Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
At 36 years old, Alex is doing quite well. He’s making $ 112,000 annually working as a federal employee, living with no debt and saving a lot on transportation and food costs because he’s working from home permanently.
Alex has worked for the government for the past 11 years. He moved back home to Toronto recently after selling a condo in Ottawa. Even though he’s doing well, his parents have both lost their jobs during the pandemic.
“I am paying their rent instead of renting my own place,” he said.
Now that Alex is back at home, his parents help cook meals while he pays for supplies and monthly finances around the house. He is used to living a frugal lifestyle.
With no debt, he has saved more than $ 205,000 through organized plans by putting away $ 3,000 of his paycheque every month. Being a meticulous calculator, he’s even looked decades into his future.
“At age 60, my defined benefit pension will pay for 70 per cent of my current income adjusted with inflation each year,” he said.
He spends most weekends on his hobbies, driving to Ontario’s parks or downtown.
“I like exploring the city and doing street photography. I also enjoy fishing and hiking when the weather is warmer. My hobbies do not cost a lot of money,” he said. “When the pandemic is over, I want to travel more.”
Still, he has questions about his financial situation. First, he wants to know if he’s doing well financially and second if he can go through his entire life without buying a property.
“I enjoy the freedom of not maintaining or owning a property. Can I rent for life without buying a property?” he asked. “I might move in the next few years so I don’t want to commit to a place yet.”
To get a better idea of his day-to-day finances, we asked a financial coach to analyze Alex’s situation. Is he doing well?
The expert: Jason Heath, managing director at Objective Financial Partners Inc.
Alex is a federal government employee whose pension will replace 70 per cent of his earnings at age 60, based on 35 years of work x 2 per cent. Federal pension plan members generally have that percentage based on their final five years of salary, assuming those are their five highest earning years. Canada Pension Plan (CPP) and Old Age Security (OAS) could replace another 20 per cent or more of his earnings at age 65. Effectively, his salary could be almost fully replaced by his three government pensions.
On that basis, Alex may not need to save much for retirement. He may of course choose to do so whether he has to or not. Or he may ultimately retire before age 60. After all, replacing 100 per cent of your income in retirement is often too much. I have met many retired defined benefit pension plan members like government employees, teachers and others who are actually saving in retirement because of how much of their income is replaced. Overall spending also tends to be lower in retirement when your kids are off the payroll, your mortgage may be gone, and other costs may also diminish.
Alex is saving a solid $ 3,000 per month. His government pension accrual is probably the same as putting another $ 2,000 per month or more into a Registered Retirement Savings Plan (RRSP). He will not have much RRSP room due to his pension, and his $ 205,000 of savings have no doubt maxed out his Tax Free Savings Account (TFSA). That means some of his savings are in a taxable nonregistered account that will generate taxable investment income each year.
Alex has inexpensive hobbies like photography, fishing and hiking, so he does not spend much on discretionary expenses. He eats meals at home so does not spend money on eating out. Developing a retirement plan or projection on his own or with a professional may help him set saving and spending targets. He may well be oversaving and when he can travel again, he may have a fair bit of leeway to indulge and still stay on track long-term.
He wonders about being a lifelong renter and not buying again given the freedom it affords him. In my opinion, house price increases over the past 25 years in Ontario are not likely to continue at the same pace for the next 25 years. A renter can be wealthy, too, if they save and invest aggressively. A mortgage can be a forced saving tool, but property taxes, insurance, repairs and renovations can be expensive, and home price growth should be much closer to the rate of inflation than the double-digit annualized growth some markets have experienced.
It sounds to me like Alex is on a great path financially. He has some financial and lifestyle considerations related to where he will live and how much he really needs to save that he should focus on coming out of the pandemic and after he moves out from living with his parents. In the meantime, I am sure they appreciate having him back home and, hopefully, it is a good financial and family arrangement for all three of them.
Results: He spent more. Spending in week 1: $ 191 Spending in week 2: $ 558
How he thought he did: Despite spending a bit more this week, Alex feels comfortable and in control of his money.
“By nature, I am not a huge spender and I enjoy living minimalistically, so fortunately for me saving isn’t too hard,” he said. “I am still living below my means.”
Take-aways: The most reassuring thing for Alex after taking part in this exercise is knowing that he’s on the right path, and now can learn to live a little bit more.
“I don’t feel as guilty spending money on food and clothing. Previously I would always think about costs and sometimes I forget to live in the moment,” he said.
In terms of being a renter for life, it’s also great to get a detailed look at the costs that come with home ownership, even if it’s intended to be an investment.
“It’s comforting to know that selling my property and becoming a renter wasn’t necessarily a silly move,” he said. “Everyone around me talks about real estate and I do feel pressured sometimes.”
Moving forward, he’s going to forge his own path, while continuing to help his parents, and to invest in things that interest him.
“I truly believe that I can also build a decent net worth by investing outside of real estate.”
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