Welcome to the Million Dollar Journey September 2014 Net Worth Update – Team MDJ edition. A select group of readers were selected to be part of Team MDJ which was conceived after the million dollar net worth milestone was achieved in June 2014. Nobleea was selected as a team member and will post net worth updates on a regular basis. Here is more about him.
- Name: nobleea
- Age: 36
- Net Worth: $681,388
- Day Job: Engineering supervisor at large oilfield services company, Teacher (wife)
- Family Income: $145,000 (main job), $30,000 (part time job), $85,000 (wife main job), $10,000 (wife part time job), $14,500 (rental income before expenses)
- Goals: Pay off primary house mortgage in September 2014, Million dollar family net worth before 40, Retirement from primary job at 50 (for me)
- Notes: Owns primary house. Owns tear down house across the street currently being rented. (to be torn down for new family home)
I stumbled across MDJ by accident the same year it was created. Such a great wealth of information and an inspiration. I’ve been following regularly since then. I track and trend these networth numbers on a monthly basis, so posting them here isn’t much of a stretch.
We live in Edmonton where incomes are high and housing prices are fairly reasonable. Some may roll their eyes at the high family income and say that a million dollar journey is going to be pretty easy. That is likely true, so some of the goals should reflect that. I have a plan to retire at 50 and pursue other things. This will still involve working, but part time on things I’m really passionate about and with no requirement for a decent income.
My wife will likely continue working until it makes sense to retire with her DB pension. The penalties for early retirement are pretty severe. She is 3 yrs younger than me. We have a 6 month old daughter and plan to have more children. She is currently on EI and will be returning to work in February on a part time basis. Income numbers above are based on last year, when she worked full time. I will be taking parental leave for 5 weeks this year as well. We recently bought a tear down property across the street from our home. We will be tearing it down in the spring and building a larger family home. Once we take possession of the new build, our current home will be sold.
We travel a lot for pleasure but are pretty frugal otherwise (no cable, coupons, pay and talk phones, dine out or take-out a few times a year). I try to keep our cash balances as low as possible and want every spare dollar going towards debt repayment. I would say our living expenses are low relative to our income. We have worked hard to avoid most lifestyle inflation.
Given our low cost of debt, some might question the choice to pay down debt. Some might suggest that we borrow to invest. Over the past several years, I have learned that borrowing to invest is not a great option for me, as I am prone to take unnecessary risks with investment choices when it is not money I’ve earned. Paying debt down is guaranteed return and once the debt is all gone, it releases a lot of cash flow which can be used for investments.
On to the net worth numbers:
Assets: $1,111,911 (+0.00%)
- Cash: $1,137 (+0.00%)
- Registered/Retirement Investment Accounts (RRSP): $154,033 (+0.00%)
- Tax Free Savings Accounts (TFSA): $0 (+0.00%)
- Defined Benefit Pension: $47,500 (+0.00%)
- Non-Registered Investment Accounts: $30,166 (+0.00%)
- Principal Residence: $458,000 (+0.00%)
- Tear Down Property: $375,000 (+0.00%)
- Vehicles/Other: $46,075 (+0.00%)
Liabilities: $431,111 (+0.00%)
- Principal Residence Mortgage: $11,959 (0.00%)
- Tear Down Mortgage: $300,000 (0.00%)
- HELOC: $110,992 (0.00%)
- Car Loan: $4,325 (0.00%)
- Credit Cards: $3,835 (0.00%)
Total Net Worth: $680,800 (+0.00%)
- Started 2014 with Net Worth: $566,394
- Year to Date Gain/Loss: +20.2%
Some quick notes and explanations to common questions:
Cash includes bank account balances in two accounts, plus any gift card balances. We try to keep as little money in bank accounts as possible and make mortgage prepayments with it instead. We use cash flow modeling to predict the maximum amount we can put towards debt today without having a negative balance in the future, taking all one time or non-regular bills in to account.
Loans and Credit Cards
The credit cards are paid off in full every month with no interest due. We put all our expenses on credit cards for points and cash back. As this can be a substantial amount some months, I believe it needs to have a line item in your monthly net worth as it is a liability at that snapshot in time. The HELOC is almost completely tax deductible (small smith maneuvre and downpayment on rental). Considering the tax deductibility of interest, our highest net interest rate on liabilities is 2.24%, with a weighted average rate of 1.79%.
TFSA’s have not been started yet as all spare cash has been going against the mortgage. Transferring the non-registered investments over would affect the tax deductibility of some of the HELOC.
Our primary residence was purchased in 2008 for $355K. We have put in $110K in renovations since then in a complete overhaul. The house value shown here is based on those two numbers and is conservative relative to what similar homes in the area sell for.
Our ‘rental’ is across the street and was purchased last month for the lot, purchase price $375K. It is currently rented (cash flow negative) and will be torn down in April to start construction on our new home. The next 2 years will be a mess with construction draw mortgages, HELOC balances for some construction costs, messy accounting for a rental that was effectively disposed of after 7 months of rent. We have no desire to remain landlords now or in the future. Once we move to the new home and sell our current home, the plan is to pay that one off in 5-10 years.
My wife has a DB pension as a teacher. The balance shown is her contributions to date as shown on annual statements. I have a matching RRSP plan through my work. Combined with CPP, we are not worried about retirement income, it’s just a matter of timing. We plan on contributing to my RRSP in order to get the full match but no more, then max out TFSA for investments, and then non-registered investments.
We have pretty substantial unused RRSP contribution room and will likely never use it. Perhaps in the event of a large capital gain, we may contribute some to offset the capital gain taxes. Not listed on the net worth values is our daughter’s RESP, which has a balance of about $1800. We plan on contributing enough every year to get the full CESG grant. The RESP is invested in TD e-series funds in a couch potato portfolio as a family plan.
About half of this amount is vehicles. We have a 2013 and a 2000 model year. I depreciate their value every month in net worth updates to keep it at just above wholesale value. The “Other” refers to fairly extensive photography equipment (part time business), sporting equipment and personal property.
A government based defined benefit pension is considered the gold standard of retirement benefits. The requirement is that you need to work for the government for 25-30 years, contribute a small portion of your salary towards the pension and in return, you get 60-70% of your working income monthly (some pensions are even indexed to inflation) during retirement. It really is a great deal for employees willing to stick it out with the same employer for their careers.
The Risk of a Defined Benefit Pension
While defined benefit pensions are a great deal for employees, it is an extremely expensive benefit for employers to offer. With these pension plans, the risk sits with the employer whereas with a defined contribution plan, the risk is reverted to the employee. However, that does not mean that plan members do not face risk. Perhaps the greatest risk that a defined benefit plan member can face is a large unfunded pension liability. While pension bankruptcy may not be that likely with a Canadian government based pension, changes to the plan to make it sustainable can significantly impact retirement plans.
In fact, there were recent changes to the Newfoundland & Labrador pension plan because of the unfunded pension liability that has affected thousands of employees, yours truly included. While I’m not vested into the plan yet and do not plan to be working for another 25 years, it still does impact my future plans. The changes include an increased contribution requirement from employees, increased working requirement to qualify for retirement benefits, and changes to the deferred pension status.
How to Reduce the Risk
For new government employees just starting out with a long career ahead of them, there is a risk of further pension changes. While many young employees who are vested in a defined benefit pension believe that the pension will take care of them, my thoughts are that risk should be reduced by supplementing the plan. Future defined benefit plan changes cannot be controlled, but saving and creating your own pension for retirement can be controlled.
Once you’ve made a plan to squirrel away some cash flow, the next question is where to put the cash. For people with a defined benefit pension, I would suggest to put the money in a TFSA. Why not an RRSP? The reason is that pension payments during retirement are taxable and RRSP withdrawals would add to the income tax payable. The additional income could also impact seniors benefits. TFSA withdrawals, on the other hand, are not taxable, and do not affect seniors benefits.
If starting this year, maxing out your TFSA and passively investing the proceeds for the long term would result in about $218,000 in 25 years (assuming TFSA max is $5,500 per year and adjusting for inflation with a 3% return). Using the 4% withdrawal rule, results in a tax free supplementary income of $8,720/year. If retiring as a couple, that figure doubles to $17,440/year tax free.
Take care of your own retirement and you’ll just brush off the future changes that your employer makes. For those of you who have a defined benefit pension, are you supplementing your retirement with other investments?