In Ask Sherry

Ask Sherry: Maxing out retirement plans, Renting versus Buying & Why I want a new home

You asked, and I am answering every Friday once I have enough questions!

https://docs.google.com/forms/d/1DKFg6SD0Kmb_0U5yb4OTNfkvfmsf5dWxJJbZTzUtH7M/edit

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Given COVID and you mentioning you seldom leave the house, is OOTD purely for content (and not outfits you wear all day?)

Yes. Although some of the sweaters you see, I wear with leggings or sweatpants all day, so it’s not a total wash. I also do wear my rings and necklaces inside, just because I want to feel like I am enjoying my closet.

Otherwise, the bottoms are all a total lie, including the footwear 🙂

Hi, Sherry! I’ve read you are planning to buy a larger home. What kind of home would you like to buy: house, apartment, more bedrooms and in what area (in the city/suburbs)?

We are going to buy land, and build a house in the middle of it.

Initially we thought half an acre, we have bumped it to an acre, and I am that person who thinks we need two acres to be sure no one is around us to bother us with noise which was the MAIN concern we had years ago with buying a home. Neighbours in homes, especially ones made out of wood like here, make so much noise if they’re close to you. Their A/C runs in the summer, they have heating, they have TVs that are loud and blare out of their windows, they have dinner parties, etc.

Think: Home Island in the middle of nowhere with No One Around For Noise.

In contrast, the only real noise we have in the apartment is the stomping of feet above us, and occasionally, their sound system blasting through the floors, everything else is fairly quiet, and we are very centrally located.

The home will be a two-bedroom affair, with my walk-in closet, double sized kitchen, living room, 3-car garage for 2 cars (I hate having to try and be careful within an inch of my car’s life when I drive in), a full-sized pantry, two bathrooms, no separate laundry room however (that can go in the bathroom, we aren’t fussy), a mudroom off the garage, and a full basement just for resale value because people love basements but I am not a fan of stairs. I’ve already mocked up plans of what we think we’d like but again we have to be flexible because if there are pre-made plans.

It’s about 2000 square feet for where we will live, plus the basement so another 2000 square feet we are not likely to use often if at all, unless Little Bun wants to.

What made you think about that? And are you going to sell or rent your current apartment? Thanks.

Even before the pandemic we thought about this because we both had wanted homes to start but because we were both working and wanted to be centrally located to go into the office, we bought something right in the middle of Montreal.

Now, with the pandemic, and the sheer fact that he has lean retired in the past 3 years, and I am already in no need of money, we started to throw around the idea of moving somewhere in the middle of nowhere, and having a home.

The main driver for me is a walk-in closet and a garden. The closet in the end, has evolved into a living space as well (with a couch!), a mini library, and a section for me to work on upcycling jewellery. I think we can just call it another home altogether, if we are honest. But this area will just be for me.

Ideas for closets:

He wants the garden but also a big pantry because he wants space to put all the food, etc. He also dislikes neighbours. I am not so ornery. I enjoy neighbours, but also having someone to collect your packages and things for you when you aren’t around although I suppose if I am retired, this won’t matter – I’ll be at home to receive them.

Now that we no longer need to work, and can simply tell companies: I work remotely, and I only go to the office TWICE a week max (even if it is an hour-long commute a day, it is doable for me), or I don’t work at all….. we are in the position in our careers to be able to dictate the terms of employment.

Or not work any more.

With the way the pandemic is going however, I suspect we are in it for another 2-5 years. This year is a definite wash, we are all staying at home. Next year, is likely to not resolve anything either, so that gives me at least 2 major wallops of earnings to save, and make sure I have enough to cover things like my future trip to Japan and so on.

We will sell the apartment.

I was going to save up the cash for the next place, but with the pandemic we don’t know when things will (if ever) calm down, so I am investing everything, and I will take an interim 5-year mortgage loan for the money for the new home and pay it off as soon as the apartment sells (even if I incur a penalty).

Do you like to put money in pre-tax pension plans or do you prefer after-tax pension accounts? Why?

At the risk of sounding too rich, I max out both.

But it’s easier for me than most people because of my income but also because I don’t have RRSP room any more even though in two months if I was working, I could easily max my RRSP and cover the entire $27,830.

If I had ANY pre-tax or post-tax room, I could transfer about $335K in unregistered accounts to max all of it out… in contrast, my RRSP has about $191K now (I had about $35K in contribution room over a decade ago) and my TFSA is at $99K (contribution room was $75,500 including 2021).

The TFSA started later in 2009 as you know, and the RRSP also collected contribution room from when I was working as a teenager but too dumb to max out things like retirement plans unlike kids these days.

As it stands now, when I work, I can put in about $15K a month to invest if I am being frugal. The rest goes to taxes which I pre-pay.

When I was earning $65K out of school, I only put in the employer’s RRSP match (pre-tax), to get their 100% match. I had $60K in debt to clear, so I didn’t really have ‘spare’ cash for it.

Once I became a freelancer, I stopped having a salary because I am avoiding all of the payroll papers, taxes and nonsense (I did it for two years and it was a bloody headache with very little benefit), and I take my salary in dividends. Ergo, I have no pre-tax pension room any more as I am not an employee. I only have the TFSA (post-tax) at $6K a year (currently).

All the rest of of my money gets plowed into my non-registered accounts.

I worked out the math between the headache that is payroll for my company versus the RRSP contribution and the math says there’s very little to be concerned about because if I buy and hold in BOTH cases (RRSP or unregistered), in my RRSP it doesn’t matter but even in my unregistered accounts, I don’t incur any taxes or capital gains/losses if I don’t sell anything.

To me – it’s about the same, minus the payroll stress. So I have decided not to inflict it on myself and I just pay myself in dividends. I can also control my salary as a result, and that in turn, controls how much I get taxed. I take what I need for the year.

Also, taxation on capital gains is 25%, which is lower than what I’d pay if I had a salary, and dividends are very favourably taxed at almost $50K of income being taxed at around $2000 a year in Québec. Read this post on dividends as an investing strategy.

That is NOT to say I have my investing strategy at 100% dividends, I do not.

I have it at 50/50, as in 50% dividend-paying stocks with a max yield of 5% (currently at 3% or so) and 50% index funds, with the shift towards index funds as I age and save more because the yield is much lower at 1%, and they are less risky than investing in a single company for its dividends.

Hi Sherry! This is a question about debt. I would like to know what you yourself would do in the following situation.

Let’s say you didn’t have your own paid-for apartment, would you borrow money from the bank to buy one? If so, how much and according to what calculation? Would there be a maximum amount that you would borrow, no matter what?

I am not sure I would. The math of a mortgage on top of the cost of a home, would be prohibitive. I’d rather rent.

To put it into perspective, let’s say we pay about $2000/month for running this apartment, or $1000 each.

Imagine if I had to borrow $500K on top of that or $250K? That’s another $1319 a month on top of that, so I am paying $2319 a month just in housing costs alone. Of course, you could make the argument that I am already pre-paying my rent in a sense that I plunked down $300K up front and am losing the investing returns of 7% average on that ….

….but if I took a $250K mortgage, I’d pay about $145K in interest on that loan over 25 years at 4% (which was what I saw at the time was the cost of a mortgage).

Not only that, I am stressed I have to cover for my half alone, $2319 a month PLUS my living extras… it doesn’t seem like a situation I want to be in.

Not that my scenario is the be-all and end all, but in the time I plunked down $300K, the home has gone up $100K in a few years, but of course, we have to then do the math to minus out a reasonable amount for the condo fees (we are overpaying for sure because this building is full of wasteful people who think they’re too rich to care about money), and factor in the opportunity cost of not having invested instead.

At the end of the day, if circumstances didn’t push us to buy, we would keep renting.

Or would you prefer to rent instead of borrowing? In what circumstances would you prefer to rent?

I would only rent from companies, not individuals. Individuals sell their homes. Individuals suck at managing their own properties because unless you get a good landlord who does it properly without trying to screw you, you end up with the situation of the landlord I had which is what spurred us to buy a place in the first place. Otherwise we would have kept renting from a company that manages it and can come fix appliances/replace them in a timely manner, and handle those things that individuals balk at.

You can read:

What would you do in old age (retirement) in case you have been renting by then? Supposing you have been saving, would you use a part of those savings to buy a small place? Would you move to a cheaper area, out of the big city? etc.

How much money do I have? I will keep in mind I will aim to live to 100 to be conservative.

If I am barely scraping by, I am moving to the middle of nowhere and renting a cheap place to live. I am definitely not staying in an expensive high cost of living area.

Thank you.

You’re welcome.

Still have a burning question?

You can ask any question using the form here and all of my previous Ask Sherry posts are here.

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Sherry of Save. Spend. Splurge.

Am my own Sugar Daddy. Am a millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I have 11 side incomes that are on track in 2020 to make me $50K - $75K. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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Posted on December 24, 2019

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4 Comments

  1. Evelin

    Hi Sherry, with the new More rural Home. Do you Stick to Home Schooling? Or is there a acceptable Walk or Bus Service?

    Reply
    1. Sherry of Save. Spend. Splurge.

      We don’t know yet. It depends on where we move.

      Reply
  2. steveark

    We live on two acres, only have a neighbor on one side of our place. She’s a spry 80 year old widow and a joy of a friend. There are more houses down the street but our house is surrounded by 800 acres of wooded wetlands on the other three sides. We don’t own the land but it might as well be ours, we are free to wander all over it. It is full of deer, beaver, foxes, otters, rabbits, squirrels and who knows what else. But we have lightning fast internet so remote working is easy. And housing costs are very low. Our 3,000 sq ft house would only sell for $200,000 most likely, its an insignificant part of our net worth. I am a big proponent of a detached home with some natural spaces around it.

    Reply
    1. Sherry of Save. Spend. Splurge.

      This is the plan. Two acres seems like a healthy size for a home to not have any neighbours too close to us, like in an urban environment which bothers me less, but really gets my partner’s goat.

      He was thinking just one acre, but I know that if given the chance, I’d buy one and a half, maybe two, just to be sure.

      I wouldn’t want any major bodies of water around on the property though I know it brings up the value – I have a real fear of children drowning, and I couldn’t mentally let my son go and play anywhere he wanted, knowing he COULD drown by some fluke, even if he knew how to swim.

      Reply

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