In Vancouver, Watson, a 46-year-old lawyer, and Rachel, an animal rights activist, who is 41, are attempting to live according to their green sensibilities. They bike to work rather than use either of their two aging small cars and have given up higher-paying jobs in order to work for agencies that are concerned with environmental issues.
Their problem, in a nutshell, is that they are bearing the cost of being ethical. Their combined gross income is $167,000 a year, which would be ample in most cities and towns in Canada, but is fairly modest in high-cost Vancouver. Their savings come from Watson's former life as a corporate lawyer. But they yearn for the things that money from the non-green world can buy.
"Has choosing prudence and social responsibility left us unable to own a home or condemned us to a poor retirement?" Watson wonders.
What Our Expert Says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Watson and Rachel. "They doubt that they can be modestly prosperous and still stay ethical. I think that they can do both."
A house in Vancouver is not cheap. Watson and Rachel have in mind something in the $500,000 to $700,000 range in a neighbourhood in which they can bike or walk to work. They have RRSPs - Watson $133,000 and Rachel $76,000 - and can use the Home Buyer's Plan to make down payments out of the RRSPs. They did own a home in another province, but that was 15 years ago. According to the Canada Revenue Agency, a person, spouse or common-law partner must not have owned a home used as a principal residence in the prior four years in order to qualify for the HBP. Withdrawal limits are now $25,000 per person after they were raised in the 2009 federal budget. The couple qualify for the plan, Mr. Moran observes.
Watson and Rachel can reserve $11,000 of their savings for legal costs and B.C.'s property purchase tax, then have a $154,000 down payment composed of $104,000 from present savings and $25,000 from each of their RRSPs via the HBP. Assuming that $154,000 is a 25-per-cent down payment, they can make a $616,000 purchase. They would need a $462,000 mortgage. At a rate of 4 per cent, they would pay $4,038 a month and be mortgage-free in 12 years when Watson reaches 58, the planner estimates. They would also have to pay $278 a month into their RRSPs to repay HBP loans, he notes. Currently, they pay $1,500 a month in rent and put $3,400 into an account for a house purchase. That's $4,900 a month. Their mortgage payments would therefore be affordable.
Watson and Rachel would like to work until each is 58. Rachel, who is younger, would therefore work for five years after Watson has retired. Based on their work experience to age 58, Watson, who spent four years in law school before beginning work, would have 73 per cent of the maximum Canada Pension Plan credits of $10,905 a year or $7,960 and Rachel would have 79 per cent of maximum credits or $8,614. Each will qualify for full Old Age Security of $6,204. All figures are in 2009 dollars.
Their RRSPs, which currently total $209,000, can grow at $24,600 year at their present contribution rate. If $50,000 is withdrawn for the HBP and then repaid over 12 years to the time that Watson is 58 (though the plan allows them to take 15 years to make the repayments), their total balance, growing at 3 per cent a year after inflation, would reach $635,059, Mr. Moran estimates. After Watson retires and assuming contributions stop, the couple's RRSPs will continue to grow up to the time that Rachel retires. At that time, they will have a total value of $736,207, Mr. Moran calculates.
If these registered savings are withdrawn evenly over the 32 years from their age 58 to the assumed date of Rachel's death at age 90, they could withdraw $35,057 a year. Including CPP and OAS payments, their total retirement pretax cash flow would then be $64,039 a year. That income would avoid the Old Age Security clawback, which currently begins at $66,335 a year per person.
Neither Watson nor Rachel should apply for CPP benefits before age 65 due to the 0.5-per-cent per month penalty, which mean a 6-per-cent cut in benefits per year to their largest indexed pension. The couple should wait until each is 65 and thus preserve the CPP pension base in full, Mr. Moran counsels.
Ethical investing remains the core of their concerns. Watson and Rachel should seek out funds or businesses that are desirable as investments and make sense in their portfolios, and then use ethical criteria as a final filter, Mr. Moran says. By leaving ethical filtering to the end, they would preserve their full universe of investment choices until the final stage of ethical asset selection, he advises. "The point is not to find a manager or company that shares your bias or ethics, but to find one that makes sense as an investment and then can pass a test for moral acceptability. The point is to keep your choices open, rather than putting values first."
Vancouver couple in their 40s determined to live and invest ethically.
Worry that living ethically will make it hard to buy a house and retire comfortably.
Use Home Buyer's Plan for down payment, continue investing ethically.
A house and a retirement that they can afford.
$9,140 per month
RRSPs: $209,000; Non-reg cash $27,000; House savings $88,000; Cars (2) $6,000; Total: $330,000
Rent $1,500; Food $700; Restaurant $250; Entertainment $200; Clothing $100; RRSP savings $2,050; Cars fuel, repair $125; Car & home ins. $250; Travel $435; Charity, gifts $130; House savings $3,400; Total: $9,140
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