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Reader Mail: My Mom has Low Income, Should She Buy a House?

The last Reader Mail article on which account to place Canadians ETFs drew quite a bit of attention which resulted in a number of financial questions.  Here is one of them about a Reader who is worried about his mother’s financial situation.

Five years ago, my mother immigrated to Ontario, Canada in the hope to find safe and better life. As most immigrant, she was brave, and decided to return to school after so many years. She finished school last year and landed a job in her field of study.

I’m starting to worry about her future since she has no pension, RRSP, Life insurance, or investment for that matter. She is getting older (she’s 53). Here’s her situation:

  • Income:  $37,500 (Annually)
  • Student loan: $16,000 ( probably at 5.5%  . Grace period ending as of November 2013)
  • Credit Card debts (she uses around 25% of her available credit). $6,000. Current balance $4,500
  • Rent: $1,075/month (all inclusive). She live with my brother, who will be off living on his own very soon)

Now, she is in the process of selling the family house back home, which would bring approximately $50,000 after paying sales commissions and all those related fees. I know it’s not a lot of money, considered how expensive life is in Canada, but I’m trying to find a better way for her to put that $50K in good use.

Some of the scenarios we came up with:

  • Open a high interest investment account, and add sum of money to it on a monthly basis, and let the money grow.
  • 20% Down Payment for a house, and rent out the basement (condo avg $175k-230k, house $220k-$250k)
  • Down Payment for rental property ( duplex, triplex), with a good ROI

I will welcome any suggestions that will help my loving mom plan her retirement. I’d like her to sustain herself financially.

What to do with the Cash

Pay off Debt!

One of the  main questions is what to do with the $50,000 that the Reader’s mother is going to acquire in the near future.  If it was me, I would take the cash to pay off the credit card and student debt.  It will provide an immediate tax free return, and help with the monthly cash flow since income is relatively low.

Real Estate?

Paying off $20k in debt will leave about $30k to play with and it appears that real estate is what they have their mind set on.  To me, buying property should not be a priority at this point, especially for a low income individual.  A $37,500 salary in Ontario will bring in about $2,300/month after taxes and payroll deductions.

Using the $30k cash on a $200k condo would result in a housing cost of approximately $1,500/month at today’s rates (including condo fees, property tax and heating) or 65% net income.  That would leave $800 a month for savings/groceries/entertainment/transportation/shopping/cable/telephone etc.  In other words, not a lot.

Another option considered is to purchase a $250k house and rent out the basement.  In this scenario, the housing costs (mortgage, property tax, heat/light) would be approximately $1,700/month which does not include insurance and maintenance.   The idea is to rent out the basement to subsidize the costs.  While collecting $800-1k/month in rent would substantially reduce the housing costs, but what about the months where there aren’t tenants?  What about unexpected repairs?  As well, being a landlord isn’t exactly passive income where it can turn into another job – at least it did from my experience.

This brings me to the third option, buying a rental property.  Personally I would not go down this route unless you know what you are doing, and/or you really want to become a landlord.  Unless the Mom is experienced in managing rental properties, I would avoid at this stage.

When it’s all said and done, the Mom has to live somewhere right?  I would recommend to continue to rent, but find somewhere that is lower cost.  If worse comes to worse, maybe the reader can build an in-law apartment in his own house for Mom. :)

Budget

Now that we’ve gotten rid of the real estate idea, lets get down to business.  First, we need to take a look at Mom’s budget and see why she has a $4,500 credit card balance.  While I do not have the numbers, the Reader needs to work with Mom to stay within her means and generate a surplus.  More on this below, but ideally, savings would be enough to max out a TFSA every year (~$500/month).

Retirement Account

After budgeting, there is still $30k floating around with nowhere to go.  With no retirement funds put away, the first instinct may be to contribute to an RRSP.  The problem with an RRSP for a low income individual is that future RRSP withdrawals will affect seniors benefits in the form of clawbacks (in this case, GIS clawback).

In light of this, contributing to a TFSA is the best bet.  Starting in Jan 2014, the Mom will be able to put the entire $30k in a TFSA ($31,000 contribution limit).  Any income generated from the TFSA portfolio (or withdrawals) will not affect seniors benefits in the future.

Income During Retirement

The main issue is how the Reader’s Mom will sustain herself in retirement.  Assuming that the Mom will not contribute to her RRSP’s and no work pension, there are four sources of income.

  1. Old Age Security (OAS):  Using the online calculator for someone who has been in Canada for 18 years results in $2,976/yr (in 2013 dollars) if she starts collecting when she’s 65. (How OAS works)
  2. TFSA Portfolio:  Assuming that the Mom can save enough to max out her TFSA every year and that a indexed portfolio returns 4% after inflation, the balance of the account should grow to about $134k which is a decent nest egg for someone starting late.  From this balance, $5,360/yr can be withdrawn from the account sustainably (4% withdrawal rule).
  3. Canada Pension Plan (CPP):    The best method to find out how much you will get from CPP is to check your Statement of Contributions, or call Service Canada 1 800 277-9914.  My understanding is that even for new immigrants, the CPP average earnings calculation starts at age 18 which results in a large number of years with zero earnings.  Assuming the Mom gets an inflation raise from her work every year, her CPP benefit amount should be about $3,700/year.
  4. Guaranteed Income Supplement (GIS):  This benefit is offered to low income seniors, specifically those that make less than $15,000 per year.  This calculation is a bit tricky as there are no clear cut calculators. Again, best bet would be to contact Service Canada.  The average GIS recipient is paid approximately $6k per year, in this case, it may be safe to assume that her GIS amount is equal to her OAS amount of $3k/year. (How GIS Works)

Using the numbers above results in a retirement income, at age 65, of about $15,000 per year or $1,250/month with very little or no tax payable. While this sounds low, not all is lost.  Her income could increase much greater than inflation, which would hopefully result in higher savings, or she could have a work pension that we do not know about, or she may simply work longer.  Or again, she could pack up her things and move in with junior.

The Plan

  1. Pay off Debt;
  2. Create a budget to generate at least $500/month in savings;
  3. Don’t buy real estate, instead, place the lump sum proceeds into a conservatively invested TFSA (not RRSP);
  4. Max out TFSA every year with savings; and,
  5. Look for opportunities for career advancement and higher income.

What advice would you give in this financial situation?

 







13 Comments, Comment or Ping

  1. 1. Geoff

    I agree. Do not buy a house. If you have to stretch to buy it, you’ll be killed financially trying to own it. Something always breaks.

    I agree with your advice above, except make sure some of the funds are liquid.

    My guess is she’s a landlord’s dream tenant – probably a nice lady who won’t have a raging kegger party and would be mortified to have a rent cheque bounce so she can find a nice place to rent probably at a little less than market rate even. She may have to get over the emotional part of ‘not owning’ but you can assure her that ownership is not the end all and be all of everything either.

  2. 2. SST

    The headline reads “My Mom has Low Income…” yet it is mentioned no where in the reader’s letter.

    It might be a case of a millionaire-to-be simply being out of touch, but the Mom in question is actually a very average income earner, according to StatsCan.

    Please don’t forget, most people in Canada don’t make a lot of money, and 99% of all Canadians will never have a million dollars (although thanks to the brand new Lotto 6/49, there will be at least 52 new millionaires a year!).

    That said, FT presents a solid and logical financial outline.

  3. 3. Bernie

    I like your plan, although I would suggest solid blue chip stocks that have DRIPs to hold in her TFSA. Canadian banks would be a low risk choice of stocks for her for a start.

    Question, does she quality for low income housing?

  4. @Geoff, I agree, she would be a dream tenant.

    @SST, my intention was not to be offensive, but I considered it low income in the context of buying a house at a major Canadian city.

    @Bernie, I’m not sure what the cut off is for low income housing, can anyone provide feedback?

  5. 5. Tyler

    Excellent and Honest points FrugalTrader.

    I agree. Smooth rides in hopes of nothing failing when owning a home does not mostly go as plan… “Murphy’s Law” = What can go wrong will go wrong at the worst moments.

    What’s the rush in owning? Rent for a while, maybe bunk up with a roommate. Spend less. Bank up. Invest wisely ( she’s 53 ) with a conservative portfolio.

    In 10 to 15 years… you’ll have a nice little nest egg and hopefully move into your sons house and pay them rent… :)
    At least you’ll own through your offsprings.. hehe :)

    Cheers

  6. Are we sure she will have the entire $31k TFSA contribution limit available to her as she may be a recent immigrant? Just something to keep in mind.

  7. Sorry, I missed the ‘five years ago’ part. You can delete this and the previous comment, oops!

  8. 8. Al

    In reality she’s going to have to work into retirement she needs to focus on capital preservation and lowering expenses. I’m learning now some people’s dream and reality of retirement is very very different from others.

  9. @Sebastien, no problem, it’s something I had to double check as well.

  10. 10. Goldberg

    Buy a house.

    To immigrate to another country, go back to school at age 50, and then find a decent job that pays around $40k… this is a very brave woman! She has likely handled a lot more than pretty much any readers on this blog.

    I agree that the best financial decision is likely to rent and invest for now. However buying a house is also (more) an emotional decision. It gives different emotions to different people, often pride or satisfaction, its good for the morale and you get to garden during the summer (something 53 yr old ladies often like)… and buying at a decent price with a decent down payment is not a bad decision either.

    50k is a decent down payment and 37k is enough to afford a $1000 a month mortgage payment. Personally, my student loans are at 3.5%, deductible, so after-tax its like a 2.25% or something… I max my TFSA in the stock market rather than repay it.

  11. 11. Cold Truth

    Assuming she lives to statistical life expectancy, she will need to be working as long as she’s physically able to do so, and her children will have to financially support her to some degree once health begins to deteriorate.

    Many *parents of the Baby Boomers* did not enter retirement with debt and had some kind of decent savings. Many also had pensions that provided minimum levels of income and health benefits to make their final years an emotional load on the Baby Boomers rather than a financial one. As a result Baby Boomers are not aware of the true costs of their last years.

    The Baby Boomers themselves are entering retirement with debt and completely insufficient retirement savings to support a healthy senior, let alone one who needs significant medical care and living assistance.

    The children of the Baby Boomers need to not only save for their own future, but must also save to support their parents once they are physically unable to work.

    With family dynamics changing (fewer children) many Boomers have only 2 children to pickup the slack, where as their parents generation often had 3 or 4 children to divvy up financial and living assistance.

  12. 12. Kathleen

    Re: cut-off for low-income housing

    That tends to vary with each province and even municipalities. They often use the stat-can and local market conditions to determine what constitutes low-income. They do take into account any debts that must be paid, etc. and of course, the funds that is used to subsidize the housing as well as the condition of the properties. The cutoff can easily range from below $10K to $40K depending on the city.

    Bottom line, no easy answer but generally, if normal rentals exceeds 40% of gross income, you have a good chance of getting into low-income housing. Unfortunately, there is usually a 2-3 year waiting list.

    Source: I’m a Low-Income Housing Coordinator

  13. 13. Paul

    My advice would be to pay off debt and invest the rest. Find a financial company that can offer the investment solutions that fit your needs. I would think about long-term goals for retirement. Good luck.

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