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- Reader Case: Feeling Disheartened about FIRE.Please help! - August 15, 2022
Greetings, readers! Today’s Friday reader case is actually pretty surprising (and surprised even us), because despite where you THINK it’s going, it takes a surprising turn.
Read on to find out:
Big Hello to FireCracker and Wanderer:
I am so frickin enamored by your story. I found your blog about a month ago and I’ve just been binge reading the posts. I’ve fully convinced my husband that we need to take your advice and get our shit together to become Financially Independent and Retire Early… I feel so late to the game and behind.
I have some questions to ask… and I’ll submit my situation to possibly get picked for a reader case Friday.
Most times you are mentioning after tax income to be that after maxing out tax deductions with RRSPs and/or contributing to TFSAs (I’m Canadian as you can now tell). But if you’ve got debt and not much disposable income to start with – investing in RRSPs/TFSAs for tax purposes takes a back seat, right? Or is there a sweet spot on the amount to put towards debt and amount invested to have more net income?
Are you able to access RRSPs before you’re 60? I have a small locked in RRSP (with a bank) and I can’t seem to get a straight answer from them on this. They just say that I can only access in financial hardship or medical issues, etc.
Since you mentioned paying into RRSPs to lower taxes, how do you guys access them now? Or are you using income from other parts of portfolio for right now… then once you’re older you’ll tap into the rrsps? I find this part very confusing (I swear, I went to University! I just wish I learned more personal finance about this sooner).
Do you ever recommend accumulating debt in order to get real estate off the books? See story below.
I’m turning 33 in July, husband almost 36. We’ve got very little to show for ourselves in the 12+ years of being in the workforce. Our earning potential is a bit one sided, as I’m working in health care and my husband often works in customer services based jobs. Sadly, I amassed a lot credit card debt ($20k) in my early 20s which we’ve just gotten a better handle on, but its impact is apparent.
We had spent the previous 2 years up North working but then recently we relocated to New Brunswick for my work, mostly to be closer to home (Nova Scotia). My husband hasn’t found work yet. We own a house in NS which we’ve been renting out, since we’ve been moving around a lot. The market where the house is has fallen dramatically in the 7 years we’ve owned the home. We bought the house for $135,000 and still owe $108,000. Although the market value is only $100,000, with our realtor is suggesting $90,000 for a quick sale (fuuuccck….).
Our renters have given notice and leaving end of June and our mortgage is up for renewal in August, so we are trying to figure out what we should do: Put some extra money in to make house more appealing to hopefully sell, but knowing we will take a loss… or keep renting it and hold onto it for now in hopes that the loss won’t be as much in two years?
Another complication is that we own two vehicles, but my sister drives one. We bought it just before something came up where we moved away but had financed the car and couldn’t take it with us, so she took over the majority of the payments. Our original plan was to put all extra money to the car to get it out of our name (but then she would continue making payments).
Here are our stats:
Mine: annual gross $74,000 (current take home: $45,500 annually) (which will eventually go up to $82k in 3 years, then top of pay scale)
Husband: [Currently on EI, $450 weekly until end Dec 2017], but hopefully finds a job before then… and hopefully makes ~$30-35,000/year before taxes).
Sister: $300 monthly car payment (kind of ‘income’) (will pay until Sept 2019)
Renters – $1000/mth… but current renters leaving in June. Maybe $900 is more reasonable.
Expenses (total: ~$3400/mth) :
Rent: $840 monthly
Mortgage $385 biweekly (includes property tax and insurance)
Home Insurances $100 ($65 house, $35 tenants)
Car 1 $149 biweekly (in my name but my sister drives it… she is paying me $300)
Car 2 $220 biweekly
Car Insurances $183 monthly ($98 for sisters car, $85 our car)
Electricity $85 monthly
Cell phones $175 monthly
Cable/Internet $125 monthly
Food/Entertainment $850 monthly
Student Loan payment $125 (minimum)
Gym $62 biweekly for us both
Credit cards: $0 (yay! Haha… but that’s not much to celebrate)
Line of credit $5700 (12.4% interest)
Car 1 $8500 balance (terms out August 2019)
Car 2 $25,000 (terms out Sept 2022 – ugh… 7 year term, such a bad idea)
Mortgage $108,000 (up for renewal, 18 years left; considering doing another 2 year term, current rates 2.19%)
Student Loan $5000 (can’t remember the interest rate… maybe 4%?)
-$20,000 in locked in RRSP at a bank
-paying into company pension plan… current value $60,000 (but when I leave I will cash out: a portion is taxed, a portion is cash and a portion must be transferred to a RRSP). So depends on how long I stay…
savings $0 (we just cashed out $4500 in TFSAs to finish paying off credit card debt).
What do we tackle first? Get rid of the house? Get rid of Car 1? And once we finally get rid of all the debt… where do we put our money? RRSPs plus index funds? Can we ever retire???
Now this is one meaty reader case! How I could say no to this?
My first thought was “Holy Shit, your house was only $135,000 and you’re renting it out for $1000/month?” That’s pretty good! Especially given how close it is to the 1% rule of real-estate investing.
When the house is that cheap, how could you possible lose?
But then I read the part about a) the property being underwater and b) the tenants moving out, and I felt this sinking feeling in the pit of my stomach.
Then I got to the 12.4% LOC interest, car loans, student loans, and let’s just say, there is some seriously messed up shit going on here.
But before we jump in to figure out how to fix this financial mess, let’s first tackle their questions since we’ve gotten the same questions from quite a few readers:
1) If you’ve got debt and not much disposable income to start with – investing inside RRSPs/TFSAs for tax purposes takes a back seat, right?
- In your case, it makes no sense to put after-tax money in TFSAs if you have high interest debt. Murder that debt monster first.
- However, with RRSPs, since it’s pre-tax money, you put money into an RRSP, get a tax refund and use THAT to pay off your debt. What this does is take money that you were going to lose to the government anyway and instead use it to kill that debt monster.
2) Or is there a sweet spot on the amount to put towards debt and amount invested to have more net income
- Not in your case. Pay off your debt first. Especially high interest debt. You won’t be able to beat a 12.8% interest rate with market returns.
3) Are you able to access RRSPs before you’re 60?
- Yes. The government would put a holding tax on it (10% if you withdraw 5000K, 20% if you withdraw $5,001 to $15,000, and 30% if you withdraw over 15,000), but you get the withholding tax back when you file your taxes.
- Any RRSPs you withdraw gets added to your salary. That’s why it makes sense to withdraw once you retire, because your income goes to 0, and you can shelter it under the basic amount. That’s how you get it out without paying taxes.
- Your company may lock in your RRSP and prevent early withdrawal (Wanderer was in this situation). However, this is a per-company rule, not a federal rule. Wanderer got access to his money once he quit, so you should too.
4) Since you mentioned paying into RRSPs to lower taxes, how do you guys access them now? Or are you using income from other parts of portfolio for right now… then once you’re older you’ll tap into the rrsps?
- Since our salary went to 0, we can withdraw 10,000 each tax-free. There is a withholding tax of 20%, but we get that back when we file our taxes.
Hope that clears things up.
Now, in order not to bore the American and other international readers to death with all this Canadian tax talk, let’s jump straight into the numbers.
Okay, so other than the underwater house, the other big red flag that jumped out at me was your spending.
Even though you say you’re spending around $3400/month, when you actually add up the expenses you’ve listed (excluding your sister’s car payment which is covered), you get:
$840 + ($385 + $220 + $62)*26/12 + $183 + $85 + $175 + $125 +$850 + $125 = $3828/month.
This means you’re spending $45,938/year! Somehow you are currently spending MORE than your take home pay, and not only that you’re spending more than we did living in Toronto! And 15% more than how much we spent travelling THE WORLD?! And you’re in freaking Nova Scotia. A place where houses cost only 10% of what they cost in Toronto?!
I suspect this is because you had dual income before your spouse lost their job, so this would’ve been okay previously, but with only $975/month coming in from EI and only lasting until the end of year, it’s time to buck up, and get those expenses under control.
But I’m seriously curious about how the heck are you spending so much in a low cost province like Nova Scotia. Let’s pull back the curtain, shall we?
The biggest expenses you have, outside of housing costs, is your cars. You mentioned that your sister pays you $300/month, but that only covers the car payment for car 1. It doesn’t cover car insurance, which you are paying for her.
So that means, outside of what your sister pays you, you are spending $660/month on cars. If you get your sister to pay her fair share, that should bring the cost down to $560/month. Still not great, but better.
On top of this, you’re also blowing $300/month on cell phone and TV/internet. Do you really love Bell or Rogers THAT much? When we lived in Toronto, we were paying $40 for internet and $20 (Wanderer) and $30 (me) for cell phone. That’s only $90. So you should be able to cut this bill to $100 by shopping around. One option is is to use VOIP. We switched Wandere’rs parents from Rogers media package to VOIP, and that easily saved them $80/month.
A bill of $850 for food and entertainment is reasonable. I don’t want you to be miserable and only eating Kraft dinner all the time, so I wouldn’t cut too much from this.
The gym membership may need to go or be suspended temporarily until your spouse finds a job. You live in Nova Scotia, there’s nature all around you. Work out by hiking or biking and that’ll save you $134/month.
So if you make those cuts, you’ll end up saving $100 + $200 + $134 = $434/month. And since these are reoccurring costs, you’d be able to decrease the portfolio you’d need to retire by $130,200!
In fact, given that $434/month * 12 = $5208, these savings alone would be enough to kill your $5000 student debt in just 1 year.
And by reducing your overall yearly expense from $45,938/year down to $40,728, which means you’d be going from a savings of $-438/year to $4770 /year! That’s only a miniscule 10% savings rate a year, but it sure as hell is better than going into red every year.
You know what else? Your spouse’s EI payments are around $975/month. With your salary covering the expenses, just by using his EI payments, you’d be able to murder the LOC in just 6 months.
So you’re not actually that knee deep in debt. But what confuses the hell out of me is why the heck your LOC is 12.5%? I could walk into any Canadian bank right now and get an LOC for 7%. So the correct thing to do is to get a lower interest LOC, pay off the higher interest LOC and then murder that LOC debt at a lower 7% or less interest rate.
But what about the house? Should you keep it and continue renting it out? Move in? Or sell it?
Back when you had a tenant, you were making $1000 – ($385 * 26/12) – $100 = $66! A whopping $66 a month?! And this is assuming you aren’t paying any taxes on the rental income. So you decide to be a landlord for the privilege of making only $66*12 = $792/year? Over your investment of $35,000, that’s a 2.3% return. WOW. I could easily beat that with a high interest savings account, without taking any risk or bending over backwards to take care of tenants.
In fact, all it takes is 1 month of vacancy (which is what’s happening right now, since your tenants moved out) to wipe out your investment gains for the whole year.
This is a terrible investment. Despite the fact that the house only cost you $135,000 and you were able to rent it out for $1000/month, your carrying cost ate up 93% of the your rental income.
Normally, I’d since ditch this investment, BUT now that your mortgage is underwater, it might make more sense to ditch your rental and move into the house instead. I know you say you’re “moving around” a lot, and I’m not sure what that means, but the only way it makes sense to hang onto the house is to actually live in it and save the rent.
By ditching your $840/month rent and $35 home insurance for the tenants, that will save you $875/month. This would reduce your monthly cost from $3828 – $875 = $2953. And if you make the $434/month cuts I mentioned above, that would bring down your cost to only $2519/month or $30, 228/year. That decreases the portfolio you’d need to retire from $1.15 Million to $755,700.
At your current trajectory, since you have no tenants and are spending MORE than you make, your time to retirement is:
But, what would happen to your TTR (Time to Retirement) if you bring down your costs to $2519/month and pay off your student debt and LOC in 1 year?
You would increase your negative savings rate to 33.56%. And investing the $80K of your RRSP and yearly savings at a conservative return of 6% would give us:
19 years + 1 year to pay off the LOC and the student loan. Which means you’d be able to retire in 20 years at the age of 53. Which is still 12 years ahead of the normal age of 65.
Now, that’s assuming that you’ll be down to 1 salary for the next 19 years. If your husband ends up getting another job paying $30K, but you kept your expenses the same, and he maxed out his RRSP, he would get an after-tax return of $27,000 (including RRSPs). This means you’d be able to ramp your savings up to 58%, decrease your time to retirement from 20 years to 12 years, and retire at the age of 45 instead of 52:
So even though your situation looks dire, it’s really not THAT bad. But because you have debt, an investment property that’s underwater with a bad ROI, and high expenses, you’re currently looking at a negative savings rate on one salary and no tenants.
So don’t even THINK about investing or retirement until you pay off the high interest debt, reduce your expenses, and move into your investment property.
You can still retire in 19 years, 12 years ahead of the normal 65, if you do the following:
- Lower your expenses by $434/month by cutting your cell phone and cable/internet bill, getting your sister to pay for her car insurance, cutting out the gym and switching that for jogging or hiking.
- Open a lower interest LOC, transfer the existing debt from the 12.5% to a lower interest LOC. Pay this off ASAP with the monthly savings above.
- Pay off your student loan with your husband’s EI pay check.
- Move into your investment property to save $840 in rent and $35 in tenant insurance.
And if your husband manages to find a job paying $30K, in addition to the above mentioned changes, you’ll be able to retire in just 12 years!
So when I initially read this reader case, I thought this was a cut and dry case where the person is SCREWED with a capital S…but because their housing price is pretty low, even though their mortgage is underwater, they still have debt, AND the husband lost his job, they can still turn it around by making a few changes and getting him a job that pays just $30K a year.
What do you think? What would you do if you were UnderWaterInNS?
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