is the data she used in her various scenarios.
The starting point
The starting point for the journey is given by the budget of $46,000 put forward by Laurence.
Within a few months, his daughter’s annual private school fees ($6,000) and mortgage payments (about $4,200 per year) will be wiped off the slate.
This will result in a cost of living of $36,000.
“If I consider her current income of $35,000, I can’t do it,” notes the planner, to put it mildly.
But Laurence is looking for a job that would provide him with an income between $50,000 and $70,000.
“With an income of $65,000 until age 63, I am able to maintain its cost of living of $36,000,” calculates Mélanie Beauvais.
This budget does not include any of the trips Laurence aspires to. However, in this hypothesis, she still lives in her house.
Bifurcation: What happens if Laurence maintains a modest income of $35,000, sells her house and buys a smaller, less expensive property? Assuming that this chain of transactions leaves him with capital of $100,000 to $125,000, Laurence would be able to maintain expenses of $40,000 until age 84. She then exhausts her liquidity and can only count on her public and retirement pensions. But he still has his property.
Once there, “she will have to reduce her cost of living or sell the house,” notes the planner.
Location
But Laurence is also considering renting accommodation. Mélanie Beauvais then assumes that the sale of the house would provide a net profit of around $500,000 – the inheritance then paid off the mortgage. She assumes a rent of $1,500 per month.
With a modest income of $35,000, Laurence is then able to maintain a cost of living of $40,000 until his hypothetical death at age 96.
“I am able to maintain my cost of living, and I am also able to travel,” emphasizes the planner. If I have rent of $1500 per month, it works. »
The result is, however, conditional on the magnitude of the rent. The planner adjusts expenses for inflation, but if rent soars, the long-term trajectory shifts in the wrong direction.
This is a risk that Laurence does not take with the purchase of a small property, a condo, for example. Since this home would be acquired without a mortgage with the proceeds from the sale of the current house, it would be insensitive to fluctuations in interest rates. It is then a matter of ensuring that the purchase price of the new property leaves him with a minimum of $125,000 in liquidity.
Rent your house?
Among the avenues that presented themselves at the crossroads, Laurence was eyeing that of renting out her current house, to acquire or rent a smaller home.
Our advisor has not gone very far down this path.
“I made scenarios, it works on paper if she is able to rent her house for $3,000 per month,” says the planner.
“The only thing is, she mentions up front that she’s tired of taking care of a big house. In addition to managing the house, he would have to manage tenants, find them, etc. Yes, financially, it is a way to improve your situation, but it still retains the maintenance component. »
The decision is up to Laurence, of course.
But the answer will largely depend on its use. It would be wise for her to confirm a salary before relinquishing her house. She will then be better placed to decide between renting and purchasing accommodation – a choice which will then likely be dictated by the amenities of the premises.