Martine* was about to retire when she learned that construction defects were going to result in $200,000 of work being done on her condo. Ouch.
The situation
It’s a “reversal of fate”, says Martine.
The 60-year-old Montrealer hoped to retire at the end of the year. But the financial edifice of her retirement is shaken by the even more fragile edifice where she lives.
“I bought a condo in 2012 for $340,000, which turned out to have a multitude of construction defects,” she says.
“It’s a construction that dates from 2009. It started with water infiltration. And finally, the more it progressed, the more people we hired to carry out expert appraisals, and the more they saw that at all levels, there had been shortcomings. »
The cost of the work is estimated at $1.3 million for an eight-unit building. ” For the moment ! These assessments are already three years old. »
His share of the work would amount to more than $200,000.
“The work will be done in the spring of 2024. So I am still at work, despite myself. I will have to empty the condo for six months – the duration of the work –, rent myself an apartment and then come back. Lawsuits are underway, but if there is no amicable agreement, it will take several years before seeing the color of the gains. If there has ! So I can’t rely on hypothetical amounts to do my retirement scenario. »
Martine has been working for a parapublic company for almost 20 years. “Obviously, I will not have reached the years necessary to maximize my employer’s pension,” she observes.
She lives with her common-law partner, who does not own the condo. “So I will be alone to assume the rest. I have been tightening the screw for more than three years, in order to raise as many funds as possible. »
His apartment, worth about $410,000, is fully paid for.
“I managed to put enough money aside to try to reduce as much as possible the mortgage loan that I will have to get for the work,” she says.
“But how am I going to proceed? How am I going to make a cash out at the same time as paying a mortgage if I retire in the next year? »
She would like to stop working in December 2023. Her salary would continue to be paid to her for 10 months, the time to exhaust her accumulated sick days.
She estimates her retirement pension at $35,000 at age 61.
“My current lifestyle is around $40,000. This amount is likely to be the same at retirement. I am currently working almost 100% from home. »
This lifestyle is independent of her spouse, who will retire this year. One more incentive to take yours…
“I can’t wait to leave my job where I’m not really happy anymore,” she notes, pensive.
“I would very much like to know your opinion on this question which weighs terribly on me and darkens my future. »
Numbers
Martine, 60 years old
- Revenues in 2022: $103,794
- Registered Retirement Savings Plan (RRSP): $236,932
- RRSP in a labour-sponsored fund: $40,000
- Tax-Free Savings Account (TFSA): $101,083
- Guaranteed investment certificate (GIC) 1 year firm: $81,000
- Condo value: $408,000
- No mortgage balance
The answer
Martine’s Stations of the Cross will not be as painful as she thought.
The analysis carried out by Sara Ducharme, Senior Advisor in Wealth Management at Desjardins, offers a sort of reversal to the reversal of destiny announced by our reader.
Assisted by her colleague Jérémie Côté, a wealth management advisor, Sara Ducharme nevertheless hypothesized the worst: Martine will have to pay the $200,000 without compensation. To do this, she recommends that he refinance his condo for the value of the work.
“Of course, people are usually advised not to have any debts in retirement. This is ideal, but there are many situations, like Martine’s, where there will be debt, and for which we will recommend financial strategies. »
“His condo is still worth more than $400,000,” she says.
PHOTO HUGO-SÉBASTIEN AUBERT, THE PRESS
Jérémie Côté, Wealth Management Advisor, and Sara Ducharme, Senior Wealth Management Advisor, both at Desjardins
To this end, she suggests a mortgage line of credit, the flexibility of which would leave room for other projects, if Martine deemed it necessary. A term of two or three years would allow him to “see how interest rates will react in the coming years”.
For the purposes of his calculations, Mme Ducharme retains a rate of 5.5%. With a loan of $200,000, it translates into a monthly payment of $1,220 for 25 years.
Martine currently has $81,000 locked in a one-year guaranteed investment certificate (GIC). With this amount, as soon as it becomes available, the advisor “recommends that he make a capital payment. His dream is to retire this year. We must have the fewest possible payments if we want to be able to support our cost of living”.
It plans two capital rebates of 15% (the annual maximum generally authorized) in the following two years.
Martine will thus be able to reduce her debt by $30,000 for each of these two years, to reduce it to under $140,000 within three years.
“It reduces the amortization by 13 years, not counting the interest saved,” argues Sara Ducharme.
To make the mortgage payments, she suggests tapping into the tax-free savings account (TFSA), whose withdrawals are tax-free. Thus, “Martine will not be required to generate additional income to make her mortgage payments,” she emphasizes.
With the 4% return that the advisor applies to all of Martine’s investments, the TFSA, in which she currently holds $100,000, will remain comfortably full when the mortgage loan is paid off.
But why not have used the sum held in TFSA directly for the work?
“I validated this option when setting up the scenarios for Martine’s financial plan, but at age 95, she had fewer assets left than in the scenario we presented, which is about $36,000 less,” explains Sara Ducharme. . Also, I would prefer to let the TFSA accumulate tax-free for monies that will not be used for mortgage payments. »
Secure your back
We do not know Martine’s intentions, but no doubt she will not want to bequeath debts to her heirs, in the event of an early death. “When you take out mortgage financing, especially in retirement, we recommend insuring it,” advises the advisor.
As Martine was already considering, the advisor assumes that she will retire this year. The first 10 months will be covered by his accumulated sick leave.
His defined benefit plan, “which really helps him in this scenario”, will earn him a pension of $33,380 per year.
From his retirement until his 65e birthday, a bridging pension of $9,372 will be added to it, pending payment of the pension from the Quebec Pension Plan (QPP), provided for at age 65.
Since her budgetary balance does not depend on it, Martine should not apply for the QPP pension before age 65, to avoid the reduction of 0.5% to 0.6% per month of anticipation.
At age 65, his plan pension and public pensions will provide him with gross income of $57,000 which, even after taxes, will be enough to cover his cost of living of $40,000.
At age 71, her RRSP will be transferred into a registered retirement income fund (RRIF), from which she will have to make mandatory disbursements. Since her cost of living was then almost entirely covered by her pensions, Martine would have to content herself with making the minimum withdrawals.
“With all these strategies, Martine can retire as she wishes, can do the work on her condo in due time, and what’s more, her situation will just be improved if she wins her case concerning latent defects,” believes our advisor.
She estimates that at age 95, Martine will still have reserves of nearly $570,000, in addition to the condo that she is “not even selling”. If it hasn’t collapsed in the meantime.
* Although the case highlighted in this section is real, the first name used is fictitious.
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