Situation Montreal couple wants to move to B.C.
Strategy Sell low-yield assets, research jobs in B.C.
Solution A manageable move with risks clarified
In Montreal, a couple we'll call Robert, 40, and his wife, Annabelle, 47, are raising their child, Devon, 3, on an average income. Annabelle left her promising provincial civil-service job when Devon was born and is now a stay-at-home mom.
Montreal is a great place to live, but Robert and Annabelle yearn to move to B.C., where they have family and where the weather is milder, albeit often wetter, than in Montreal. Their problem is not only how to finance the move, but the risk that Robert will have to give up a job with a terrific defined-benefit company pension plan, a treasure in a world in which such plans are becoming rare. In giving it up, he could be sacrificing a payout of $56,000 a year in 2011 dollars at age 60, 20 years from now.
For now the family gets by on Robert's $6,000 monthly pre-tax pay and Annabelle's child benefits. It's not a lot, but they supplement it with income from two rental properties, one in British Columbia and one in Ontario, that in a month when all rents are paid adds $1,563 to gross income for a total of about $8,000 before tax.
Today, their finances are solid. Their $350,000 house has no mortgage. Robert's pension plan takes care of most of his retirement savings. Montreal provides opportunities for living well on relatively modest incomes.
"The issue is whether we can afford a move to British Columbia," Robert says. "Should we sell our income properties to buy a home in B.C.? Unfortunately, my job would not be likely to go with me if we made the move."
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Robert and Annabelle. The trick, he says, is research.
"What the couple has to do is to check out jobs in B.C., rationalize their real estate investments, and estimate what they will have to spend for a home and living expenses if they do make the move," he says.
Robert and Annabelle are not yet at the stage of life where they have to make irrevocable plans. In middle age, they have perhaps two decades to build savings. The starting point is their present asset balance of $973,560, of which $612,560 is in investment assets. Take off mortgages on rental properties that total $106,500 and they have net worth of $867,060. Add in the potential pension transfer Robert would get were he to leave his present job - $68,240, though that money would be locked into a retirement account - and they would have $935,300 as a base for starting life on the West Coast.
Rationalizing the Real estate
Their existing British Columbia property, a $450,000 condo with a $58,500 mortgage, brings in $1,300 a month rent less mortgage interest, taxes and upkeep for net rent of $995 a month. On an annual basis, that's total rent of $11,940. The return on current market price is 2.65%; on their $391,500 equity, 3.05%. It should go, the planner advises.
Their Ontario vacation property is a modest holding with an estimated market value of $75,000. They owe $48,000, so their equity is $27,000. They get $850 a month rent less $282 expenses, including mortgage interest, taxes and upkeep, for net rent of $568 a month, or $6,816 per year. The yield on current market price is 9.0% and yield on their equity is 25.2%, a terrific return either way. But it is far from their present or future home, tenant quality is not the best, and it is hard to maintain. It should be sold, Mr. Moran recommends. If both properties are sold, the couple would have $418,500 less selling costs and modest capital gains taxes to use as a partial payment for a home in B.C.
Though retirement at 65 is 25 years away for Robert and 18 years for Annabelle, it is possible to estimate that Robert will earn full Quebec Pension Plan credits of $11,520 in 2011 dollars, Annabelle perhaps 60% of credits if she returns to work, say $6,912 a year. At 65, each would get full Old Age Security payments of $6,456 a year at present rates. Total annual public pensions at age 65 would be $31,344.
Annabelle would be entitled to a civil-service pension of $853 a month to age 65 and $572 thereafter.
Their present net worth, $846,900 without counting their RESP and cars, plus Robert's potential pension payout of $68,240, or $915,140 in total, could generate $27,454 per year at 3% above inflation.
At 65, Annabelle's $6,864-a-year civil-service pension, plus Old Age Security and Quebec Pension Plan benefits of $31,344 a year, plus investment income of $27,454, would give them potential cash flow before tax of $65,662 a year.
That retirement income would be reduced if they were to buy a home for $600,000. Allowing $250,000 for a down payment, their net worth (not counting their RESP or cars but including the pension payout) would be reduced to $665,140 and their investment income at 3% of invested assets would fall to $19,954 a year. That would leave them with total income of $58,162 a year before tax at age 65.
Before age 60, when they could access QPP benefits at a loss of 36% of age 65 benefits, retirement would leave them dependent on income from whatever assets they have not used to buy or rent housing. For a family with a growing child, that would require careful budgeting, to say the least.
Clearly, the risk is that they might have to exist on their capital before Robert gets another job.
Assuming they sold their house and their rental properties, they would have $846,900, not including the pension transfer, RESP and cars less any selling costs. At 3% a year after inflation, that capital would yield $25,407 per year. That's not much to support a family with shelter, food and other basics.
However, if Robert gets another job after a move and if Annabelle were to return to work, their potential combined salaries of, say, $100,000 a year total before tax, would take the pressure off their budget. They would be able to afford to add to their savings and to contribute more to Devon's RESP.
"The wise course of action is to research the move," Mr. Moran says. "Get a job in B.C., then bring the family. That cuts the risk down to manageable size, eliminates any desperation finding income shrivelled and expenses in a new home rising. If there are no jobs that will at least replace Robert's present employment, don't do it. Better weather on the coast isn't worth wrecking the family's finances."
(c) 2011 The Financial Post, Used by Permission