Reader Case: Choosing Between Health and FIRE

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Guess what day it is? Friday! (And apparently there’s something called a “weekend” coming up? How do these things work again?)

That means it’s time for another reader case! 

This reader’s situation is tough and something that hits close to home. Remember how we said we came back to Canada due to a family emergency? Well, to date, said emergency is still ongoing, so I could immediately relate to this reader’s situation as soon as I read their e-mail. Without further do, here we go:

Hello Firecracker/Wanderer,

First, I’d like to say thank you for providing your investment advice for free. Life changing for those who can’t seem to figure it out ourselves!

I am trying to make my way through your book and all the case studies right now but I thought I would write as I think I have some unusual circumstances for a young person that may be of interest to your readers.

I was diagnosed with cancer and have spent the last two years recovering. In my thirties, this is a significant life event that I simply did not plan for. I think it is relevant to mention that I was in “perfect” health up until I wasn’t. I was lucky enough to be in a FT job with benefits including Short Term and Long Term Disability. If it weren’t for the STD and LTD I am not sure how I would have gotten through this difficult period as I only had about $10k in emergency savings. The only silver lining (if there can be one) from this cancer diagnosis was that because of the seriousness of the illness my mortgage was forgiven due to critical illness. I now live mortgage free in a one bed, one bath condo that was bought for $310K over  five years ago. Based on comparisons in the neighbourhood, condos of similar specs are selling for anywhere between $539K to $608K.

The answers to your questions:

Your gross/net annual family income: single income $120K.

Your monthly family spending:
Expense Amount per month
Condo Fees $480
Hydro $75
Gym $560
Cell Phone/Internet $125
Property Tax $330
Pet Costs: $230
Food, entertainment, life costs. *This fluctuates greatly and with Covid, I have been able to bring this down significantly. $2200

Total $4000

Debts:

  • The outstanding balance on a line of credit is $9500 with an interest rate of 3.34%. Paying max monthly repayment of $988 per month. 2020 available prepayment amount of $1400 which I hope to pay in full before the end of the year. 2021 prepayment amount should be about $4400.

Any fixed assets you have (house, car, etc.):

  • Condo with no mortgage. See above.

And investments or savings you have (cash, bonds, stocks, etc.)

  • Wealthsimple RRSP:$18K (RRSP available room: $65K)
  • Wealthsimple TFSA: $8K (TFSA available room: $75K)
  • RRSP account with high fees that I am embarrassed to mention: $100K
  • Current work pension plan: $30K
  • Emergency Fund: $5K

After all of this, it might not be clear why I am writing. Before this health crisis I was already really trying to tackle a number of financial issues like build up my emergency fund, try to max out TFSA and RRSP, pay down debt but with my mortgage I didn’t feel I had any choice but to continue working a corporate job. Yes I know you’re eye-rolling about the mortgage but now I am here now – I didn’t know your blog existed a decade ago! In my current role, there is employer matching and I max it out by contributing about $800 a month. Instead of contributing more to the work pension account I prefer to contribute to the TFSA and RRSP accounts I have  outside of work which is more in line with your asset allocation recommendations. For some reason I still can’t get over the mental hurdle of moving that $100K pension into a self managed account but I am hoping the numbers and your analysis will finally give me the motivation and mental safety net to do so.

General questions/direction I am seeking:

1. What would FIRE look like for someone in my situation who would like to be financially prepared should another significant health event occur? How much of a financial buffer should one work towards if they don’t want to be chained to a corporate job for the rest of their lives previously for mortgage reasons now for health reasons (current job provides benefits, STD, LTD etc.)?

2. Another significant issue that I haven’t seen much about on your blog is planning for the potential of one’s parents to become dependents. 

3. What to do with condo? A. Sell and invest money, rent instead. B. Keep condo and live mortgage free. C. Is there a scenario where it would make financial and life happiness sense where I would rent out condo and rent another place to live so my dogs can have access to a yard? I am anticipating your answer as it was pretty clear from your case study sell or rent the condo, the outcome of selling and investing clearly beat the keep it and rent it out option. My secondary question to this is, should the numbers work out such that selling and investing is the better option now, what type of investing is best if one day in the near future (5-10 years) buying a home again is something I’d like to do (If my health and/or parents prevents me from travelling the world)? How do I ensure that I can still access that money and be able to access let’s say 20% down payment (could be up to $200K max)? I understand if you completely recommend against this. I am about to review Paula Rant’s advice as you suggest in your blog for buying.

Thank you for reading,
–UnusualCircumstances

Okay, first of all, I just have to say, my condolences on the cancer diagnosis. It’s been a tough year for all, but it’s especially difficult for you. Since we’ve recently had an immediate family member diagnosed with cancer, we know how even more challenging it is living through a pandemic when you’re immunocompromised.

On the plus side, as you mentioned, even with this difficult situation, I’m thankful for you that you have a job with disability benefits, as well as the ability to discharge your mortgage. Got to celebrate the wins whenever we can, right? My first instinct is to keep the condo since you now only have to pay $885/month (quick aside, where is your home insurance? Don’t you ensure the condo in case of fire, flooding, etc?), but let’s actually do the math to figure out whether that’s correct or not.

Summary: Amount
Income: $120,000
Spending: $4000/month or $48,000/year
Debt: $9500
Investible Assets: $18,000 (RRSP) + $8000 (TFSA) + $100,000 (RRSP) + $30,000 (pension plan) + $5000 (emergency funds) = $161 000
Home: Approx: $539,000 * 95% (real-estate commission) = $512,050

Okay, I wanted to clarify something here. You referred the $100K amount as both an RRSP and a “pension” at different points in your email, so it’s not clear which it is. For the sake of this analysis, I’m going to flip a coin and guess that it’s an RRSP that you can direct rather than an employer-run DB pension plan.

Also, for the employee matching program, you’re saying you’re want to stop doing that and contribute to RRSP and TFSA instead in order to have self-directed investing. Don’t do this. You want to max out the employee matching, otherwise you are losing out on free money.

Ok, now that I got that out of the way, let’s see what your time to FI is.

By using the 4% rule, you’ll need $48,000/year x 25 = $1.2M to become FI. I’m assuming that by $120K, you mean gross income, which after maxing out your RRSP, the tax calculator gives me a net income of $93,561. This means your yearly savings is $93,561 – $48,000 = $45,561 or a savings rate of 49%. Not bad!

And yes, I did do a double-take on the $48,000/year spending for a single person since Wanderer and I have spent way less than that for the two of us living in Toronto for the past 6 months, but given your unusual circumstances and still high savings rate, I’m going to give you a pass on that one. You are absolutely right in that you need to focus on your health right now, not maximizing your savings.

So the first thing you should do is pay off your debt. I’m not sure why you refer to a “max monthly payment” since LOCs generally allow you pay off the balance whenever you want. Take some money out of your TFSA, pay off the LOC.

Now with investible assets of $151,500, if you are able to put away an estimated $45,561 per year, you should be FI in:

Year Starting Contributions ROI (6%) Total
1 $151,500.00 $45,561.00 $11,823.66 $208,884.66
2 $208,884.66 $45,561.00 $15,266.74 $269,712.40
3 $269,712.40 $45,561.00 $18,916.40 $334,189.80
4 $334,189.80 $45,561.00 $22,785.05 $402,535.85
5 $402,535.85 $45,561.00 $26,885.81 $474,982.66
6 $474,982.66 $45,561.00 $31,232.62 $551,776.28
7 $551,776.28 $45,561.00 $35,840.24 $633,177.52
8 $633,177.52 $45,561.00 $40,724.31 $719,462.83
9 $719,462.83 $45,561.00 $45,901.43 $810,925.26
10 $810,925.26 $45,561.00 $51,389.18 $907,875.44
11 $907,875.44 $45,561.00 $57,206.19 $1,010,642.62
12 $1,010,642.62 $45,561.00 $63,372.22 $1,119,575.84
13 $1,119,575.84 $45,561.00 $69,908.21 $1,235,045.05

13 years!

Not bad.

What would happen if you sell the condo? If you can rent the condo for $1800/month or less (based on my research of one bed condos in your city), your cost of living goes up to $4000 + $1800 – $480 (condo fees) – $330 (property tax) = $4990, or $59,880 a year. This would change your FI target to $4990 x 12 x 25 = $1,497,000.

But, you’d be able to unlock the equity in the mortgage-discharged condo, putting you ahead by $512,050, for a total of strting investable assets of $151,500 + $512,050 = $663,550. Finally, it would change your savings rate to $93,561 – $59,880 = $33,681.

What does this do to your time to FI?

Year Starting Contributions ROI (6%) Total
1 $663,550.00 $33,681.00 $41,833.86 $739,064.86
2 $739,064.86 $33,681.00 $46,364.75 $819,110.61
3 $819,110.61 $33,681.00 $51,167.50 $903,959.11
4 $903,959.11 $33,681.00 $56,258.41 $993,898.51
5 $993,898.51 $33,681.00 $61,654.77 $1,089,234.29
6 $1,089,234.29 $33,681.00 $67,374.92 $1,190,290.20
7 $1,190,290.20 $33,681.00 $73,438.27 $1,297,409.47
8 $1,297,409.47 $33,681.00 $79,865.43 $1,410,955.90
9 $1,410,995.90 $33,681,00 $86,678.21 $1,531,315.12

 

It shortens it from 13 years to 9 years.

You can play around with these numbers, using different rental prices and yearly contributions/savings, to see how it changes your time to FI.

So it looks like your windfall came from having your mortgage forgiven (though obviously for not the greatest reason), and then having the condo appreciate while at the same time rents plummeting due to the pandemic. Given the amount of equity you’re able to unlock, selling it and fast tracking your path to FI gets you there 4 years faster.

However, the math might say one thing, but life sometimes gets in the way of the math. Would I suggest you go call up a realtor and start packing your stuff? No. Given your special circumstances, it’s better for your health to stay put and recover for the time being. Since you are immunocompromised, I wouldn’t risk moving until at least the pandemic is over. Right now, hunker down and don’t get sick. Reaching FI is not the most important thing right now. 

And now to answer your questions.

1) From a purely numbers perspective, getting your equity out fast tracks your time to FI. However, given that your job lets you work from home, gives you disability insurance, and currently there’s a second wave of Covid coming, the best thing you can do for your health is to stay put. Quitting your job and becoming FI shouldn’t be the highest priority right now. Wait until this pandemic is over before you make big financial decisions like selling your condo. Your life is more important than money.

2) We’ve talked about this exact thing with our Chautauqua friends recently. I understand the desire to help one’s family, however, it’s also important to set boundaries. Coming from an Asian background, it’s extremely difficult for me to do that and that’s why it’s taken me years to get here, but there has to be a balance between your happiness and your parents’ happiness. If you want to help your parents, you can set aside a monthly amount that you feel comfortable with and factor that into your FI number. Alternatively, there are other ways to support your family besides money (helping them manage their finances, spending time with them, buying them groceries, cooking for them, etc).

3) Mathematically, option A (Sell, rent and invest instead) wins. However, from a safety and health perspective, option B is likely better for you during the pandemic. You’ve also brought up an option C, rent out your condo and then rent out a house. This is definitely the worst choice, the gain you’d be getting from renting out the condo (an estimated $990) is not enough to rent an entire house. So you’d have to spend extra money while incurring the risk of moving during COVID while you’re still immunocompromised. I would say stick with option B for now and evaluate option A after you get better.

To answer your secondary question, if you want to sell 20% of your portfolio to buy a house later on down the road, your assets are liquid, so you could exit the market in minutes if you choose. But should you choose to do that? Well, I would say, as always, do the math. You would be losing out on the passive income from that portion of the portfolio and locking up the down payment in an illiquid asset. Rents on downtown condos is actually where the value’s at right now, not houses in the burbs. You’d be trading a portfolio generating passive income for a giant mortgage, which would likely set you back massively in your FIRE journey, so when the time comes, you have to make a choice. Would you rather have a backyard for your dog, or retire?

So there you have it.

I’m sorry to hear about your diagnosis, UC, but it looks there are options, so don’t stress too much and focus on your recovery. We are sending you lots of good thoughts and vibes.

What do you think, readers? Do you think UC should stay put? Sell her condo? Rent it out and rent a house?

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26 thoughts on “Reader Case: Choosing Between Health and FIRE”

      1. Pets are not things to simply be discarded when they get sick. They are feeling beings that become your responsibility once you adopt them. So if you decide to have one you need to factor in possible costs when they get sick. And to most people, their pets are a part of their family. I don’t assume you would advise getting rid of a relative if they get sick?

    1. Wow is right, some people are pretty harsh to criticize about the care of pets. Thank you Nina for what you wrote. This pet is most likely helping this person through her difficult time.
      This person should be congratulated on how far they have come in saving as well.
      How many people in their 30’s do you know have accumulated what she has?
      I only started my career in my late 20’s as a nurse with (would you believe) no work? But in 1996 this was true.
      So we should celebrate the positives for sure.
      If this person wanted to get to FI quicker then yes I would for sure look at the expenses, especially tennis since you already have a gym membership.
      All the best

  1. This cancer patient may care to investigate the Gerson therapy at Gerson dot org. The therapy helped me out with a prostate problem I had twenty years ago. I’ve been healthy since, and FI for many years too.

  2. How does one get a mortgage discharged? Do you need critical illness coverage on the loan? I’m in my early 40’s and I’ve been battling cancer this last year. Luckily I also have STD and LTD benefits, but could I have cleared my mortgage, without knowing it?

  3. The only thing standing between you and financial Independence notwithstanding your cancer diagnosis, is your ego ( by the way I understand what you’re going through I am recovering from breast cancer). Not to sound harsh. Ditch the tennis lessons the gym the pet groomers in the pet insurance that gives you a net-positive of almost $800 a month. With that in your pocket adding to your savings now you can take your time a little bit and decide what you want to do as far as moving. I hope you don’t take any offense at this. Just my two cents. If you feel up to it, and if it were me, I would sell as soon as possible and rent a two-bedroom apartment that allows pets. Now you can walk your pet instead of going to the gym. Just a thought.

  4. In all your case studies you don’t factor in that fi number they need is in today’s dollars. For example, you say she needs 48k to live per year, hence she can retire in 9 years but that’s in today’s dollars. Her 48k needs to be adjusted to inflation for every year after that until she take her retirement.

    1. If you look back at our previous Reader Cases, we mention that we account for inflation using the assumption that her salary rises by the rate of inflation each year, and we don’t include any raises, bonuses, or promotions. The detailed mathmetically breakdown for this assumption is also explained the Appendix of our book, Quit Like a Millionaire.

  5. The only part that is confusing to me is the math calculating if she sells and rents instead. You saw rent in her area would be $1,800 for something similar to what she owns, so you add that rental cost in to her monthly spend and take the proceeds of the sale of the home and add that to her starting net worth balance. Totally makes sense. But why are you then reducing her rent by $480 for condo fees and $330 for property taxes? I get the landlord bares those costs not the tenant but when you go to rent something you don’t then negate costs from the rental price? The rental price is the rental price. The landlord pays certain costs (such a mortgage, condo fees/HOA, upkeep, and landlord insurance) and the tenant pays other costs (such as rent, utilities, renters ins). The way I see it, if she can rent nearby for $1,800 then it should be $4,000 + $1,800 = $5,800/mo or $69,600/year which would push out that 9 year timeframe. Maybe I’m missing something but subtracting condo fees and property taxes when it comes to monthly rent doesn’t make sense to me.

    1. Nope. From my research, $1800/month is all in for UC’s city, including utilities (and even parking in some cases), no additional costs, except maybe hydro, which is why I didn’t deduct the $75/month. Most of the landlords in that city is bleeding money because the rent they get can’t cover all their ownership costs.

      1. Right ok so $1,800 all in rent with utilities, nice. So it would be $4,000 $1,800. Is the $4,000 $1,800 then minus $480 minus $330 because the $4,000 includes the condo fees and property taxes? I think so and if so I now see how you’re doing the math. Only home related thing I could think to add in as a renter is renters ins depending on if it’s required or not.

    2. The condo fees and property taxes are deducted from rental scenario because in this scenario she would no longer be paying these fees on her CURRENT condo. She saves these costs each month if she chooses the rental option. Hope this helps.

  6. It’s hard what you are living rigth now. I’m sorry. In my case I will keep the condo. Is a safe move for you in my opinion. I know mathematics can safe you 4 years if you sell but the feeling of have a place without mortage can contribute to your health too. It’s my two cents.

  7. Hi, Two points: WHY so much for the GYM? Do you have a personal trainer you are supporting? There are other alternatives, be creative. And a good point was made about keeping you and the dogs healthy by exercising together, just get outside as much as possible. I’m turning 60 soon. At home, I play music, work out at home, use Utube videos, yoga videos, use 2-5 lb. free weights while doing my own stretches recommended by a physiotherapist after my knee surgery. I walk, ride my bicycle and play free community pick-up pickleball. I do what I can myself. I do NOT go to the gym. I try to dedicate 8 hours per week on exercise. (I don’t reward myself with coffee until I have at least done 20 minutes of stretches or dance…so morning coffee is my built in reward!)

    PLEASE consider, owning mortgage-free is much more emotionally secure then renting if you don’t want to move every year or two…..in other words, you put yourself at the whims of a landlord. At least until you have your financial direction and some further financial progress established, like paying down your credit line. I don’t know the particulars about your dogs, but keeping a yard/property yourself may also be more than you can handle, physically. (I own a house and a condo as a snowbird).
    Cheers, all the best!

  8. Thanks for sharing.
    One thing I find missing is the option of pulling the equity out and investing it. Mortgages are very cheap and the money works harder in the market?

  9. KIS (Keep It Simple)

    Financial Investment Plan for the Next 6 Years (Starting today)
    1. Reduce your expense down to 30K/Yr
    2. Build up 2 years living expenses 60K (CASH, CD, Money Market Fund)
    3. Put the rest of the savings into low cost index fund
    4. Keep the all your current Investments (Condo, Retirement Accounts) on auto drive until you feel better and have more time for more optimization (FireCracker is your girl if you need help).

    Relationship Investment (time and money) Plan for the Next 6 Years (Starting today)
    1. (Time) spend more time with your parents if and only if they empathize with your health condition. (Money) the amount of money you can give your parents plus your expenses must be in the 30K/year target.
    2. (Time) connect with others outside of your bloodline. You must find connection with someone beyond the boundary of yourself (your dog does not meet this requirement). (Money) movies, dinners with a friend.

    *NOTE, once you have crossed the 6th year, it is the quality of the relationship that is going to impact the quality of your life most – specifically your health.

    Good luck!

  10. The point about balancing FI and helping family is almost understated. It’s incredibly difficult to balance and we’ve been dealing with similar questions for years.

    I’d love a more complete resource and discussion about how to handle typical back and forth about how much or how little should be contributed back, how to handle family pushing back on FIRE plans suggesting their needs are more important (which, legitimately, they are sometimes! …but when?).

    It’s all pretty personal, but probably a very common roadblock for many on the FI path.

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