Financial Facelift for Saturday, February 19, 2010. Moe Doiron/ The Globe and MailThe Globe and Mail
As engineers earning a combined $262,000 a year, Hailey and Jeff are well ahead of the game. He is 38, she is 32.
Two and a half years ago, they bought a house in downtown Toronto and aim to have the mortgage paid off by the end of its five-year term.
Occasionally, they "splurge on travel and luxury dinners at home," Hailey writes in an e-mail, but for the most part they are careful with their money, clipping coupons, shopping at discount stores and taking full advantage of the tax benefits offered by registered retirement savings plans.
Neither has a company pension plan, so they are depending on their RRSPs, which they calculate have earned about 4 per cent a year on average over the past few years. They would like to do better.
Their aspirations are the same as many people their age: to pay off their home and have a child or two over the next few years. Longer term, they want to save for the children's education and retire by the time Jeff is 55. They are not sure how much money they will need, but their goals include an education fund of $9,000 a year for each of two children over four years, and enough income in retirement to enable them to maintain their current lifestyle.
Their house renovated, furniture bought and a new car in the garage, they do not see any big expenses looming on the horizon. We asked Ian Black, a fee-only financial planner and portfolio manager at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Hailey and Jeff's situation.
What the expert says
They can do it all, but not all at once, Mr. Black says. Their household income will drop markedly when Hailey goes on maternity leave. As well, having children will raise their expenses. If they don't want to wait 2½ years until their mortgage is paid off to start a family, they will have to postpone one goal in favour of the other.
"The result will be that each period of [maternity]leave will add an equivalent period to the time it takes to repay the mortgage," Mr. Black says. "They will have to decide which short-term goal they wish to accomplish first."
Before the kids come along, Hailey and Jeff need an emergency fund. In deciding what amount to set aside, they need to consider any disability insurance Jeff might have with his employer - and the exclusion period before benefits are received, the planner says.
With children come considerations about estate planning - additional insurance, revisions to wills to appoint guardians, possibly making a child the beneficiary of an RRSP.
Once Hailey is back to work and the mortgage is paid off, they can begin saving in earnest for their retirement. They will need to save at least $50,000 a year - for a total of $2.8-million excluding their house - to ensure after-tax retirement income of $75,000 a year. They have $442,000 already.
Mr. Black's calculations assume an average annual return on investments of 5 per cent - the more they save, the lower the required return. He also assumes they both start collecting Canada Pension Plan benefits at age 60.
Mr. Black recommends Jeff and Hailey take full advantage of RRSPs, tax-free savings accounts and the Registered Education Savings Plan for their children.
As their savings grow, so will their non-registered investment portfolio. "This will require the couple to allocate investments to their various accounts with tax efficiency in mind," Mr. Black says; for example, interest-bearing instruments in registered accounts, stocks in non-registered accounts. He recommends they seek professional advice to build a diversified portfolio that will give them a sufficient return and be appropriate for their risk tolerance.
Hailey and Jeff should be aware of how the adviser they choose is compensated and how that might affect his or her advice. Investment costs "should be known and kept as low as practical."
CLIENT SITUATION
The People
Hailey, 32, and Jeff, 38
The Challenge
Pay off the mortgage, plan for a family, save for children's education and retire early
The Plan
Either pay off the mortgage before having kids or keep it for a few years longer. Take advantage of RRSPs, TFSAs and RESPs and save $2.8-million by the time Jeff retires at 55.
The Payoff
Security now and in future without any undue financial stress either from trying to do everything at once or from leaving it to the last minute.
Monthly net income
$14,375
Assets
Chequing and savings accounts $13,745; TFSA $2,190; employee stock purchase plan $38,020; Jeff's RRSP $249,230; Hailey's RRSP $140,000; home $700,000. Total: $1,143,185
Monthly disbursements
Clothing, dry cleaning $160; tech stuff $115; pet care $30; entertainment $200; groceries, dining out $750; donations $200; auto expense $500; travel $650; public transportation $220; property taxes $360; house insurance $50; condo fees $650; telecom, cable $150; repairs, maintenance, furniture $100; RRSP $3,250; mortgage $6,700; group insurance at work $125; gifts $200; club membership $30. Total: $14,440
Liabilities
Mortgage $204,350
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Special to The Globe and Mail
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