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(Dushan Milic/Dushan Milic)
(Dushan Milic/Dushan Milic)

BUILDING A NEST EGG

Getting their (brand new) financial house in order Add to ...

Getting their house in order is an instinct Carl and Maya have taken literally. With their two-year-old son, Jonathan, they’ve recently moved from a downtown Toronto townhouse to a detached home in the suburbs and, prompted by Carl’s promotion to a senior management position, the couple is looking to finally build their savings.

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How to add to their admittedly modest nest egg is a major question. Both Carl, 33, an operations manager in technology systems at a major bank, and Maya, 34, a registered nurse who works as a patient adviser in a downtown hospital, have pensions but little in the way of RRSPs – indeed, they’ve both been stung by penalties from cashing them.

Despite the fact that Carl works for a bank, the couple has never had professional planning advice. “I feel like I manage my money pretty well,” he says. “I’m a numbers person.”

Recently, their expenses have risen, thanks to a sizable mortgage, additional property taxes and a second car. Other costs include daycare, as well as the $450 a month Maya sends to South America to support her father.

Maya says that “things are much more in perspective” money-wise since they bought their new home, but “I’ve never been a saver.” She vows now to watch her spending.

“We have good earning years ahead,” adds Carl, who has started investing in his bank’s stock through an Employee Share Ownership Plan (ESOP) and expects a yearly bonus of about $20,000. Maya is able to moonlight as a bedside nurse, and loves the hands-on work.

Many of their investment goals and strategies are built on housing. “We’d like to be mortgage-free sooner rather than later,” Carl says. Down the road, they want to buy a vacation or retirement income property in South America, as well as a Toronto condo, where Maya’s mother and grandmother would pay to live, giving the couple the accrued equity.

Dave Salloum, a Certified Financial Planner with RBC Dominion Securities in Edmonton, and Kurt Rosentreter, a Certified Financial Planner at Manulife Securities Inc. in Toronto, took a look at the couple’s portfolio.

The financial planners identified many of the same issues and offered Carl and Maya similar advice. This includes preparing wills and buying significant life and disability insurance to top up their employer-provided coverage. As much as no one wants to think about it, “falling off the perch” would leave them with significant liabilities, says Mr. Salloum, who wants to see our couple reassess their financial plan twice a year or whenever their circumstances change. Mr. Rosentreter thinks they’d benefit from a budgeting software tool to track monthly expenses and ensure that appropriate savings and debt repayment are at the foundation of their financial goals.

The basics:

  • $20,000 in Carl’s RRSPs, plus his company contributes $2,700/year to an RRSP
  • $17,000 jointly in non-registered savings
  • $2,800 in son’s RESP, invested at a rate of $150 a month
  • $3,000 in Carl’s ESOP; he contributes $46 bi-weekly to it from his pay

Dave Salloum’s tips:

  • Ratchet up the house payments. As interest on a personal mortgage is not deductible, Carl and Maya should consider taking advantage of any opportunities to increase their monthly mortgage payments or make lump-sum annual repayments. This can greatly reduce the amount of interest paid on their outstanding debt. Once their mortgage is paid off, they may wish to borrow against their home to invest in further real estate. Provided it’s used for purposes of earning rental income, the interest may be tax-deductible.
  • Go for tax-free savings. Carl and Maya can use the $17,000 they currently have in their bank to repay debt and have a line of credit for emergency funds. If they want to have the funds accessible for emergencies, consider putting them in a tax-free savings account (TFSA), so any return can be earned tax-free. Because they have never contributed to a TFSA, in 2011 they are allowed to contribute up to $15,000 each. Withdrawals from the TFSA are not taxable, which allows flexibility should they require cash (for example, as a down payment on additional real estate.)
  • Top up the RESP contributions and pay attention to the RRSPs. To receive the maximum grant of $500 per year, they should contribute $2,500 to the RESP annually. This way, the maximum grant will have been received by the time their son is 14. Both Carl and Maya should also focus on contributing to their RRSPs to enhance their retirement funds.

Kurt Rosentreter’s tips:

  • Focus on debt and the RESP. Maya’s pension plan gives them a good start on retirement, allowing them to focus new savings on the RESP and paying down debt. Being debt-free by age 50 should be a priority, and they are on track to do so. They should raise their RESP contributions to $208.33 per month to reach the annual grant limit, a lucrative 20 per cent guaranteed return each year.
  • Save for a rainy day. Set up a TFSA and put three months of income into a high-interest savings product as an emergency fund.
  • Max out the stocks. Carl is not maximizing his company stock purchase plan, which offers a deal where he pays for two shares and the bank pays for one. He should try to max out the plan yearly. Meanwhile, he should open an RRSP in his name (as his wife has a better pension) and move the company stock he’s buying into the RRSP to get the tax deduction each year. Go further and sign up for automatic dividend reinvestment. It is hoped Carl’s employer pension plan and his annual stock contributions will get him close to his annual RRSP limit – an important cornerstone in his own retirement planning.

Apply to get your own Portfolio Makeover by sending a confidential e-mail to PortfolioMakeover@globeandmail.com.

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