- Investment Workshop 59: Are Robo-Advisors Compatible With FIRE? - June 22, 2020
- Reader Case: Grounded in Vancouver and Dreaming of FIRE - June 19, 2020
- Real Estate Agent Gets Crushed by Real Estate Math - June 8, 2020
It’s Friday, and you know what that means: Reader Case time!
But before we begin, if you’re going to write into us asking us to analyze your finances, please follow the guidelines here. It’s to ensure that when we get to your reader case, we have enough information to actually come up with a meaningful response. As much as we’d like to help everyone, the days where we had the time to correspond back-and-forth with people asking for missing information is long gone. If we get to your case and see any information missing, your reader case will not get picked. This isn’t because we’re trying to be mean, but at this point there are so many people asking us for our (free) financial advice, that if your case is missing any information we have no choice but to ignore it and move on to someone who we can actually help.
I am a Millennial Boomer – 54 years old – spent like crazy on really nothing…we do own a house with a mortgage still! Renegotiated mortgage over 5 times and it went from $250 to $450k due to renos, childcare, a couple of Europe trips and just the high cost of living in Vancouver. Bank has made millions from us in interest. Did I mention I birthed 3 boys? All good dudes, however struggling with what to do with their lives. We are trying to educate them and us with sites like yours! If only there was Internet when I was in my 20’s and I could have learned all this stuff!
Well, I have finally had the epiphany and our youngest is finishing high school in 4 years so we need to start actioning a plan.
We put our $250k combined RRSP in a mutual fund – MER 2.4% on the advice of our bank’s mutual fund advisor.
I did just open a self directed account in June 2017 and put $10K in there from the $250K much to my mutual fund advisor’s chagrin. He thinks we need to stay in the mutual he has suggested for us.
However, I have not touched the $10K yet – it is sitting there in the self directed account and I have been on WAY too many financial sites trying to determine how to start investing.
So I wanted to perform a test with my $10K but became immobilized. So I have just drifted on to your site and you are doing the $10K workshop! So I thought I would follow along and then hopefully instil this knowledge on to my kids. I already forwarded them your web site but you know…it’s from Mum so probably they’re not reading.
Here is my question to you both.
We could sell our house today. – Worth about $1.5M We still have mortgage of $450k and we are paying $2000 a month in mortgage PLUS $900 a month in property tax!!!! We are both still employed and combined income of about $8500 a month after tax.
I know you cannot give advice but could you run some scenarios? I feel like we have been such idiots. We bought into the buying house, having kids, giving them music lessons, ski lessons, schooling etc. only to find out that the boys are not interested in education right now and are struggling financially themselves. They have low paying jobs. One did 2 years university in literature only to feel disgusted with the bureaucracy of university. Now he is the quintessential low paid barista hipster. My middle son (the rebel) HATED high school and is now learning the ropes doing labour jobs at $20 bucks an hour. My husband and I did not have any extra curricular growing up so we thought by giving our kids an enriched childhood that they would go on to university, become critical thinkers and find their way. We preached avoiding mainstream popular culture as much as possible but maybe too much.
My husband dreams of having a cheap sailboat ($22K) and then $500 a month moorage plus fixing fixing fixing! I dream of FI and travelling with him.
Can you run scenarios? If it is a too tall an ask, can you just tell me if you recommend banking with Tangerine or another institution that is not so corrupt. I know!! One extreme to another…
If we sell our home in 4 years…should we just do couch potato portfolio now with the $250k? Should we sell now and do couch potato with the $1M profit and start our travelling now? Take son along for the ride and homeschool? We will need a home base of some sort. We could purchase in another cheaper area. Comox or Gibsons (half the cost of Vancouver real-estate) or we could rent in that area. I know crazy ass questions and I don’t expect you to answer, but perhaps comment.
You much get these kind of queries from people all over the world who hit your site. Are you gobsmacked by our utter stupidity?!
Last question- Now that ETFs are becoming SO popular do you think they are at risk of imploding? I guess not if they simply follow the index but I do find it curious how there are thousands of ETFs following index.
Thank you for your generosity and kindness in setting up your site and not charging anyone. If there is such thing as KARMA you will get repaid one hundred fold in happiness. You both ROCK!!! I mean it from the bottom of my heart. Thank you for what you are both doing.
Your gross/net annual family income
- Gross: $150,000 annual
- Net: $8500 a month, $102,000 annual
- $2,000.00 mortgage ($450K mortgage at 2.8%)
- $870.00 property tax (North Vancouver!)
- $1,500.00 Groceries
- $300.00 Heat & hydro
- $150.00 Cell phone
- $150.00 House insurance
- $150.00 Car insurance
- $150.00 Gas
- $90.00 Internet
- $10.00 Net flix
- $75.00 Clothes
- $500.00 Vacation
- $50.00 House repairs
- $150.00 misc (entertainment, dinner out, unexpected..)
- $100.00 Interest on credit line of $49K (sailboat we that we are in process of selling – no bites yet)
- $150.00 Youngest boy activities (school stuff, piano, 1 week camp, dance – he’ll be working part time job soon)
- Total: $6,395
- $450k mortgage
- 2 years @ 2.8%
- Your minimum monthly payment: $980 bi-weekly, $1960 monthly
- Outstanding balance: $425k
- $49k home equity credit line (sailboat we purchased but are now selling)
- 3% interest
- $100 monthly payment
- Outstanding balance: $49K ( will be done once we sell boat)
Any fixed assets you have (house, car, etc.)
- Husband’s Honda van
- Luckily I currently have company car but will probably lose my job soon due to ageism.
- House worth about $1.5M right now
And investments or savings you have (cash, bonds, stocks, etc.)
- $125k each spouse in Mutual Funds
OK so to summarize, here’s SpendyHomeowner’s top-level numbers.
|Income (after tax)||$8,500 per month|
|Expenses||$6,395 per month|
|Assets||$250,000 RRSPs, $1.5M house|
|Debt||$449,000 mortgage + HELOC|
Hoo boy. Where do we begin?
First of all, I had a sneaking suspicion I wasn’t going to like their numbers from the line they “spent like crazy on really nothing.” That’s…rarely a good sign. And they didn’t disappoint. Their savings is stuck in a stupid mutual fund with a 2.4% MER. Most of their net worth is stuck in a house. And they seem to have used the house as a piggy bank, taken out a HELOC, and then used it to buy a boat (!) which they now regret and are now trying to unload. And on top of that they appear to have a bunch of listless kids working menial jobs with no direction in their lives.
Now, I’m not going to comment on the kids thing. I’m not a parent, so I can’t give parenting advice. On the plus side they don’t seem to be leaching off the parents as both are earning their own money, and the parents seem open to selling the house so it looks like they’re not tying SpendyHomeowner’s location down too too much. So I’m gonna leave the kids to their own devices here.
Learn How To Invest
First of all, regardless of what you end up doing here, you’re going to have to learn how to invest. I’m glad you’re reading the workshop, because that’s a great place to start. If you’re going to retire, you’re going to HAVE to build and manage your own portfolio. A mutual fund with a 2.4% MER is not going to cut it in retirement. That fee is eating up more than half of your 4% withdrawal!
I was especially annoyed at the line “on the advice of our bank’s mutual fund advisor.” This is what I hate about bank advisors. They will never tell you what the right thing to do for you. Only what the right thing to do for them. These guys have a hand in your retirement savings cookie jar and will continuously steal from you each and every year.
That being said, you do have some time so you don’t need to do anything drastic right away. I’d advise that you take that $10k and try to implement a low-cost Index portfolio like the one we write about in the workshop. Looking at the fund prospectus (I’ve removed the fund code from the above email since I don’t want to implicate any particular bank), this fund is trying to replicate a 60 equity/40 fixed income portfolio. Which is super convenient, since that happens to be the allocation we did in the portfolio.
So when you’ve read enough and are feeling confident enough, go ahead and make your buys with that $10k in the self directed account. Then sit back and wait. If you did it correctly, you should see your $10k mini-portfolio gradually outperform the mutual fund over time. In fact, it should outperform the mutual fund by about 2.4%, which is the MER you’re saving.
And once you start seeing this and get sick of paying your fund advisor a fee for doing such a crappy job, feel free to liquidate your holdings, move it all over to your self-directed account, and shove it into your much better, low-cost Indexed ETF portfolio.
Then as those bank advisors start freaking out over the commissions they’re losing, feel free to flip them off on your way out the door.
To Sell Or Keep?
So now the big question: What to do about this house? While it’s appreciated quite a bit in value, the costs of owning this thing are substantial. On top of the hefty $2000 monthly mortgage payments, SpendyHomeowner has to shell out $870 in property taxes, $300 in heat/hydro, $150 in home insurance, $50 on home maintenance, and $100 in interest for the attached HELOC. That’s a total of $3470 a month, also known as “a lot of money”!
Right now, in order to cover their total monthly cost of $6,395 a month, they’d need $6,395 x 12 x 25 = $1,918,500.
And given their current savings rate of $8500 – $6395 = $2105 a month, or $25,260 a year, that would take…
Wow. 22 freaking years. In Canada, a life sentence is 25 years, and that’s almost as much amount of time they’d have to spend slaving away for this house of theirs. And they didn’t even kill anyone! Assuming they even make it, they would be 76 by the time they can retire. So much for sailing around on that boat of yours.
But if they were to sell their house, what then? Well a LOT of costs would drop. True, they’d have to rent instead, but let’s say then can find a place to rent for the same cost as their mortgage payment, or $2000 a month. According to Numbeo, the cost of renting a 3 BR apartment in Comox, BC (which they’d be OK moving to) is $1,633 a month. So $2,000 should be plenty.
Now we’ve replaced their mortgage payment with a rent. BUT, and this is important, that would mean we’d be able to drop the property taxes, the the utilities, the insurance, and all those other home-related costs. The HELOC would also get paid off by the proceeds. That takes their monthly costs down from $6,395 to $4,925. Their monthly savings would also jump to $8,500 – $4,925 = $3,575 or $42,900 annually.
At that lower cost, the portfolio they need to support that would be $4,925 x 12 x 25 = $1,477,500.
They would also have more money working for them. Now most of their money is no longer tied up in the house where it can’t help them retire, and is instead in the market growing or throwing off an income. After real estate commissions and clearing their debts, their $1.5M house will net them $1,500,000 x 0.95 (real estate commissions) – $425,000 (mortgage) – $49,000 (HELOC) = $951,000. Add that to their existing RRSPs balance and we have $1,201,000. Now we’re talking.
How long will it take for them to get from there to their FI number? Well, let’s see…
By unlocking their equity, eliminating those insane home ownership costs, and investing in self-directed account using the skills we teach in the Investment Workshop, they have gone from 22 years to just 3. Incredible.
Now, that doesn’t mean they have to sell right now. Again, I don’t recommend they do anything until they become comfortable with investing their money themselves. And maybe they want to wait for their kid to exit high school before they cast off. Heck, if they do that, the extra year of savings would be enough to comfortably afford that $22k sailboat! Assuming of course they manage to sell their existing sailboat first. Don’t own two sailboats.
As for their other questions, let’s address them real quick lightning-round style.
If we sell our home in 4 years…should we just do couch potato portfolio now with the $250k?
Yes, but dip your toe in the water with $10k first. Once you can see your portfolio outperforming theirs, you know you’ve done it right and can pull the trigger on the rest.
Should we sell now and do couch potato with the $1M profit and start our travelling now?
No. If you’re nervous handling $10k, you’re not ready to handle $1M. Do it once you’re confident.
Now that ETFs are becoming SO popular do you think they are at risk of imploding?
ETFs won’t implode just because they’re popular. They’re just containers. The underlying assets my fluctuate in value but that’s why we index and diversify.
Are you gobsmacked by our utter stupidity?
I don’t often get gobsmacked, whatever that means, but I do get annoyed at willful ignorance. People who read all the finance blogs, understand the concepts, and then do stupid things anyway. But that’s not you. You’re here because you realized you didn’t know what you were doing and went searching for answers. That’s the correct thing to do, so nothing to feel ashamed about.
And with that, we’re done! Questions? Comments? Let’s here it below!
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