Grace and Gordon have little debt, substantial savings, a home in Toronto and two daughters, aged 9 and 7.
Gordon, an executive, is 51. Grace, who works in marketing, is 48. Between them they earn $280,000 a year.
They feel strongly about their children’s education and are concerned that the local high school, which is a fair distance from their house, “is not of the nature that we would want for our daughters,” Gordon writes in an e-mail.
The dilemma: Should they sell their house and move to a better high school district, with all the costs that would entail, or dish out a considerable sum – which Gordon estimates at $240,000 in after-tax dollars (four school years, times two) – and send their children to a private school instead?
Grace plans to work part-time in about three years when the girls start high school so she can be more actively involved in their education, so the family income will drop.
“We have been quite frugal and disciplined in saving for retirement,” Gordon writes. They figure they’ll need $110,000 a year after tax when Gordon retires at age 65 and they want to be debt free. They are concerned the cost of either moving or sending their children to a private school will compromise these plans.
We asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto, to look at the couple’s situation.
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Investor Education: Buying a home
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What the Expert Says
“This couple is extremely well organized financially,” Mr. Baldwin says. Grace and Gordon have made a “strong and concerted effort” over the years to pay down debt and build a nest egg and they have a firm understanding of their budget.
Still, selling to move to a better school district doesn’t make sense financially, the planner concludes. Grace and Gordon estimate a new house in a better neighbourhood would cost $300,000 more.
Selling their existing house would cost another $40,000 to $50,000 in commission, legal fees and moving expenses. The new house would likely need some minor renovations. Taxes would be higher and so might operating expenses.
And what if the new school district didn’t meet their expectations?
Going the private school route would give them more choice, Mr. Baldwin points out. It may be that both of their children would not benefit from a private school education, or that one child would be better suited to one private school and the other to a different one, “depending on the child’s particular strengths and weaknesses,” he adds.
Besides, a bigger house now would likely leave them with debt when they retire, possibly forcing them to sell it and downsize again.
Sending their children to a private school will not leave them with the annual income they desire in retirement, Mr. Baldwin says. As it stands, they will have to keep their annual expenses to $98,682, short of their target $110,000. This would carry them through comfortably to Grace’s age 90 without having to sell the family home.
Mr. Baldwin calculates Gordon’s pension and registered assets will total $1.7-million when he retires at 65, while Grace’s will total $1.2-million. They would each have $120,000 in tax-free savings accounts.
If they spend the higher amount ($110,000), they will run out of savings by the time Gordon is 90 and Grace is 87, forcing them to sell the house to cover living expenses.
The calculations assume that Grace will earn half her current salary when she goes to part-time work in three years and that this money will cover the cost of the girls’ education. Mr. Baldwin assumes the pair will maintain their maximum RRSP and TFSA contributions. Inflation is estimated at 3 per cent and their average annual return on investment at 7 per cent.
Client Situation
| The people: | Gordon, 51, Grace, 48, and their two children, 9 and 7 |
| The problem: | Whether to move to a better school district or pay for private school education |
| The plan: | Private school option |
| The payoff: | A good education for girls and a secure retirement |
| Monthly net income: | $15,200 |
| Assets: | Bank account $8,500; TFSAs $22,000; RESPs $23,500; Combined RRSPs $478,000; Grace’s pension plan $10,358; Grace’s LIRA $64,000; Gordon’s pension plan $200,000; residence $890,000. Total: $1.7-million. |
| Monthly disbursements: | RRSP $1,900; RESP $500; pension plan $620; food and eating out $2,000; clothing $720; drugs, dental $380; child care, cleaning $1,250; allowance $600; house tax and insurance $575; utilities $385; phone, cable $235; maintenance $250; furniture, appliances $400; vacations $800; entertainment $500; children’s activities $620; auto lease and expenses $1,155; other transportation $110; line of credit $1,450; health insurers $540; donations $120; gifts $235. Total: $15,345 |
| Liabilities: | Line of credit $29,500. |
Special to The Globe and Mail
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