Sébastien and Sofia are in their late 30s and have three children aged 10, 7 and 5. Sébastien works in education, Sofia went back to university to get an advanced degree. Her family income is about $ 200,000 a year. It will increase as soon as Sofia starts full-time employment.
“So far, Sofia and I have been very careful with our money,” Sébastien wrote in an email. “We avoided debt and have done well with our investments,” he says. “Our decisions are rarely based on money and almost always on our values, life goals and the kind of education we want to offer our children.” The Montreal couple plan to move to a larger apartment in the next few years to have more space for theirs Family to create. They want to give their children the opportunity to attend a private high school if they wish. Private schools in Quebec cost about $ 7,000 a year. They also want to help with their higher education.
In the midst of these well-ordered plans, an unexpected opportunity landed: Sébastien and his brother were asked if they would like to buy the family house, a small three-season house that has to be extensively remodeled. “It has been in the family for three generations,” writes Sébastien. After the renovation, each family would spend time in the cottage, renting it out when they were not there to cover expenses.
Can you do this without jeopardizing your other goals? asks Sébastien. If so, how should you finance the purchase and renovation?
“We’re not too worried about retirement, but we are more concerned about the time kids go to high school,” he writes.
We asked Matthew Ardrey, a vice president, portfolio manager and financial planner at TriDelta Financial in Toronto, to look at the situation of Sébastien and Sofia.
What the expert says
If they decide to buy and renovate the family home, Sébastien and Sofia will split the cost with Sébastien’s brother 50/50 and expect the total to be $ 550,000, of which Sébastien and Sofia would pay $ 275,000, Ardrey says. To pay for the purchase and rebuilding, they have three options: Sébastien and Sofia could sell some securities and pay their share in cash; together, the partners could take out a 2.39 percent mortgage on the cottage; or Sébastien’s brother could borrow 1.05 percent on his condo, with both partners responsible for the loan.
“Selling securities results in capital gains and a loss of investment income,” says Ardrey. “That would only make sense if they could set it up as a Smith Maneuver, which would make the loan interest tax deductible,” he says. (If they sold some securities to pay for the cottage and then borrowed again to resume investing, the interest on the debt would then be tax deductible.) You would have to match the cost of taxes on capital gains with the tax savings from deductible interest compare payments.
Financing with a mortgage is probably the best option, says the planner. “Borrowing costs are very low today, and as long as your investment returns can exceed the cost of borrowing, this is the preferable choice.” Your mortgage payments would be about $ 11,680 per year.
Although the interest rate on the brother’s apartment would be lower, try not to mix the business with the family, Ardrey says. “If for any reason your financial situation has worsened, your brother shouldn’t bear the consequences.”
In his forecast, Mr. Ardrey assumes that they can get a mortgage for 80 percent of the value. The remaining capital will come from Sofia’s portfolio as her income is lower and the tax consequences of the capital gains are lower.
Aside from the cost of the mortgage, Sébastien and Sofia expect a net budget of about $ 1,200 a year as they plan to rent the cottage part-time to cover some of the costs. It also reduces other vacation costs.
The forecast is for Sébastien and Sofia to move into a larger apartment in 2023, increasing their rent from around $ 1,500 to $ 3,000 per month.
Her biggest spending year shows a $ 26,500 surge with higher rents, private high school and cottage mortgage payments, Ardrey says. “Apart from that, with Sofia’s increased income, her annual surplus savings remain in the range of 25,000 to 30,000 US dollars,” says the planner. “So there is a significant buffer to deal with this additional expense.”
Sébastien and Sofia are saving $ 625 a month on their children’s higher education with a registered education savings plan. Assuming $ 15,000 a year, including living expenses, for post-secondary education (lower due to lower tuition fees in Quebec), they could get the full bachelor’s degree for their first two children and two-thirds the cost of their third cover child. He assumes that any shortfall of Sébastien and Sofia will be covered from their personal investments.
Sofia and Sébastien are making their maximum annual contributions to their tax-free savings accounts, saving an additional $ 6,000 per year on Sofia’s registered retirement savings plan. Sébastien also pays $ 920 a month into his defined benefit plan. “They found a surplus of around $ 49,500 a year in their questionnaire,” says Ardrey. By the end of August, they had already saved $ 27,000. It is therefore assumed that a surplus will be saved.
“If your income rises and expenditures like the private schools end, your surplus grows considerably and we assume that your annual savings will also increase,” says the planner.
Sébastien and Sofia plan to retire at age 65 if they will receive the full benefits of the Canadian Pension Plan and Retirement Plan. Sébastien’s pension will pay him $ 60,280 annually, linked to inflation. Your goal for retirement is $ 80,000 per year after tax.
Their current mix of assets is 4 percent cash, 4 percent bonds, 11 percent preferred stocks, and 81 percent stocks, 47 percent of which are in Canada, 41 percent in the US, and 12 percent in international and emerging markets. This portfolio has achieved a historic return of 5.03 percent. You invest with stocks and exchange-traded funds, which keeps costs low, so that the planner assumes an average investment cost of 0.25 percent.
“We assume that in retirement they will need to be more conservative in their portfolio to avoid the inherent volatility of their current mix,” says Ardrey. “We expect them to switch to a 60/40 stock / bond portfolio, which will bring their return down to a historic 3.84 percent.”
Sébastien and Sofia can achieve their retirement goal with ease, says the planner. “In fact, they could more than double their spending and still have money left over.”
The human: Sebastian, 38; Sofia, 39; and their three children
The problem: Can you afford to work with Sébastien’s brother to buy and renovate the family home without jeopardizing your other goals? How are you supposed to finance it?
The plan: Take out a mortgage to finance 80 percent of their stake in the cottage and sell stocks in Sofia’s portfolio to pay the rest. Keep saving your sizeable surplus.
The payout: All goals achieved
Monthly net income: $ 12,600
Financial assets: Cash of $ 14,500; its shares $ 401,455; their shares $ 146,000; its TFSA $ 130,765; her TFSA $ 135,670; his RRSP $ 120,345; their MSRP $ 96,990; estimated present value of his DB pension $ 157,500; RESP $ 85,000. Total: $ 1.29 million
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; Food, drinks, entertainment $ 380; Personal care $ 20; Sports, hobbies $ 500; Subscriptions $ 20; Dentists, drugstore $ 20; Health insurance, dental insurance $ 70; Life, disability $ 90; Communication $ 145; MSRPs $ 500; RESP $ 625; TFSAs $ 1,000; his $ 920 retirement plan. Total: $ 8,460. An excess of $ 4,140 goes to an unregistered savings account.
Would you like a free financial facelift? E-mail [email protected].
Some information can be changed in order to protect the privacy of the profiled persons.
Be wise with your money. Get the latest investment insights delivered to your inbox three times a week with the Globe Investor Newsletter. Register today.