Like many Quebecers, they succumbed to the call of the cottage in 2020. But will this haven of peace ultimately cause them financial stress in their retirement?
The situation
Fannie* and Guillaume* dream of retiring at 60 or, at the very least, slowing down from that age to three days a week until 65.
“We wonder if our chalet is hindering us in this objective,” wonders the couple, who fear they are not on the right track to achieve this goal.
In 2020, the couple bought a cottage on a lake and near ski hills for $350,000. They added $5,000 to fix the roof. “I was left with the impression that we paid a lot,” Fannie says. The couple says the family doesn’t enjoy the cottage as much as they did during the pandemic, but they still go there often enough to appreciate it.
Although there are no recent comparables, as no sales have been made around the lake since their purchase, Fannie estimates the market value of the property at $375,000.
When they bought the cottage, Fannie and Guillaume thought that this forced savings would one day allow their children to buy a property with its eventual value. They also thought about buying a triplex, which could serve as a home for the children and an office for Fannie’s private practice. “This project is in the pipeline, but again, we don’t know if it’s a good or bad idea!”
The mortgage on the house and cottage is due in 2025. The 40-somethings fear that rising interest rates have a significant impact on their retirement plans at age 60. Their current rate is set at 1.99%.
“We rent the cottage for short-term stays,” Fannie says, “which gives us a few thousand dollars in extra income annually, but not nearly enough to cover the cottage’s basic costs of $25,000.”
Fannie and Guillaume have a good income, but also several recurring expenses. First, the eldest, 14, attends a private school that costs $6,000 per year. The youngest, 11, will also attend private high school. There are orthodontic treatments that add up for both children, a total amount of about $10,000. Not to mention that the family lives in a century-old house that will need renovations.
The forty-somethings have good savings habits. They put $200 every two weeks into the children’s RESP. Fannie contributes the maximum allowable to her RRSPs each year, because she doesn’t have a pension fund from an employer, unlike Guillaume.
The couple recently did a budget that left them speechless. “Basically, after paying taxes, saving for RESPs and RRSPs, there’s nothing left,” says Fannie. “It feeds into this feeling of not being very good right now, with this plan of being financially free by 60.”
They sent a series of questions for the planner. “Should we increase our income? Decrease our expenses, but which ones? Sell the cottage? Rent the cottage more?”
Numbers
Fannie*, 41 years old
Salary: $83,560
Retirement fund: no
Projected QPP at age 65: $1,417 (at age 60: $858)
RRSP: $114,089
TFSA: $17,093
Guillaume*, 42 years old
Salary: $88,895
Employer Target Benefit Pension: $1,867 per month at age 65/$1,040 at age 60
Projected QPP at age 65: $1,595 (at age 60: $976)
CRI: $233,000
RRSP: $46,660
TFSA: $3,800
RESP: $25,000
Grandparents RESP: $10,000
Home Mortgage: $122,000
House value: $425,000
Cottage mortgage: $308,000
Value of the cottage: $375,000
The analysis
Pierre-Raphaël Comeau, Senior Advisor, Financial Planning, Laurentian Bank Securities, a financial services firm, analyzed the file.
Right from the start, he observes that the family has several expensive projects underway.
“Living in a century-old house has a lot of character, but when something breaks, it costs a lot. Orthodontic treatments and private school are also expensive,” says Pierre-Raphaël Comeau, who specifies that his role is not to judge the validity of projects, but to help consumers to prioritize the most important ones and to carry them out.
PHOTO MARCO CAMPANOZZI, THE PRESS
Pierre-Raphaël Comeau, Senior Advisor, Financial Planning, Laurentian Bank Securities, Financial Services Firm
According to his calculations, if the couple continues in their current direction without making any changes, they will hit a wall in 2026.
Already, with their mortgage rate at 1.99%, the family will be in the red by $7,000 next year. But in reality, it will be nearly double, because the rate will no longer be the same when the mortgages on the cottage and the house are renewed in 2025.
What will the rate be in 2025? Mystery. The expert therefore relied on the one suggested by the Financial Planning Institute for long-term projections: 4.4% fixed for 5 years.
“That’s almost $500 a month more in payments in 2026 for both mortgages. The projected deficit is $13,000 in 2026. That’s starting to add up.”
The options
What are the solutions? In discussions with Fannie, she said that she had reached the maximum number of hours per week possible in her profession, while she estimated the possibility of increasing the rental of the cottage by 15%. However, this additional amount will not be enough to cover the $25,000 in fixed maintenance costs.
Cut back on expenses? It’s up to Fannie and Guillaume to determine what’s less important to them.
One thing is certain: if Guillaume stops contributing to his RRSP, for example, it means that the couple will have to postpone their early retirement plans. Not to mention that the taxes to be paid will be higher.
If Guillaume and Fannie want to keep the house and the cottage at all costs, they could ask their financial institution for a longer amortization. “They can go back to the notary with a 30-year amortization. Some financial institutions offer this possibility. They would have smaller payments, but the disadvantage is that they will pay a lot of interest.”
Mopping up the deficit with their emergency fund is not recommended, because everything would fall apart in the event of a problem, says the expert, who notes that the amount of the fund should be $47,000, while it currently stands at $21,000.
The solution
After having multiplied the scenarios and made all the calculations, Pierre-Raphaël Comeau comes to the conclusion that the couple must sell the chalet.
A licensed appraiser or real estate broker will be able to provide them with comparables and set a price. According to the latest Royal LePage report, average prices for recreational properties in their area have increased by about 30% since 2020.
For the projections, the expert was cautious, estimating the sale amount at $400,000.
“The new 66% capital gains inclusion rate rules would not apply. The gain would be in the range of $50,000 (15%) to $100,000 (30%) for the couple, well below the threshold of $250,000 per person, per year, for the new inclusion rate to apply.”
Pierre-Raphaël Comeau advises waiting until next year to sell.
After paying off the mortgage, taxes and other costs associated with the sale, the couple would have approximately $86,000 remaining.
William could then put $31,000 into his RRSP and $12,000 into his TFSA, while Fannie would put $43,000 into her TFSA. The emergency fund would be replenished.
By 2025-2026, by paying for private school and orthodontic treatments, the budget would be balanced.
As of 2027, the couple would have a surplus that could be used for retirement savings. William could take advantage of this to use his remaining RRSP rights. In 2028, even after putting additional amounts intended for retirement, the couple will still have surpluses.
“It will be a good time to change cars and perhaps also re-evaluate the triplex project,” suggests the financial planner.
By following this plan, the goal of full retirement at age 60 in June 2043 would therefore be possible. Their monthly net income would amount to $6,800.
Pierre-Raphaël Comeau points out that a financial plan is subject to change. “This discussion lays a good foundation for the next six years, but we will have to check afterwards whether it still holds up.”
* Although the case highlighted in this section is real, the first names used are fictitious.