Can We Go Now?
Ed and Anna are fed up with life in suburban Calgary – so fed up they want to know if they can raid their retirement savings to buy a country dream home
Financial Post Magazine November 06, 2007
Ed and Anna Jones are sick of their neighbours. They feel cramped by life in their crowded Calgary suburb. And even though Ed loves his downtown job and Anna is from the city, in the end, they just don’t see themselves as urban people. In fact, the Joneses have a long-held dream of moving out to the country and buying a house on an acreage. They used to think they’d fulfill that goal in retirement. But now they’ve decided they can’t wait any longer. “Lately, we’ve felt like we’re postponing our lives,” Ed says. Moreover, they want to raise their three young children somewhere with a generous supply of green space and more than four feet between front porches. To make the move a reality, however, they’ll have to dig deep into their retirement savings. Can they afford to do that and still meet their other major financial goal of having Ed retire in 15 years, when he reaches age 55?
At least the Joneses are starting from a healthy position. As a manager with a large oil and gas company, Ed earns a yearly salary of $133,000, including a bonus. Anna, 38, is a stay-at-home mom, but she has a small income of $6,500 from child benefits and investments that brings the Joneses’ annual household income to $139,500. On top of that, they own their home outright, which was recently valued at $500,000. They also have savings of about $145,000 in RRSPs and $223,000 in non-registered investments.
To make their dream a reality, Ed and Anna expect to spend about $900,000 for land and a house. They can raise most of that money if they sell their current home and cash in the investments they hold outside of their RRSPs. After the purchase, they’d still have a mortgage of about $200,000. For retirement savings, they’d have a total of about $175,000 accumulated in their RRSPs and in Ed’s defined-contribution pension plan from work.
So, buying an acreage is in the realm of possibility, but the Joneses worry they’d be “foolish” to sell assets they’ve spent years accumulating for life after work. After all, they have ambitious goals. Ed says he and Anna would like to have $100,000 a year to fund their retirement lifestyle, which they hope will include lots of travel, both in Canada and abroad. They’re also looking forward to joining a golf club, as they’ve neglected their favourite sport since the kids arrived. And they’d like to have enough money in the future to help their kids with down payments when they buy homes of their own.
All these hopes and aspirations have left Ed and Anna feeling confused about what they should do about their country dream. “Our hearts say ‘Yes,’ but our minds say ‘Whoa, slow down,'” Ed explains. “We’re not sure how far it will set us back. Will it add a few years to my working life – or longer? We’re just not sure.”
What the experts say
David Cox of IPC Investment Corp. in Edmonton says the Joneses can afford to move. And if they’re serious, this is the time to do it. Alberta housing prices are soaring. The longer they wait, the more they’ll pay, as the gap between a $500,000 home and a $900,000 home widens. “They’re losing ground by dithering,” Cox says.
Of course, moving now will delay Ed’s retirement, says Cox. The Joneses will also have to reassess how much they can spend on travel in retirement and how much they’ll be able to help their kids with down payments. But if they really want to move, the trade-offs may be worth it, says Cox.
Ray Kasten, of One 2 One Financial Consulting in Calgary, agrees that the Joneses could leave the city now, but says there are factors they need to consider. For starters, the Alberta real estate market is showing signs of slowing. That means the value of the Joneses’ acreage could stop growing in the near future. “But if they keep this investment for 20 or 30 years,” Kasten adds, “I don’t see a problem.”
As for meeting their retirement goals, Kasten says that Ed and Anna will have to accept some setbacks if they move now. But there are strategies that they can use to get back on track. Anna, for example, plans to return to work once their youngest child, now four, starts school, generating money that could be used to rebuild savings.
But even though the Joneses can afford the move, Kasten says they should be absolutely certain that buying an acreage is what they want to do. Looking after such a property takes more work than keeping up with a suburban home, he warns. Are Ed and Anna ready to haul the kids to the city for every soccer game or music lesson?
Finally, he says they should be prepared for possible tax implications. When the Joneses sell their Calgary home, they won’t pay tax on the capital gain, as the house is clearly a principal residence. Depending on a variety of factors – such as the amount of land owned and local bylaws – acreages don’t always enjoy the same status. Sales can be subject to some tax. Ed and Anna should be aware of potential tax issues.
Otherwise, Ed and Anna can start house hunting, although Kasten and Cox say they should be sure to have insurance, something they didn’t mention in the information they submitted for this article. They also suggest the Joneses rethink their $100,000 retirement income target, since they’ll be mortgage- and child-free when the time comes to stop working.
But none of these are issues that stand in the way of fulfilling the dream. Kasten says Ed and Anna will do fine if they can maintain their current level of annual saving ($38,650) until retirement and take aggressive steps to replace the savings they sacrifice initially to buy an acreage. If they do that, they’ll accumulate $1.85 million by the time Ed hits 55, assuming a 6% return. That would give them an after-tax retirement income of $60,000 a year until Anna is 90, not including CPP and OAS benefits.
In other words, the Joneses can afford an acreage. It may take a few sacrifices, and they may want to consider pushing back Ed’s retirement date to meet their all their goals. But the alternative is staying put and sacrificing the lifestyle they want today.
Tip of the Month: Rural homes may be subject to capital gains
Even if you declare a rural home as your principal residence, you may have to pay capital gains tax when you sell it. Canada Revenue Agency usually exempts up to half-a-hectare of land from capital gains on sales of rural residences. It may allow more if, for example, local bylaws set larger minimum lot sizes. But the remainder may be subject to tax when it?s sold. Investigate the tax implications before you buy.