With two young children – ages 1 and 3 – Sarina and Brad face the prospect of adding to their Ottawa home soon or buying a larger one. Either way, they’ll have to increase their mortgage substantially.
Then there’s the $5,700 in student loans to pay off, the children’s postsecondary education to save for, a car to replace, an emergency fund to build, and off in the distance, retirement. Somewhere along the way, the couple, both 33, would like to take a nice vacation every now and then.
Where to Start?
A few months ago, Brad landed a government job, so if he sticks with it, he’ll have a fully indexed, defined benefit pension plan when he retires. Sarina has a defined contribution pension plan. Together, they earn about $106,000 a year.
Their biggest monthly expense in the coming year will be $1,800 for daycare, Sarina writes in an e-mail.
“Our financial goals are to be able to send our two children to postsecondary school and retire with a modest lifestyle ($50,000 a year after tax) by age 60,” Sarina says. They’re not sure whether they can pay the full cost of their children’s university education, but would like to save $10,000 for each child for four years, a total of $80,000.
We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management of Ottawa, to look at Sarina and Brad’s situation.
What the Expert Says
Sarina and Brad can easily afford to upgrade their home because their debt load is manageable, their cash flow is strong and their expenses are modest, Mr. McShane says. Their mortgage comes up for renewal in 2013, at which time they could refinance for an extra $175,000. He has built this number into his calculations.
With daycare costs significantly lower in 2014 when their children start school, their cash flow will allow them to pay the mortgage off over 10 years, assuming interest rates stay the same, he estimates.
First, though, Brad should concentrate on paying off his student loans, which carry an interest rate of prime plus 2.5 percentage points, or 5.5 per cent currently.
“I do not suggest increasing the mortgage payments until this debt is eliminated.”
Their tax-free savings accounts (TFSA) and registered retirement savings plans (RRSP) can wait until their debt is substantially paid off, the planner says. They will continue to contribute to their pension plans, and carry unused TFSA and RRSP contribution room forward to use in future.
Once their mortgage is paid off, they could focus on using up Brad’s RRSP contribution room first because he is in a slightly higher tax bracket.
With $17,000 or so in registered education savings plans, Brad and Sarina are on track to meet their financial goal for their children’s postsecondary education, Mr. McShane says. To reach their $80,000 target, they would have to set aside $150 a month for each child. The federal government’s Canada Education Savings Grant would add another 20 per cent to their contributions.
If they wanted to, they could contribute up to $2,500 a year ($208 a month) to take full advantage of the government grant, he says. The extra money could be used for grad school or to fund a larger proportion of the children’s undergraduate costs.
The way they are going, Sarina and Brad should easily be able to retire at age 60 without taking too much risk on their investment portfolio, Mr. McShane says.
“They are in excellent financial condition for their age.”
Mr. McShane based his assumptions on an average annual return on investments of 6 per cent and an inflation rate of 2 per cent, although they could get by earning 5 per cent, he notes.
