However, since their employers may not always pay such large bonuses and incentives, Mr. Rosentreter suggests they increase their personal savings, maximize their RRSP contribution room each year as well as their tax-free savings accounts.
The Invest for Life series:
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As for their son's post-secondary education, there is already $50,000 in place thanks to his grandparents. The couple has $2,300 in a registered education savings plan and are adding $540 a month starting this year.
The monthly RESP savings should be adjusted to equal $5,000 a year, which will entitle them to a $1,000 government grant, Mr. Rosentreter advises.
An undergraduate degree for a child living away from home could easily cost $80,000.
“With $50,000 plus $2,300 saved already and new annual savings of $5,000 a year, they are in a position to cover all the costs,” he says. Because of the short time horizon before their son could start his post-secondary education, the couple needs to “park all the cash in bonds and short-term cash instruments with no volatility,” he advises. “Stay away from bond mutual funds.”
Stella and Stan wonder whether they should be saving first or paying down their debts. It depends on what interest rate they are paying on their debt and how it compares to what they could make by investing, he says. They are paying interest of 3.89 per cent on their mortgage. (Investment returns, it should be noted, are not guaranteed.)
Finally, the couple should improve what appears to be some bad financial habits, the planner says.
“Stop using debt like a bank account – the line of credit and the car loan. Save in advance for future needs,” he says. They can start by building a three-month emergency fund in a savings account that is separate from their regular accounts.
“Create a savings account to save for vacations, home renovations, new vehicles, Christmas,” he says. “Set up an automatic savings plan from your bank account for as little as $25 a month and start getting ahead better.”
Finally, as Stan's long-term incentive plan vests, he should consider selling some or all of his holdings to pay down debt or to diversify his investment portfolio. The money could also be used to catch up on unused RRSP and TFSA contribution room, Mr. Rosentreter notes. “Then take the tax refunds and pay down debt even faster.”
Client Situation
| The People: | Stella and Stan, both 49, and their 13-year-old son |
| The Problem: | Catching up with education and retirement savings after taking time out from work to raise their son. |
| The Plan: | Cut spending, draw up a budget, pay off debt and start saving for retirement at age 60 (in 11 years). |
| The Payoff: | Plenty of money for their child's education and a comfortable and secure lifestyle in retirement. |
| Monthly net income: | $10,700 |
| Assets: | House $450,000; RRSPs and company registered savings $412,000; RESP $2,300; long-term incentive plan and other investments $138,000; Total $1,002,300 |
| Monthly Disbursements: | Mortgage, property taxes, home insurance $2,500; car $769; water $40; electricity $110; food $1,200; clothing and household $1,000; oil $275; gas $500; telephone/Internet/cable $200; club and sports $350; pet supplies $50; car insurance $219; line of credit/credit card payments $1,000; travel $450; life insurance $37; other $2,000. Total $10,700. |
| Liabilities: | Mortgage $154,000; car loans $30,000; line of credit $7,000. Total $191,000 |
Special to The Globe and Mail
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