SoHyea arrived in Canada as an international student five years ago from Korea, and was hired after graduation to be a software developer at one of the world’s biggest technology companies. She’s working on obtaining her permanent residency in Canada right now, and intends to move to the US in the next 2-3 years. She had never met a financial planner, but managed to save up $58,000. She came to us to learn more about the Canadian financial system and to find guidance on reaching her goals:
- Retire comfortably
- $40,000 for emergency fund
- Teach her how to maximize her work benefits (stocks, RRSP & DPSP matching)
- Understand the benefits of buying real estate vs. renting
- Make her $2000/mo savings work more productively
- Should she invest her money in a Non-Registered account, Tax-free account, or RRSP account?
We presented her with three plans:
Plan #1 shows her current situation:
SoHyea can retire at 65 years of age and have an income of approximately $2600 per month after taxes. We have not assumed SoHyea leaving Canada. This retirement income is based on:
- Long-term $2000/mo savings into her bank account (now to age 65)
- Estimated company stock shares
- 100% Canada Pension Plan (CPP)
- 100% Old Age Security (OAS)
Plan #2 shows strategies we recommended for SoHyea to achieve her goals and increase her estimated retirement income to $5330 month after taxes. No real estate in this plan.
- Place her $40,000 emergency fund in a higher interest bank account (RBC’s 0.55% vs. Manulife Bank’s 1%)
- Participate in her company’s Group RRSP and Deferred Profit Sharing Plan. If she invests 3% per paycheque (GRSP), her company will match 3% (DPSP).
- Invest $18,000 and future $2000/month savings into moderate-conservative investment earning 4-5%/year. We recommended a conservative-moderate risk investment as she has intentions to leave Canada in the short-medium term, and she may not want too much fluctuations in her investments. We will initially place her money into a Non-registered investment account. We will shift the money to her TFSA after we receive confirmation from Canada Revenue Agency on her TFSA room. After thorough discussions with SoHyea and her accountant, we recommended she not place any money into her personal RRSP, as it will be fully taxed in 2-3 years when she leaves Canada.
- No real estate. She continues to rent for $1150/mo (now to death) with inflation
- Estimated company stock shares
- 100% Canada Pension Plan (CPP)
- 100% Old Age Security (OAS)
Plan #3 shows how buying real estate would help increase her retirement income to $6560 per month after taxes.
- This plan includes everything outlined in plan #2, as well as:
- Purchase a condo for $340,000
- SoHyea’s mom to gift $100,000 CAD
- SoHyea to get $240,000 mortgage at 3% interest; $1150/mo mortgage payment (same as rent)
- Real estate will dramatically increase her future net worth. SoHyea is building a long-term asset, not helping to pay someone else’s mortgage
In the end, SoHyea chose to proceed with plan #2, as she did not intend to buy real estate during her 2-3 years in Victoria. She appreciated the personalized financial plans and recommendations we provided for her specific situation.