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(Laura Leyshon for The Globe and Mail)
(Laura Leyshon for The Globe and Mail)

Financial Facelift

Couple's best move may be to pay down debt Add to ...

During the years they lived and worked in Hong Kong, Ross and Debby earned good money, "spent lots and saved lots," he writes in an e-mail.

When they left for Ross's native Canada in 2008, they had enough money for a 25-per-cent down payment on their suburban Vancouver townhouse and $80,000 worth of investments in Hong Kong, where they both have permanent residency status.

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For the past year, Ross has been earning $77,000 working as a teacher in a private school, while Debby stays home with their two-year-old son and does a bit of freelance editing, bringing in another $10,000. He is 47, she is 40.

Their income has plunged, they have a big mortgage to pay off and a child's education to worry about. They are wondering where they'll get the $50,000 a year, after tax, they figure they'll need when they retire.

"Money is the only thing we argue about," Ross writes. "We hope you can help."

We asked Keith Copping, an investment counsellor and financial planner with Macdonald Shymko & Co. Ltd. in Vancouver, to look at Debby and Ross's situation. Macdonald Shymko is a fee-only financial planning firm with an investment counsel arm.

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WHAT THE EXPERT SAYS

The couple's situation will improve once Debby goes back to work full-time, Mr. Copping says. Already starting to look at the job market, she estimates she will earn anywhere from $3,000 to $5,000 a month, after tax.

The extra income will help them pay off their mortgage more quickly and meet their retirement income goal. To do so, the planner estimates they will need to save an average of $48,000 a year from now until Ross retires in 18 years at age 65. That assumes an inflation rate of 3 per cent and an average annual return on investments of 6 per cent.

They are saving anywhere from $14,000 to $20,000 annually, depending on whether their surplus cash flow is included, mostly in Ross's defined contribution pension plan. Ross's employer matches his $500 monthly contribution. As well, Ross will get an indexed pension of $500 a month from a previous teaching job when he turns 65.

They are on track with their registered education savings plan to meet most of their son's postsecondary education costs, estimated to be at least $68,000 over four years, Mr. Copping notes.

What has the financial planner scratching his head is the $80,000 of investments in Hong Kong, money that could be used to help pay off the mortgage over time. Ross says there are tax advantages to leaving the money there, but Mr. Copping is not so sure. "They should seek professional tax advice to review Canadian tax reporting for this investment income," he advises.

As for whether they should pay off the mortgage or invest in dividend-paying stocks, Mr. Copping says the best investment may be simply to pay down debt. The 3.75-per-cent mortgage is equivalent to about 5.5 per cent before tax, he notes.

"Debt reduction provides a guaranteed, risk-free investment return, whereas equity returns are uncertain."

If Ross and Debby were to direct their $750 monthly surplus, some of Debby's income when she returns to work, and some of their Hong Kong investments to paying off the mortgage, they could eliminate it in eight to 12 years, the planner estimates.

"After the mortgage is paid off, they could concentrate fully on building investment assets for retirement."

They should review their overall tax situation and any early redemption penalties before cashing in some or all of their foreign investments.

Mr. Copping suggests an emergency fund of six months' expenses, or about $24,000, half in liquid investments (high-interest savings accounts or cashable guaranteed investment certificates) in their TFSAs and half as a line of credit.

Once Debby becomes a Canadian citizen next year, Ross should consider contributing to a spousal RRSP for her if he has some unused contribution room to enhance future income-splitting possibilities, Mr. Copping says.





Client Situation

The People:

Ross, 47, Debby, 40 and two-year-old son.

The Problem:

How to cope with a big, but temporary, drop in income; reduce debt; save for their child's education; and build a retirement nest egg.

The Plan:

Focus on paying off the mortgage once Debby goes back to work, expected to happen soon. Consider cashing in some of their Hong Kong investments to make annual lump-sum payments to mortgage principal. Once mortgage is paid off, concentrate on saving and investing for retirement.

The Payoff:

An end to the arguments about money and a secure future for the family.

Monthly net income:

$5,610.

Assets:

Home $350,000; bank accounts $11,000; Hong Kong bank account $10,000: stocks $110,000; tax-free savings account $15,000; employer pension plan $10,000. Total: $506,000.

Monthly disbursements:

Food and dining out $800; clothing $100; child care/cleaning service $150; personal allowances $400; miscellaneous $300; mortgage $1,200; property taxes $140; home insurance $50; heat, hydro, water $90; telephone, cellphone, Internet $120; auto expenses $300; public transit $100; credit cards $50; life insurance $160; donations $50; RESP $200; TFSA $150; employer pension plan $500. Total: $4,860. Savings capacity or surplus: $750.

Liabilities:

Mortgage $240,173.

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