Jean and Gary, at 28, are already planning for life's big milestones.Rafal Gerszak for The Globe and Mail
Jean and Gary plan to marry in April, pay off Gary's student debt and save up for a month-long backpacking trip to South America. Easily done.
Their longer-term aspirations will take more effort. Mind you, at 28, their dreams look possible – a home, a family, a "robust" investment portfolio. Jean will graduate this summer and hopes to get a job, perhaps with a municipal government, paying in the $60,000 range. In the meantime, she gets about $2,100 a month working as a research assistant. Gary earns about $60,000 working for a regional transportation authority.
Already, they're thinking about their financial future.
"We think we are generally pretty wise with our money but are keen to learn about financial planning and investing," Gary writes in an e-mail. Once Jean starts work, they intend to begin saving to buy a house in Vancouver in about five years.
"We are unsure if we can afford to buy a place and wonder if we should continue to rent for the longer term," Gary adds. Their rent in Vancouver is $1,600 a month. They figure a house that will meet their needs will cost at least $800,000 in that market. Alternatively, to get a foot in the real estate market, they are mulling buying a rental property in Gary's hometown in small-town Ontario.
Longer term, they are wondering how best to save for retirement. "Should we put all our eggs in one basket or spread our money out among RRSPs, TFSAs, stocks and other investments?" Gary asks.
We asked Nancy Woods, an investment adviser and associate portfolio manager with RBC Dominion Securities Inc. in Toronto, to look at Jean and Gary's situation. Helping Ms. Woods was her colleague, Steve Mogdan, a financial planning specialist from RBC Wealth Management.
What the experts say
Once Jean starts working at a salary of $60,000 a year, the couple's cash flow will improve substantially, Ms. Woods says. They will easily be able to pay off any bills they run up for their wedding or their backpacking trip. Next step will be to tackle Gary's student loan, which she estimates he will repay in full in two years.
Once the student loan is paid off in 2014, the couple will have a surplus of about $13,065 a year or about $1,090 a month if they keep their expenses in check. That's on top of their registered retirement savings plan and tax-free savings account contributions. This money can go toward saving for a down payment.
With time and compounding at 5 per cent a year, they could conceivably save more than $160,000 by 2017, the planners calculate. They could withdraw $35,000 from their RRSPs under the federal Home Buyers Plan, $74,410 from their TFSAs and $52,000 from non-registered savings, for a total of $161,410.
Even so, they may want to rethink that $800,000 price tag on a home. If they put $160,000 down on an $800,000 house, they'd be left with a $640,000 mortgage. Amortized over 25 years with an interest rate of 5 per cent, the loan would cost $3,700 a month in principal and interest. If, instead, they bought a $600,000 house with the same down payment, their monthly mortgage payments would be $2,560.
As for the rental property in Ontario, the planner advises against it.
"It is difficult to manage a property where you don't have ready access, so I would suggest that they try to purchase where they are living for their own use," she says.
For their first home, Jean and Gary may have to start with something very small and out of their current area, the planner says. "A home is their best non-taxable investment, and besides, they have to live somewhere."
Because they are just starting out, Gary and Jean will need to review their financial plan many times along the way. They want to have children, so will have to plan for a temporary drop in income. Then they'll have to start saving for the child's education, which will eat into their own retirement savings. They may even have to suspend RRSP contributions entirely until the children have finished school and are out on their own.
As for their investments, Ms. Woods suggests they invest in dividend-paying equities in line with their risk tolerance and objectives. Gary's defined-benefit pension plan affords security and if Jean finds a job with such a plan, so much the better.
"A defined-benefit pension is like having a bond in the bank," Ms. Woods says. "It guarantees an income for life."
She recommends they continue to invest as much as possible in their TFSAs and RRSPs as the years go by, reinvesting the dividends so their savings will grow. Exchange-traded funds or individual stocks will give them a clear view of what they own and will also help them to learn about investing.
"Saving their money in RRSPs and TFSAs is not putting all their eggs in one basket, but being tax smart," Ms. Woods says. "Sheltering any growth or deferring tax is always a good strategy."
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CLIENT SITUATION
The people
Gary and Jean, both 28
The problem
How to devise a financial plan to guide them both now and in future.
The plan
Pay off student debt, keep expenses in check, buy an affordable home and continue to save as much as possible as time goes by.
The payoff
A stable and relatively worry-free financial future with their feet placed firmly on the ground.
Monthly net income
$6,020.
Assets
Bank savings and chequing accounts $12,700; Gary's RRSP $10,000; Jean's RRSP $24,000; TFSA $3,500; employer pension plan $6,400. Total: $56,600
Monthly expenditures
Investments $300; RRSP $150; employer pension plan $360; groceries, drinks, takeout $500; lunch, lattes, dining out $150; clothing, dry cleaning, grooming $200; tech tools and toys $100; gifts $100; rent $1,600; insurance, utilities $45; telecom, cable, Internet $175; furniture, appliances $50; vacations $200; courses, hobbies, movies, reading $125; auto expenses $170; Gary's student loan payments $500; outdoor activities $200; Jean's tuition $450. Total: $5,375. Monthly surplus: $645.
Liabilities
Gary's student loan $11,000
Special to The Globe and Mail
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