Aiden wants to retire at age 55 with lifestyle spending higher than he has now and enjoy the good life – skiing in the winter, concerts and travelling.Todd Korol/The Globe and Mail
Aiden is 25, single and the proud owner of his first home, a half duplex in Alberta. He’s enjoying his second career job, earning $85,000 a year in public relations. He previously worked for the government.
“I saved my salary while I worked from home and lived with my parents during the worst of the COVID-19 pandemic to make the down payment,” Aiden writes in an e-mail. He also emptied his tax-free savings account. He put 20 per cent, or $85,000, down on a house that cost $425,000 in 2021. With the improvements he has made, including a basement apartment, he thinks his house could be worth $550,000 now. He has about $323,500 remaining on his mortgage.
Should he pay off the mortgage or invest for the future?
“Traditional personal finance wisdom suggests I pay the house off ASAP,” Aiden writes. His mortgage rate is low – 1.74 per cent – but he is averse to debt and concerned about having to pay a higher interest rate when his mortgage comes up for renewal in 2024. He could probably earn a higher rate of return in stocks – or even a guaranteed investment certificate, Aiden adds. Should he use his surplus cash flow to pay off the house or invest for the long term?
He also wonders whether it is worthwhile to open a registered retirement savings plan (RRSP) given that he has substantial contribution room in his TFSA.
Long term, Aiden wants to retire at age 55 with lifestyle spending higher than he has now and enjoy the good life – skiing in the winter, concerts and travelling.
We asked Jason Heath, an advice-only financial planner at Objective Financial Partners in Markham, Ont., to look at Aiden’s situation.
What the Expert Says
Aiden has roughly a $250,000 net worth, which is pretty good for a 25-year-old, Mr. Heath says. Granted, nearly half of that has come from home price appreciation on the house he purchased in September, 2021. “He bought a house he could afford, he has an emergency fund in his TFSA, and he has monthly payments he can manage while continuing to save,” the planner says. “So good on him.”
Once Aiden is done paying off an interest-free loan from a relative for his student debt, he will have an extra $1,000 a month to use to pay down his mortgage or invest, the planner notes. “Aiden asks whether he should pay down his mortgage more aggressively but is leaning toward buying stocks.” If his 1.74-per-cent fixed-rate mortgage renews at an assumed 4.5 per cent in September, 2024, Aiden’s payments would need to rise by $455 a month to $1,855 to maintain the same amortization.
Some of Aiden’s mortgage interest is tax deductible because he rents out his legal basement suite, so this makes his cost of borrowing a bit less, Mr. Heath says. If Aiden thinks he can earn a higher rate of return investing in his TFSA than the borrowing rate on his mortgage, he may come out ahead by investing. “That said, the new normal of higher interest rates makes investing rather than debt repayment less compelling.”
In the long run, there may not be a compelling advantage to paying down his mortgage versus contributing to his RRSP or TFSA, assuming the mortgage interest rate and investment returns are similar. Both investing and debt repayment are good because they increase your net worth (net worth = assets minus liabilities). Aiden mentions being debt averse, so considering a lump-sum payment against his mortgage at renewal, or increasing his payments, should be considered.
Aiden has never contributed to a registered retirement savings plan. “He is just on the cusp of going from a 30.5-per-cent marginal tax bracket to 36 per cent, so this is the tax refund rate he could expect on his first dollar of RRSP contributions as an Alberta resident,” the planner says. It is likely he will withdraw money from his RRSP at a 30-per-cent tax rate in retirement, making RRSP contributions advantageous for him if his income continues to rise.
Once Aiden pays off his student loan later this year, he should consider directing at least some of his $1,000 of extra monthly cash flow to RRSP contributions, Mr. Heath says, “especially given he has a healthy TFSA balance of $30,000.”
Aiden’s budget seems light on planning for future home repairs and renovations, as well as an eventual car replacement, the planner says. In preparing his forecast, he added in $500 a month for each item to bring Aiden’s monthly expenses up to $4,045a month, excluding debt repayment, saving and taxes.
Aiden’s $12,000-a-month desired after-tax spending in retirement is “way higher” than his current spending, adjusted for inflation, Mr. Heath notes. Even with the extra $1,000 a month added to his spending, assuming a 2-per-cent inflation rate, his current after-tax spending would be about $6,500 a month by his age 50. “It is not unreasonable to want to spend more in retirement, especially in the early years for travel, for example, but that’s nearly doubling his current standard of living,” the planner says.
Aiden saw his parents retire at 55 and would love to retire by 50 if he can. “I made some assumptions beyond the $4,045 per month of living expenses (including renovation/repair and car budgets),” Mr. Heath says. These include a modest 2-per-cent annual increase in his salary, bonus and basement rental income, 65 per cent of the maximum Canada Pension Plan benefit at age 65 (low because of early retirement), maximum Old Age Security, his small government defined-benefit pension at age 65 (adjusted for 2 per cent inflation from now until then), 6-per-cent returns on his self-directed stock portfolio, 2-per-cent inflation (as inflation subsides), and a 4.5-per-cent mortgage rate for the balance of his mortgage after the 2024 renewal.
“The result is his investments are projected to be depleted by about age 87 and he may need to borrow about 10 per cent of his home equity by age 95,” Mr. Heath says. “Obviously, if he wants to significantly increase his spending to his $12,000 after-tax monthly target, he will have to work way past age 50.”
Given Aiden’s current age and stage, and how much can change between age 25 and retirement, the main thing he can do is just maintain the good trajectory he is on currently. Life changes, such as a relationship or a family, could be material in his long-term planning, Mr. Heath says. Aiden may not always want a basement tenant either.
Because Aiden is financially dependent on himself, he should consider disability insurance, which he presumably does not have available through his employer, the planner says. “The odds of him becoming disabled are much higher than dying [prematurely].” A disability insurance policy that would replace Aiden’s income if he was disabled and could not work is an important risk-mitigation goal for him to consider.
Client Situation
The Person: Aiden, 25.
The Problem: Should he pay down his mortgage or invest for the future? Should he open an RRSP? Can he retire early?
The Plan: Consider opening an RRSP to take advantage of his unused contribution room. Monitor interest rates when deciding whether to pay down the mortgage or invest. Plan on spending much less in his later years if he wants to retire at age 50.
The Payoff: The rewards that come from good spending and saving habits.
Monthly net income: $5,150 (plus $1,150 gross rental income).
Assets: Bank account $1,000; TFSA $30,000; estimated present value of defined benefit pension $21,400; residence $550,000. Total: $602,400.
Monthly outlays: Mortgage $1,400; property tax $300; water, sewer, garbage $110; home insurance $150; electricity $100; heating $130; maintenance, garden $170; transportation $440; groceries $500; clothing $25; interest-free student loan to relative $1,000; gifts, charity $170; vacation, travel $250; political donations $100; dining, drinks, entertainment $400; sports, hobbies $50; subscriptions $20; health care $30; communications $100. Total: $5,445.
Liabilities: Mortgage $323,500; personal loan $7,000. Total: $330,500.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
