George and Christine are young, well educated, ambitious and in debt.
At 29, fresh out of graduate school in the United States and with new jobs, they want to have a well thought out savings and investment plan, George writes in an e-mail. They have a condo in downtown Toronto with a mortgage and a vacation rental outside of Canada in which they have net equity of about $90,000.
“Some of the questions we are struggling with include how much to invest in RRSPs and efficient debt consolidation strategies,” George writes. Their goals include saving for a comfortable retirement 35 years hence, for the education of their future children, for a new home purchase in three to five years (trading up from a condo to a house) and for buying another investment property some time in the future. They are eager to pay off the $76,000 borrowed to pay for George’s degrees.
Together they earn about $145,000 in salary plus some rental income from their vacation property. George will be eligible to join his employer’s pension plan (a hybrid of defined benefit and defined contribution) in two years while Christine is part of her company’s defined contribution plan (capped at 3 per cent of her salary with the company contributing another 2 per cent). Given that they are just starting out in their careers, neither is sure they will spend the rest of their lives at their current job.
We asked Bryson Milley, financial adviser and associate portfolio manager at Rogers Group Financial in Vancouver, to look at the couple’s situation.
What the expert says
Christine and George’s short term goals include paying off their loan, saving $3,000 for holidays this year and next, saving $100,000 for a house purchase by the fall of 2015 and saving enough both in their company plans and their registered retirement savings plans to generate net monthly income of $5,000 when they finally put their feet up and retire.
“These goals may seem lofty, but they have three key ingredients working for them,” Mr. Milley says: solid and growing income, reasonable expenses and the desire to save. Thus their goals should be achievable, “albeit with some effort,” the planner says. The keys are good cash-flow management – they have a monthly surplus of income over expenses of $3,565 – and “being efficient with your debts and investments.”
Short term, Mr. Milley recommends Christine and George direct some of their surplus to a high interest savings account with no fees, such as the one offered by ING Direct. This money could be used for emergencies or travel expenses, he says. “Strive to always have $10,000 earmarked for an emergency fund.”
They should use the $10,000 they have in the bank to pay down the loan and then begin making big monthly payments. Assuming a 5 per cent interest rate and payments of $3,250 a month, the loan will be fully repaid in about 20 months. Another $250 a month could go to their travel fund.
“Consider living on George’s income ($5,000 a month) and using Christine’s income ($4,200) for savings and/or debt repayment,” Mr. Milley advises.
Once the loan is repaid, the couple can maximize their tax-free savings accounts and eventually, build their non-registered investment accounts as well. They are both advised to take full advantage of their company pension plans, contributing as much as possible to take advantage of their employers’ contributions.
First off, though, they have said they want to buy a house in three to five years. “Once the loan has been fully repaid, redirecting the money to home upgrade savings could provide up to $80,000 in additional capital ($3,250 a month at 3 per cent) 24 months later.” As for saving for future children, this is more of a cash-flow question than a savings question, Mr. Milley says.
How much they need to stuff away in RRSPs for their retirement depends to a great extent on their company pensions, the planner notes. Their retirement savings target (private and company) should be $1,000 a month now, rising to $1,300 a month (indexed for inflation) once cash flow allows.
He recommends they take out enough insurance to cover all their debts and provide $200,000 to the survivor. They would increase their coverage when they have children or if they take on a larger mortgage. They might also want to add to any disability insurance they might have with their employers.
“Keep in mind that your financial goals, and your ability to achieve them, will be an ever-changing landscape that requires constant monitoring.”
Christine and George, both 29
How to pay off loans, save for a larger home and prepare financially for having children.
Pay off the loan aggressively, then contribute the maximum to registered accounts (company and private pension plans). Once they are caught up, save for the purchase of a new, larger home.
Realization of most goals, although perhaps not all, provided they keep spending in check and invest and borrow in a tax-efficient way.
Monthly net income
Cash $10,000; mutual funds $400; stocks $20,000; TFSA $10,000; RRSP $2,700 ; registered pension plan $1,700; home $325,000; net equity in rental property $90,000. Total: $459,800
His stock purchase plan $335; her RPP $165; groceries and eating out $1,500; clothing $250; mortgage payments $1,300; condo fees $500; house insurance $30; telecom, cable, Internet $120; repair, maintenance $40; furniture, appliances $50; entertainment, music, books $500; education, hobbies $200; bus, subway, taxi $160; life insurance $35; donations $150; gifts $100. Total: $5,435. Surplus: $3,765
Personal loan $76,000; mortgage $255,000. Total: $331,000
Special to The Globe and Mail
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