Source: The Toronto Star Personal Finance section online
Written by: James Daw
New homeowner Sean Cooper, 27, has a plan and the will to make sacrifices and have a comfortable retirement income. But can he retire at 55?
Sean Cooper has graduated from renter to homeowner, at the age of 27, in one of Canada’s most expensive housing markets.
To do so, he will live in a basement apartment while the tenants upstairs pay much of his mortgage and ownership costs, at least until he is out of debt. “I got the idea from Scott McGillivray, host of Income Property on HGTV Canada,” he admits.
Ironically, Cooper once wrote for the website Million Dollar Journey about five good reasons to rent accommodation. Home ownership seemed out of reach for a junior employee earning only $40,500 a year at a financial consulting firm.
But he worked part-time in a store, earning about $11,500 a year, to avoid having a large mortgage and shopped carefully until he found a home for $425,000. Now, with that hurdle crossed, he wonders whether he will be able to retire at 55.
A financial planner consulted by Moneyville Makeover has calculated that Cooper could have substantial wealth to supplement reduced workplace and government pensions by age 60, even if he were quit his part-time job at the end of the year, and never earned a job promotion. But retiring at 55 would be a stretch.
Cooper insists he is prepared to make sacrifices to reach his goal. “Some people prioritize different things in life,” says the young graduate with a Bachelor of Commerce degree. “Owning a car and going on vacation are more important to them.”
Cynthia Kett, a Certified Financial Planner, was impressed by Cooper’s determination: “We wish everyone took as much pride and responsibility for their financial well-being as you,” she commented.
The principal of Stewart & Kett Financial Advisors Inc. in Toronto, which charges fees for services rather than earning commissions on the sale of investment and insurance products, says it’s too soon to predict whether the young man will be able retire as early as age 55. Marriage, a family, or a change in expectations could alter the projections.
He paid rent to his parents before purchasing his own home, yet saved a substantial sum. He shopped for about two years before buying his three-bedroom bungalow with an attached garage, not far from his mother’s home.
His mortgage is only $255,000. At the current rate of 3.04 per cent interest, the minimum monthly payment is $1,078. Rental income of $1,480 is more than enough to cover this cost, plus nearly half of the cost of energy, water, insurance, property tax and budgeted maintenance expenses.
In fact, Kett’s firm calculated that Cooper could afford to pay $11,000 or more each year toward mortgage principal repayments. At that pace, the mortgage would be gone by the end of 2021, provided interest rates do not increase.
“The increased home equity (will provide) Cooper with greater financial flexibility,” Kett reasons. Cooper could contribute to a registered retirement savings plan later, when he may be in a higher tax bracket. After using up his RRSP contribution room, he could also contribute to a tax-free savings plan and to a non-registered investment account.
Kett’s firm calculated that Cooper could accumulate the equivalent of about $930,000 in today’s dollars — mostly outside of his RRSP — by age 60, assuming annual price inflation of 3 per cent, and an annual investment return of 5.5 per cent (before taxes) from a 60/40 mix of equity and bond index funds.
If he were still single, Cooper’s accumulated savings would be more than enough to supplement a company pension of $26,000 in today’s dollars, plus a reduced Canada Pension Plan equivalent to $8,146 and, starting at age 67, an Old Age Pension of $6,540.
The results assume Cooper would continue to collect rental income after his mortgage is fully paid, or earn the equivalent in salary increases. Not counted is the extra RRSP room that rental income would produce.
“Despite the positive outcomes, it’s uncertain whether Cooper (would) be able to retire at age 55 or age 60 (as assumed in the plan),” says Kett. “There may be many changes in Cooper’s life during the intervening years. However, he is definitely heading in the right direction.”
“I don’t really plan to live downstairs forever,” Cooper concedes.
He thinks his house will be a good long-term investment, even if the sale value were to decline temporarily. “I think this house will meet my needs for the next few years, and depending on how things work out, I think it’s a definite possibility I will be able to retire at 55,” he says.
James Daw is a former Toronto Star columnist and a Certified Financial Planner. Reach him at jamesdaw@sympatico.ca
Moneyville Makeover: Sean Cooper, 27
The client: Sean Cooper, 27
His situation: Just bought a new house at 27, but lives in the basement and rents the rest to help pay for it. He wonders whether his early start will allow him to retire at 55.
The strategy: Retire the mortgage within 10 years, then continue earning rental income or get a promotion in order to save aggressively for retirement.
Assets: $425,000 house, $22,211 RRSP, $10,000 TFSAs, $2,000 other savings. Total: $459,211.
Liabilities: $255,000 mortgage.
Annual income (2013): $40,500 full-time job, $17,760 rental income. Total: $58,260.
Annual expenses: $12,936 minimum mortgage payment, $10,000 income tax, $9,784 house-related expenses, $6,000 payroll deductions, $3,600 groceries, $2,500 miscellaneous expenses, $480 communications, $480 transportation, $300 entertainment, $840 personal care, $11,340 mortgage prepayment and savings. Total expenses: $58,260
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