Noreen Goodchild wants to change her life. Richard, her husband, wishes she wouldn’t.
A year ago, Noreen was transferred from her comfortable government job close to home in Leduc, Alta., to another one 80 km away. The new job offered her more interesting work as a manager in the planning department of a federal government agency, plus a $15,000 salary increase. But although she enjoys the work, plus her gold-plated government pension and $80,000 salary, the stress of the daily two-hour commute is tiring her out. “I get up at 6 a.m. and I don’t get home until close to 7 in the evening,” says Noreen, 43. “It’s dark and there are moose and deer to look out for. But what bothers me most is that I barely have any time to spend with my 16-year old son, Sam, and my 7-year-old daughter, Mia. I want a job closer to home.”
Richard, also 43, sympathizes but admits that he feels differently. (We’ve changed both their names to protect their privacy.) As a private tutor and home-care worker, Richard earns about half of what Noreen makes—$45,000 annually—and has no company pension. Until now, the couple has always dreamed of retiring at 55 and the grand plan is that Noreen’s government pension will be a key piece in that retirement puzzle. The other piece is the nine-unit apartment building that the couple bought seven years ago. “We really can’t save any money as long as we hold on to it,” admits Richard. “But that doesn’t bother me, because I know that Noreen’s government pension at 55, along with the $35,000 net income from the nineplex at that time, will guarantee us early retirement.”
With $456,000 in mortgage debt on their real estate, there is no money left for retirement savings. And while the Goodchilds expect the nineplex to start making a few thousand dollars annually by next year (it has lost about $10,000 in each of the last two years), it won’t do more than that until the mortgage is gone. “Paying off all the real estate debt by 55 is all part of the early retirement plan,” says Richard.
Noreen, however, is more focused on the present. She wants to change jobs, sell the nineplex, and improve her quality of life now. She believes that the proceeds they would net from the sale of the building would give them a nice nest egg to grow over the next 12 years. “Without the debt we should be able to save another $15,000 annually, even if I am earning only $65,000,” says Noreen. If she left her government job today, her 11 years of service would still net her a $1,400-a-month pension that she can start receiving at 55. “That should be enough to retire on.”
Richard is skeptical. He feels they’ve never been able to save money, but they have been disciplined in paying down their mortgages, and the nineplex has doubled in value from $380,000 to about $800,000 today. He wants Noreen to stay in her job until she’s 55, which would allow her to collect a pension of $3,000 a month. But Noreen isn’t sure she can follow that plan.
Noreen has never been good at saving and investing. She grew up in Leduc, where her dad was a successful small business owner and her mom stayed home with the three kids. “We had vacations and parties and lots of sports and activities for me and my brothers,” says Noreen. “But it was devastating when interest rates went up in the 1980s and my dad almost lost his business. I’m afraid the same may happen with the nineplex.”
Richard thinks differently. He remembers how his parents took comfort in investing in real estate when he was a child. “Mom bought a small duplex that my parents held on to for 25 years,” says Richard. “When they retired, they had a nice income from the property. Their retirement plan was so simple, and it provided them with a nice life—Florida in the winter, and trips home to visit family in England during the summer. I want that for us, too.”
Noreen had to struggle through her early adult years. In 1987, when she was 19, she left home, moved to Edmonton and began living with Charles, her high-school sweetheart. She worked as a bookkeeper to help pay the rent, but in 1994, just before Sam was born, Charles left her. “I was devastated.”
Noreen moved back in with her parents and went back to work while her mom and dad looked after her son. Then, when Sam was 2, she returned to Edmonton, where she met Richard.
Richard had moved to Edmonton from Morinville, Alta., in 1986 and was studying physical education at the University of Alberta. He graduated in 1990, and later went back to university to complete a teaching degree. In 1996, he met Noreen while she was coaching volleyball and he was coaching softball. “We hit it off right away.”
They married in 1997, and after a couple of years of teaching, Richard quit and got a job as a home-care worker and tutored kids on the side. In 1998, they bought their first home, a modest three-bedroom bungalow, for $90,000. Noreen got an accounting job with a good salary and great benefits with a federal government agency. Mia was born in 2003, and a year later they sold their home for $150,000.
At that time, a close friend of Noreen’s found out that he had only a few months to live. He offered the Goodchilds a chance to buy his nineplex for $380,000. They bought the building and lived in it for three years. But the neighborhood deteriorated and in 2006 the Goodchilds decided to move closer to Noreen’s family, just south of Leduc, where they bought their current home, a four-bedroom colonial on an acre of land. “We found ourselves quite quickly with close to half a million dollars of mortgage debt on the two properties,” says Noreen. “Since then, we’ve been strapped for cash all the time. We can’t save any money and basically live hand to mouth.”
When Noreen was transferred to her new job last year, the salary increase looked so attractive that she jumped at it. Sam was going to university and she thought the extra money would help with the costs, not realizing the toll it would take on her family life.
Today, in what little spare time they manage, Noreen and Richard coach youth sports teams. They also vacation down south every couple of years, including a recent trip to Guatemala. “That really made me see how happy people can be with modest lifestyles if they have lots of time to spend with family and friends,” says Noreen. “I was envious. I’d be happy with that.”
Richard is comfortable staying the course, even though he spends several hours each week doing maintenance on the apartment building. Last year the work was especially time-consuming and expensive: the whole building had to be rewired and smoke alarms were mysteriously going off at all hours of the night. Then the roof had to be redone and several appliances had to be updated. “It’s been expensive up to now, but next year we’ll start turning a profit,” says Richard. “We just have to be patient.”
Neither Richard nor Noreen knows much about investing. “In the past, we’ve just acted on stock tips from friends,” says Richard. “That never worked out well.” Still, the couple has $70,000 in RRSPs that are split between GICs and a balanced mutual fund. That gives them a safety cushion in case of emergency or unforeseen expenses.
But what’s next? Richard wants Noreen to keep working at her job for at least another decade. But she doesn’t want to. “I’ve done a lot for my family and I want to do something for myself now,” says Noreen. “Is it too much to ask for a balanced life?”
What the experts say
The Goodchilds’ money problems don’t surprise the experts. “Noreen is kidding herself if she thinks she got a raise with this new job,” says Warren Baldwin, a regional vice-president with T.E. Financial in Toronto. “After she pays for gas, car repairs, extra car insurance, maintenance and depreciation every year, that $15,000 raise is gone.”
What’s worse is that Noreen resents spending so much time away from her family. “There’s no way she is going to last another 12 years at this job,” says Alfred Feth, a fee-for-service planner in Waterloo, Ont. “They’ve lost their way.”
The good news is that the couple should be able to achieve work-family balance and early retirement—if not at age 55, then certainly by 60. Here’s what they should do.
Noreen needs to change jobs
Noreen should try to transfer to another government job closer to home. That would allow her to keep her pension. “Even at lower pay, it would be ideal,” says Mary Prime, a fee-for-service planner with Prime Consulting in Toronto. If Noreen fails to do so within a few months, then she should take a private-sector job close to home. “Even at $65,000 a year and no company pension, the Goodchilds can still do well,” says Prime. “But they need to make some choices.”
Consider selling the nineplex
Assuming that Noreen gets a job closer to home and makes only $65,000, the couple could sell the building. If they do that, they could pay off their home and still net about $200,000 after expenses, commissions and capital gains taxes. If they invest that sum in index funds that return 6% annually, the couple will have $400,000 at age 55. If they also cut $5,000 in annual expenses (especially in travel, groceries and transportation), they will be able to save $21,300 a year that they can add to their RRSPs, TFSAs and other investments. That should increase their nest egg to about $759,000 by age 55.
With a conservative 3% withdrawal rate (adjusted annually for inflation), the Goodchilds could draw down their portfolio by $22,700 in the first year. They will also get $16,800 from Noreen’s pension at age 55, which will give them a total of $39,570. “They can semi-retire at 55 on that—possibly working part-time to bring in an extra $20,000 a year to give them the $60,000 gross they will need to live comfortably at that time,” says Feth.
However, the experts have some reservations. “I hesitate to recommend this plan for the Goodchilds, because even though the numbers work on paper, the couple knows almost nothing about investing,” says Prime. “It leaves them open to being taken advantage of by people in the finance business.”
Baldwin agrees. “They have to be very disciplined with their money for this plan to work,” says Baldwin. “They will need to work closely with an adviser, and I’m just not sure they’re up to that challenge.”
Or … make the nineplex their plan
The experts agree that it would make more sense to keep the building for now. “Richard is right,” says Feth. “Even though the nineplex isn’t a great investment, it’s a good one for them because of their limited interest in other types of investing. It’s easy—simply pay down the mortgage for the next few years, and then live on the rental income. It’s nice if it goes up a lot in value as well, but even if it doesn’t, the income will be an invaluable resource.”
If they keep the building they need to make some changes. Right now, the Goodchilds are pinched for cash, and that’s because they’ve put themselves on a short 12-year amortization schedule. “They’re handcuffing themselves to their debt,” says Baldwin. “They need to change that.” Baldwin suggests the couple “blend and extend” their mortgage. Right now the Goodchilds are paying 5.75% on both their home and apartment mortgages. If they can reduce that to 4% and extend their amortization schedule by five years to age 60, that will save them $8,000 a year. “I know they want to have the nineplex paid off by age 55, but they don’t need to do that,” says Baldwin. “Why suffer now when they really need the cash flow, both for Sam’s education and to accommodate a lower-paying job for Noreen? It doesn’t make sense.”
If they extend the amortization period, even if Noreen takes a lower-paying job with no pension, the couple will still be able to retire at 60 quite comfortably. Between the income from the apartments and the partial government pension Noreen earned earlier, they should have an income of at least $51,800 a year until age 65. At that point, they’ll be able to collect CPP and OAS—about $27,400 annually. “That’s when they should sell the nineplex,” says Prime. “Richard will be at the age where he won’t be interested in being a landlord anymore.” Whatever money they make from the sale of the building at that time—let’s be conservative and assume it will still be worth $800,000—they should put a third of that into an annuity that pays $15,000 annually for life. “This plan means that starting at age 65, the Goodchilds will be guaranteed $60,000 every year,” says Prime. “That’s more than enough to enjoy the retirement of their dreams—even without a full government pension.”