Indeed, it is better to ask the question before the means run out.
Posted May 23, 2021
Marc TisonThe Press
The situation
Nathalie* and Yves* cherish a dream which they doubt holds true.
Yes, a recreational vehicle, to recreate the couple. And maybe recreate it a bit, why not...
Nathalie and her husband, aged 55 and 61 respectively, want to retire in about three years.
“On the other hand, we are not going to earn millions, specifies Nathalie. For my part, I should receive $2,000 per month and my spouse, $2,700. After 32 years in the public service, she currently earns a salary of $48,000.
Yves, who has worked for a private company for 22 years, earns $92,000.
Nathalie's retirement pension is coordinated with that of the QPP, which will amount to $8,466 starting at age 60.
Yves will collect his RRQ pension at age 65, up to $11,894.
Between them, they hold $26,000 in RRSPs and $100,000 in TFSAs.
“Our annual expenses are around $40,000,” says Nathalie. We still have a girl at home. »
With another couple, Nathalie and Yves also own a small duplex on the outskirts of Montreal, valued at $250,000. The mortgage balance of $140,000 will be paid in 2034.
"Income is $16,200 and expenses are $14,000," she said. We've had this duplex for six years, every time we accumulate money, we renovate. It's a duplex that needs love. »
Their own house is fully paid for. “But we are going to have to secure our basement for a French drain problem, at a cost of $20,000. »
Reparation is intertwined with their retirement plan.
"We would like to buy a luxury trailer to be able to travel as we please", describes Nathalie.
They are targeting a class C vehicle, “the one that consumes a lot, a lot of gasoline”.
She estimates the price at $125,000. It would be financed using a home equity line of credit at a rate of 2.85%.
“On the other hand, we will still have to make monthly payments and be disciplined. »
Especially since they don't know how much the vehicle will be used for, other than by this approximation: “We know it's going to be expensive. »
That's why she asks the question, "Do you think we're living beyond our means?" »
Numbers
Nathalie, 55Salary: $48,000RRSP: $10,000TFSA: $65,000Retirement pension at age 58: $24,000QPP pension at age 60: $8,466
Yves, 61 Salary: $92,000 Retirement pension at age 64: $32,400 QPP pension at age 65: $11,894 RRSP: $16,000 TFSA: $35,000
HouseCurrent value: $430,000Mortgage free
Duplex, owned with a friendly couple Current value: $250,000 Mortgage balance: $140,000 Income: $16,200 Expenses: $14,000
The answer
David Truong was surprised.
The financial planner and advisor at the National Bank Private Banking Center of Expertise 1859 has calculated that with combined salaries of $140,000, Nathalie and Yves generate a net income of approximately $90,000.
However, Nathalie estimates the current cost of living for the household at $40,000.
“That means technically they must have saved $50,000 a year,” he says.
It does not appear in their RRSPs and TFSAs.
Maybe they just paid off their mortgage? Are they underestimating their cost of living?
"There are two ways to determine the cost of living: either by the budget approach or by the disposable income approach", underlines the planner.
The budgetary approach is theoretically the most precise, insofar as the figures are exact and complete.
The disposable income approach focuses more on family income after taxes and after annual savings.
In the case of Nathalie and Yves, we know that the after-tax income is $90,000. The only annual savings is the amount contributed to the retirement fund. Their cost of living under this approach should hover around $80,000 per year.
David Truong, Financial Planner and Advisor at the Center of Expertise at National Bank Private Wealth 1859
Clarification…
A request for clarification from Nathalie confirmed the planner's estimate.
"Right now, we're spending almost all of our salaries," she said.
You have to consider the costs for work – gas, dinners, clothes – and supporting their daughter in school.
“The $40,000 is really the calculation I had planned based on our retirement with both feet in it. »
That is clearer.
But is it realistic?
Faced with this uncertainty, David Truong became interested in the maximum cost of living that the couple could afford in retirement.
With the Old Age Security pension (PSV) and the coordination of the QPP pension, Nathalie will cash in at age 65 a fixed income before taxes of $31,400 in today's dollars.
Yves will receive approximately $40,200.
“So that gives a guaranteed gross family income of $71,600 when they retire,” observes David Truong. If we make a retirement projection with $40,000 a year, there is no problem. »
But the hill leading to the retirement project is steep, and the planner pushes the savings engine to the limit. Over the next three years, he plans savings of $41,000 a year for the couple, including $25,000 paid into RRSPs.
Under these conditions, he estimates that he would be able to maintain an indexed lifestyle of $66,000 at retirement until Nathalie's 96th birthday.
Since the couple's retirement expenses will truly be $40,000 a year, is there room for an RV?
The cost of an RV
Fees vary greatly depending on usage.
But since we need a basis for comparison, we will assume six months of annual use, therefore six months of storage ($600), 50 paid camping nights ($2,500), 10,000 km traveled ($2,900 of gas ), $1400 for maintenance and $1300 for insurance. We are at $8700 per year.
We are amortizing the $125,000 loan over 10 years at a rate of 2.85%, for payments of $14,370 per year.
On a budgetary basis – since that's what this is about – our nomads could have to pay around $23,000 a year.
If we add the basement repair work of $20,000 to the line of credit under the same conditions, the payments increase by $2,300 per year, for a total of $25,300.
This amount fits into a cost of living of $66,000, but barely.
The couple will have to inform themselves carefully and make their own calculations, depending on their intentions.
Note that taking into account a depreciation of 60% after 10 years, the real cost of the recreational vehicle would be around $17,700 per year.
Reduce interest charges
After 10 years, they will have paid $21,800 in interest, including $3,940 for the most expensive first year alone.
But there are ways to reduce this cost, suggests David Truong.
With the cash damming strategy, “you can make the 2.85% interest deductible from your income,” he says.
This involves contracting a line of credit that will be used exclusively to pay their share of the maintenance and renovation of the duplex.
“Because the borrowed money is used directly to pay expenses to earn rental income, the interest is tax deductible,” he explains.
Instead, the share of rental income they spent on maintenance will be used to accelerate the repayment of the loan for the recreational vehicle. In this way, they will gradually transform non-deductible interest into deductible interest.
This ambitious recreational vehicle project, however, depends on vigorous savings and rigorous discipline.
Will they be able to live in their RV and within their means? Natalie worries.
This is the proof they will have to do in the three years that separate them from their retirement.
* Although the case highlighted in this section is real, the first names used are fictitious.
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