A Big Plan to Realize a Small Town Dream

Not far from Toronto, a couple we'll call Everett, who is 32, and Samantha, who is 30, have had it with their harried lives as middle managers in the corporate world.
They are prepared to cash in their gross incomes, which currently total $138,000 a year, in order to move to a small town where they would not have to commute, be transferred around the country and live for their jobs.

"The last thing we want to do is to leave successful careers in Toronto only to have to return to urban living in future because we could not make a go of it in rural Canada," Samantha explains. "We struggle with knowing if we are doing the right things to get us there while minimizing our risk of failure."

What our expert says

Facelift asked Derek Moran, head of Smarter Financial Planning in Kelowna, B.C., to work with Everett and Samantha. "They want to know the costs and benefits of leaving the known for the unknown. We can do the analysis by looking at what they can transfer from their present life and how adequate their preparations will be for that life."
Everett figures he could become a school teacher. Samantha thinks she could be a real estate agent. The move to new careers would entail study, training and reduced incomes, but it would also change the labour force risks the couple face.
Teachers in public schools have generous defined benefit pension plans. A permanent move to teaching within the public service would tend to make for a more secure retirement, the planner notes.

Real estate sales, however, are cyclical and have no guaranteed pension benefits. Also, the industry is well populated with agents.
The plan is for Everett to get an education degree while Samantha continues to work. When he finishes his bachelor of education and gets a job, the couple will move. That's when Samantha will become a real estate broker.
They have $76,000 equity in their home, $74,333 equity in a rental property and various other assets that total $134,000, some of which are locked into pension plans. Their net worth, therefore, is $284,333.

Their rental property nets $500 a month or $6,000 a year, plus $3,225 of principal repayment that adds to their equity. Their current annual yield on the property is therefore $9,225/$74,333 or 12.4 per cent a year. Mortgage costs for this income are tax deductible. The cost of covering the debt could rise when the economy revives and interest rates rise, but the property's high current rate of return makes it worth keeping, Mr. Moran explains.
Samantha's taxable income was boosted this year by exercising stock options. It pushed her income close to $120,000 before deductions and left her in Ontario's top tax bracket.

The couple should therefore make use of all of Samantha's $40,000 RRSP space, including her estimated 2008 space, Mr. Moran suggests. She would get a refund of about $15,000, a sum sufficient to pay Everett's tuition for the final year of his degree program.
Everett should wait until he is a teacher to make use of his RRSP contribution room, Mr. Moran suggests. He should have a defined benefit pension plan and a large pension adjustment that reduces contribution room. Carry-forward rules for registered retirement savings plans impose no time limits, so the space will grow increasingly valuable in the future, the planner says.

The couple will be starting life in a small town with less expensive housing than is available in or near Toronto. They have estimated that for $220,000 they can find a larger home than the one they have now. After transaction costs for selling one house and buying another, they would be able to free up a sum Mr. Moran estimates would be $130,000, potentially reducing their present mortgage from $274,000 to $144,000. If they continue their present $2,000 monthly mortgage payment, assuming a 5-per-cent average mortgage rate, their 17-year amortization would drop to seven years and six months.
They would save $103,400 in interest costs and be mortgage-free by age 40, the planner estimates.

It is premature to calculate the couple's capacity to save, but lower living costs in a small town will translate into higher retirement savings.
As a teacher in the public system, Everett should qualify for an indexed defined benefit pension by age 65. Each spouse will have worked full time since age 23, and will therefore be entitled to receive maximum Canada Pension Plan benefits of $10,905 in 2009 dollars at age 65. They will also receive full Old Age Security benefits at age 65 at a present rate of $6,204 a year. Adding up CPP and OAS and the minimum pension entitlement that would come from teaching for 30 years, Everett and Samantha would have at least $68,400 a year in 2009 dollars, plus income from savings and rental properties, Mr. Moran says.

"The costs of moving to a small town will be high in income lost until the couple's new careers are established," Mr. Moran says. "At that point, the lower costs of small-town life will translate into higher discretionary income for raising the children they are considering having and greater savings for their eventual retirement."

Client situation

The People
Toronto couple in their early 30s.

The problem
Estimate costs and benefits of new careers in a small town in Ontario.

The plan
Reduce costs of carrying debt in transition.

The payoff
Financial security in a small town with lower costs of living.

Net monthly income

$8,000

Assets
House $350,000, rental property $233,333, RRSPs $40,000, Samantha's pension $30,000, company stock $5,000, other stocks $6,000, cash $45,000, two cars $7,000. Total: $716,333.

Monthly Expenses

House mortgage $2,000; food $500; restaurants $250; hydro, utilities and property tax $560; home, life and car insurance $230; gas, car repairs and tolls $900; phone and Internet $200; clothing $250; entertainment $350; travel $500; RRSPs $1,065; grooming $150; gifts and charity $225; miscellaneous $400; savings $420. Total: $8,000.
Home mortgage $274,000; rental property mortgage $159,000. Total: $433,000.

Liabilities

Home mortgage $274,000; rental property mortgage $159,000. Total: $433,000.

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