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:
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
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
- 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,
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.
|Spending:||$4000/month or $48,000/year|
|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:
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?
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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