adplus-dvertising
Connect with us

Investment

Should Mark and Meredith invest their surplus or pay off their mortgages?

Published

 on

Mark and Meredith, seen here, should catch up on their TFSAs first, lower the extra payments on their original house and invest the difference.

Lars Hagberg/The Globe and Mail

As a military couple, Mark and Meredith have relocated seven times in the past 10 years, so they’re looking forward to moving back to their original home – now rented out – when they eventually retire.

Mark, an officer with the Canadian Armed Forces, is age 44 and earns about $142,400 a year. Meredith, an employee at the Department of National Defence, is 47 and earns $72,660 a year. Her income has suffered from long spells in places where no work was available. They have a 12-year-old daughter, two houses and substantial mortgage debt.

Mind you, they’ll be well-fixed when they retire from the military. At the age of 55 Mark will be entitled to a defined benefit pension, indexed to inflation, of $116,000 a year plus a bridge benefit of $12,838 to the age of 65. From 65 on, he will get $134,623 a year.

Story continues below advertisement

300x250x1

At 58, Meredith will also be entitled to a DB plan: $35,427 a year plus a bridge benefit of $988 until she’s 65. After that, she will get $39,315 a year.

First, though, they want to pay off their mortgages. They’re not sure which one to tackle first or whether they would be better off investing their surplus funds. “My husband thinks that it would be better to invest extra dollars [in financial markets] because our mortgage interest rates are low,” Meredith writes in an e-mail.

We asked Robyn Thompson, president of Castlemark Wealth Management Inc. in Toronto, to look at Mark and Meredith’s situation. Ms. Thompson is also a certified financial planner.

What the expert says

Mark and Meredith have $2,715 a month in surplus cash flow that they can use for debt repayment, investing, or increased lifestyle spending, Ms. Thompson says. They are using $1,000 of this to make prepayments to the mortgage on their original family home, now rented out.

In addition to their two properties, they have investment assets in their various accounts totalling $305,515, with 60-per-cent equity, 30-per-cent fixed income and 10-per-cent cash. Both have unused RRSP room that they are carrying forward to reduce taxes payable on their retiring allowances (a taxable, one-time payment on retirement in addition to their pensions) – $80,000 for him and $25,000 for her.

The couple would like to retire at the age of 55 with an annual after-tax income stream of $72,000 in today’s dollars (or $106,234 at retirement, indexed at 2 per cent), the planner says. When they do, they plan to move back to their original house and rent out their current residence.

Complicating matters is the fact that they have, at different times, declared one property or the other as their principal residence, Ms. Thompson says. “This will create a taxable capital gain on the property that is eventually sold,” she notes.

Story continues below advertisement

For example, renting out part or all of a principal residence changes its use to an income-earning property. So capital-gains tax may apply for the period during which the property was used to earn income. Mark and Meredith would still be able to claim the principal residence exemption for the period in which they used the house as their primary residence.

“It is therefore critically important for Mark and Meredith to keep detailed records of when and how each property was used along with receipts for any improvements made, no matter how minor,” Ms. Thompson says.

Given their substantial income and relatively modest living expenses, Mark and Meredith will be able to achieve their short- and long-term financial goals, the planner says. “They have some catching up to do with their tax-free savings account contributions and prepayments toward the mortgage, but they are in a rock-solid financial position,” she adds.

The couple’s investments have done well, delivering an annualized rate of return of 8 per cent going back to 2013, Ms. Thompson says. The value of their portfolio shrank somewhat in early 2020 as a result of the stock-market meltdown triggered by the COVID-19 pandemic, the planner says. “But they have a long time horizon and view the market downturn as a short-term event.”

Their portfolio consists mainly of Canadian and U.S. large-cap, blue-chip stocks, exchange-traded funds and a small mutual-fund allocation. They use an investment adviser to whom they pay 1.65 per cent a year. The adviser does not provide planning or tax services.

Story continues below advertisement

The registered education savings plan for their daughter is allocated 50 per cent to fixed income and 50 per cent to equities. Using a 4.5 per cent expected rate of return and a 2 per cent inflation rate, at their current contribution rate the RESP will grow to $73,028 by the time their daughter starts university at the age of 18.

Now for the mortgages. Mark and Meredith are paying 1.95 per cent interest on the $468,560 mortgage on their original home (rented out for $36,000 a year). Their current mortgage payment on the original house is $40,685 annually. In addition, they are making an extra payment of $1,000 a month, or $12,000 a year.

When the mortgage comes up for renewal next year, the interest rate could well be higher, the planner says. She assumes a 2.39 per cent interest rate at renewal. Instead of paying $1,000 a month, they could cut their prepayment to $500 monthly and redirect the surplus cash flow of $6,000 a year to their tax-free savings accounts, where they have unused contribution room. There the investments are forecast to grow tax-free with an expected real rate of return of 4.5 per cent annually, the planner says. “They will still have the property paid off by [Mark’s] age 55.”

As for the house they are living in now, they plan to rent it out for $2,000 a month after they retire. Rather than paying off the $215,000 mortgage, the planner recommends they continue with it, deducting the mortgage interest along with the other expenses. They could use the net cash flow first to contribute to their TFSAs and then invest any surplus in a non-registered, balanced portfolio.

“Meredith’s first inclination is to pay off the mortgage as fast as possible,” Ms. Thompson says. “This is not always the best option in a low-interest rate environment.” For Mark and Meredith, using cash flow to maximize TFSA contributions makes more sense at this point, the planner says. “With a properly diversified, balanced portfolio, the after-tax compounded annualized rate of return on their investments inside the TFSA is likely to exceed the compound interest payable on their mortgage.”

At Mark’s age 56, the first full year they are both retired, Mark and Meredith will have after-tax income of $169,160 a year. After-tax lifestyle needs and the mortgage payment on the rental will total $120,408 a year, giving them plenty of room to expand their goals if they choose to.

Story continues below advertisement


Client situation

The people: Mark, 44, Meredith, 47, and their daughter, 12

The problem: Should they invest their surplus or pay off their mortgages?

The plan: Catch up on their TFSAs first. Lower the extra payments on their original house and invest the difference. Leave the mortgage on the second house when they retire.

The payoff: Making the best use of their money.

Monthly net income: $16,160 (includes gross rental income).

Assets: Cash $7,000; emergency fund $20,000; her TFSA $52,300; his TFSA $30,815; her RRSP $96,905; his RRSP $80,375; RESP $38,120; residence $450,000; rental $750,000; estimated present value of his DB pension plan $2.36-million; estim. PV of her DB plan $863,000. Total: $4.7-million

Story continues below advertisement

Monthly outlays (both properties): Mortgages $4,570; property taxes $990; water, sewer, garbage $115; home insurance $150; electricity, heat $215; maintenance $895; garden $100; transportation $780; groceries $800; clothing $180; gifts, charity $315; vacation, travel $1,250; other discretionary $30; dining, drinks, entertainment $700; personal care $30; club membership $15; pets $15; sports, hobbies $120; other personal $450; health care $25; disability insurance $370; phones, TV, internet $130; RESP $200; TFSAs $1,000. Total: $13,445

Liabilities: Residence mortgage $215,000; rental mortgage $468,560. Total: $683,560

Want a free financial facelift? E-mail finfacelift@gmail.com.

Source link

Continue Reading

Investment

Be cautious of financial advice on social media: Expert

Published

 on

 

Li Zhang, the principal of corporate citizenship with Chartered Professional Accountants Canada (CPA), said in an interview with BNN Bloomberg Tuesday that it is very difficult to quantify the rise of financial advice on social media as there are so many different platforms and influencers.

However, Zhang said it is crucial to understand what credentials a financial influencer might have. She said it is important to understand if an influencer is qualified to provide financial advice and that people should understand how those dispensing advice get paid.

“All influencers have some way of deriving income from what they’re doing. So it’s super important to understand, especially when they’re finfluencers [financial influencers], how they’re being paid,” she said.

300x250x1

“And then finally, if something feels too good to be true or it’s jumping on a trend, really ask yourself to get a second opinion.”

 

728x90x4

Source link

Continue Reading

Investment

Zacks Investment Ideas feature highlights: Alphabet, Tesla, Shopify, Amazon and Palo Alto

Published

 on

For Immediate Release

Chicago, IL – February 2, 2023 – Today, Zacks Investment Ideas feature highlights Alphabet GOOGL, Tesla TSLA, Shopify SHOP, Amazon AMZN and Palo Alto Networks PANW.

Which of These Stocks Has Been the Best Buy, Post-Split?

Stock splits have been a regular occurrence in the market over the last several years, with many companies aiming to boost liquidity within shares and knock down barriers for potential investors.

Of course, it’s important to remember that a split doesn’t directly impact a company’s financial standing or performance.

In 2022, several companies performed splits, including Alphabet, Tesla, Shopify, Amazon and Palo Alto Networks. Below is a chart illustrating the performance of all five stocks over the last year, with the S&P 500 blended in as a benchmark.

300x250x1

As we can see, PANW shares have been the best performers over the last year, the only to outperform the general market.

However, which has turned in a better performance post-split? Let’s take a closer look.

Tesla

We’re all familiar with Tesla, which has revolutionized the EV (electric vehicle) industry. It’s been one of the best-performing stocks over the last decade, quickly becoming a favorite among investors.

Earlier in June of 2022, the mega-popular EV manufacturer announced that its board approved a three-for-one stock split; shares began trading on a split-adjusted basis on August 25th, 2022.

Since the split, Tesla shares have lost roughly 40% in value, widely underperforming relative to the S&P 500.

Palo Alto Networks

Palo Alto Networks offers network security solutions to enterprises, service providers, and government entities worldwide.

PANW’s three-for-one stock split in mid-September seemingly flew under the radar. The company’s shares started trading on a split-adjusted basis on September 14th, 2022.

Following the split, PANW shares have struggled to gain traction, down roughly 15% compared to the S&P 500’s 3.3% gain.

Shopify

Shopify provides a multi-tenant, cloud-based, multi-channel e-commerce platform for small and medium-sized businesses.

SHOP shares started trading on a split-adjusted basis on June 29th, 2022; the company performed a 10-for-1 split.

Impressively, Shopify shares have soared for a 50% gain since the split, crushing the general market’s performance.

Alphabet

Alphabet has evolved from primarily being a search engine into a company with operations in cloud computing, ad-based video and music streaming, autonomous vehicles, and more.

Last February, the tech titan announced a 20-for-1 split, and investors cheered on the news – GOOGL shares climbed 7% the day following the announcement. Shares started trading on a split-adjusted basis on July 18th, 2022.

Alphabet shares have sailed through challenging waters since the split, down 10% and lagging behind the S&P 500.

Amazon

Amazon has evolved into an e-commerce giant with global operations. The company also enjoys a dominant position within the cloud computing space with its Amazon Web Services (AWS) operations.

AMZN’s 20-for-1 split was a bit of a surprise, as it was the company’s first split since 1999. Shares started trading on a split-adjusted basis on June 6th, 2022.

Following the split, Amazon shares have lost roughly 18% in value, well off the general market’s performance.

Bottom Line

Stock splits are typically exciting announcements that investors can receive, with companies aiming to boost liquidity within shares.

Interestingly enough, only Shopify shares reside in the green post-split of the five listed.

Why Haven’t You Looked at Zacks’ Top Stocks?

Since 2000, our top stock-picking strategies have blown away the S&P’s +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.

See Stocks Free >>

Media Contact

Zacks Investment Research

800-767-3771 ext. 9339

support@zacks.com

https://www.zacks.com

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

728x90x4

Source link

Continue Reading

Investment

$13 million investment in Campbellford Memorial Hospital

Published

 on

The Campbellford Memorial Hospital will be receiving a $13 million investment from the Ontario Government to address infrastructure concerns.

The announcement was made at the hospital by Northumberland—Peterborough South MPP David Piccini.

The $13 million is broken down as follows:

  • $9,639,900 will be going to CMH as one-time capital funding to address the HVAC and generator
  • $1,874,929 for reimbursement of CMH’s COVID-19-related capital expenses
  • $771,797 in COVID-19 incremental operating funding
  • up to $600,000 in one-time funding to support the hospital’s in-year financial and operating pressures
  • $163,600 in pandemic prevention and containment funding
  • $81,132 through the Health Infrastructure Renewal Fund
  • $46,884 in health human resources funding.

Interim President and CEO Eric Hanna welcomed the news, saying much needs to be done about the HVAC and generator.

300x250x1

At the announcement, Hanna spoke of the issues with the generator.

“I’ve got the wee little generator up at the lake and then I’m thinking well, everything should be going well at the hospital,” Hanna told the audience in attendance.

“You get a call from the person in charge who says, ‘Guess what Eric? Generator didn’t start. Oh, so what does that mean? There’s no power in the hospital.’  That’s happened a couple of times in the past year and the generator is over 30 years old.”

Hanna says the solution was not as easy as replacing the generator.

“You can go buy the generator and that may be about a million dollars. But then when we found out afterwards, we came to hook up the new generator to the electrical distribution system and said it won’t work with that because your electrical distribution system is 1956. You can’t plug this generator into that. So now we’re putting close to $5 million into a whole electrical distribution system so the generator will work. It’s part of that ongoing thing and that’s why these costs continue to go up.”

The HVAC system was also something addressed by Hanna.

“It’s a contract close to $7 million to replace that. This wing, for example. There’s no fresh air in this wing. It hasn’t worked in here for 15 years. So now this is administrative areas and the concern was that in some of the patient carriers, it wasn’t working either.  So – having those discussions with David (Piccini) and saying what we have to do to correct this.”

728x90x4

Source link

Continue Reading

Trending