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(J.P. Moczulski for the Globe and)
(J.P. Moczulski for the Globe and)

Financial Facelift

Timing the 'sweet spot' for a cottage Add to ...

Albert and Pam share a family cottage with relatives, but they would like a lakefront summer place of their own while their children - a 10-year-old son and 6-year-old daughter - are still young enough to enjoy it.

The estimated price tag: $500,000.

Pam is a teacher, Albert is in marketing. Together they earn $186,500. They have a mortgage on their suburban Toronto home and a line of credit that they would like to pay off as quickly as possible.

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"Can we afford a cottage on our own?" Albert writes in an e-mail. He wonders, too, if they are on track with their retirement savings plan. "I have no clue whether we are looking okay, if we spend too much or if we should save more aggressively," he writes. "Is the cottage dream simply a dream?"

We asked Jason Heath, a consultant and financial planner at E.E.S. Financial Services Ltd. in Markham, Ont., to look at the couple's situation. E.E.S. is a fee-only financial planning firm that does not sell investment products.

What the expert says

If Pam and Albert wait too long to buy a cottage, "they could miss the 'sweet spot' from a lifestyle perspective," Mr. Heath said. Teenagers are not as interested in spending time with mom and dad up north.

"So it's a fine balance, timing the lifestyle and financial implications of a cottage purchase."

First, the line of credit. If Pam and Albert want to pay it off quickly, they might consider using the money they have in their savings accounts, tax-free savings account and even their non-registered mutual funds, he said. As well, they could divert the money they are contributing to their TFSAs to paying down their credit line.

"They'll cut their line of credit in half right off the bat and it will be gone in less than one year instead of two."

Mr. Heath figures they are earning less in interest in their savings accounts and TFSA than they are paying for the loan. "Why not use these funds to pay down debt? Sometimes debt repayment is the best investment you can make."

. Weigh in on whether you would stash some extra money into an RRSP, RESP or a TFSA.

Pam and Albert's dream of buying a cottage in the next few years is also "very attainable," Mr. Heath said. Their mortgage will be paid in five or six years, so they will be able to take on new debt without stretching their budget.

"The cottage is an investment - in their family and in their net worth," he said. "It will bring enjoyment to their family for years to come."

As for the $500,000 target price, "that's a lot of money to spend for a cottage they may not get to use very much," he said. They might want to consider renting it out for part of the summer to help offset the expenses. They would also get tax deductions for some of their operating expenses.

Looking ahead, the couple's RRSP accounts are a "pretty good size" given their age and the fact that they both have pensions, the planner said. Their children's registered education savings plans are also well-financed.

Their company pensions of $85,000, CPP of $43,000 and RRSP withdrawals of $84,000 for life will give them a gross income of $212,000 and an after-tax income of $160,000, which will more than cover their estimated expenses in retirement of $136,000."They won't need much of a non-RRSP nest egg as long as their debts are paid off."

If they do run short, they will still have their house and cottage to fall back on, which Mr. Heath calls "pretty significant cushions" that would help to fund their retirement or leave a larger inheritance for their kids.

Client Situation

The People:

Pam and Albert, both 42

The Problem:

Can they afford to buy a cottage within the next few years without jeopardizing their financial security?

The Plan:

Pay off the line of credit, then start working on the mortgage. Once that is paid off, borrow to buy the cottage. Strive to have the cottage loan paid off by the time Albert retires at age 68 - about 26 years from now. Pam plans to retire when she is 56, about 14 years from now.

The Payoff:

A family cottage of their own up north that they can enjoy during the long, hot summers and eventually bequeath to their own two children in time.

Monthly net income:

$11,375.

Assets:

House $578,000; bank accounts $10,000; TFSAs $1,900; RESPs $43,000; non-registered investments $1,500; Pam RRSP $30,000; Albert RRSP $111,200. Total: $775,600.

Monthly disbursements:

Mortgage $1,160; transit $160; employee benefits $55; RRSP contribution $200; TFSA $250; RESP $410; employer pension plan $690 (Albert), $370 (Pam); food and eating out $750; clothing $250; medical, drugs, dental $15; child care $255; personal allowance (haircuts) $60; miscellaneous personal $300; share of family cottage upkeep $125; property taxes $385; house insurance $90; heat, hydro, water $250; telephone, cable, Internet, cellphone $210; painting, repairs, maintenance $250; replacement of furniture, appliances $100; vacations $300; entertainment, music, books $225; education, evening courses $50; auto expenses $835; line of credit $700; life, mortgage insurance $55; union dues $70; group insurance $80; gifts $250; charity $100; emergencies $150; children's sports $550. Total: $9,700. Savings capacity: $1,675.

Liabilities:

Line of credit $23,000; home mortgage $175,000. Total: $198,000.

Special to The Globe and Mail

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