Go to the Globe and Mail homepage

Jump to main navigationJump to main content

  (Matthew Sherwood For The Globe and Mail)

 

(Matthew Sherwood For The Globe and Mail)

FINANCIAL FACELIFT

Late starters plan for their child's future (and early retirement) Add to ...

Four years ago, at the age of 42, Pauline and Steven met for the first time. They married soon after and had a child, now a toddler.

He was an engineer, an American working in an ailing industry. She was a Toronto teacher. Because her job was more stable, they decided to make Canada their home.

It was difficult at first, with Steven having to establish himself anew in a different country. Their income dropped while Pauline was on maternity leave.

More Related to this Story

“I feel we have taken a few steps backward in our financial situation,” Pauline writes in an e-mail.

Now that they are both working full time, grossing $160,000 between them, “we are finally starting to save again and we want to ensure that we are on the right path for our retirement,” Pauline writes. They are both approaching 47 and would like to retire at age 61 with an after-tax income of $72,000 a year.

Their short-term goals are to pay down their mortgage and save for their son’s education. Longer term, Pauline wants to take a sabbatical in five years “without sacrificing retirement.” They have insurance, but no wills.

We asked Barbara Garbens, a financial planner and founder of B L Garbens Associates Inc. in Toronto, to look at Pauline and Steven’s situation.

What the expert says

Pauline and Steven are “on track to a very comfortable retirement given their expenditures and saving habits,” Ms. Garbens says. With a young child, though, the first thing they need to do is draw up wills and powers of attorney.

“They need to consider who would look after their child if something were to happen to them,” she says – and ensure some financial assistance is paid to the guardians to help support their son until he is independent.

The two are paying an extra $500 a month to their mortgage, putting them on track to be mortgage-free in 10 years. If their salaries increase in future, they might consider putting the extra money on the mortgage to pay it off even sooner, Ms. Garbens says.

The second priority will be to continue stashing away $2,500 a year in a registered education savings plan for their son. (This takes full advantage of the federal government grant of $500 a year on a $2,500 RESP contribution, up to a maximum of $7,200.)

After that, surplus disposable income should go to their tax-free savings accounts until they are in a higher marginal tax bracket, at which point they should shift their focus to registered retirement savings plans, Ms. Garbens says. As an American citizen, Steven will have to file U.S. tax returns, which means he will have to declare earnings on the money in his TFSA, “which doesn’t have the same exemptions from U.S. taxation as the earnings on RRSPs,” the planner says. He should check with his U.S. tax preparer to determine how much tax he will have to pay.

“If it’s an issue, he may be better off accumulating wealth through the RRSP even though he is in a lower tax bracket since investment earnings within an RRSP are exempt from U.S. taxation.”

To ensure their savings grow in value, Pauline and Steven need to keep an eye on costs, making sure they are paying as little as possible in ongoing management fees and commissions, the planner says. They might want to consider buying a mix of exchange-traded funds or low-cost mutual funds through a discount broker.

Pauline can easily afford a sabbatical year without jeopardizing her retirement goal, Ms. Garbens says. Both can retire at age 61. Their cash flow will come from a combination of pension income, Canada Pension Plan and Old Age Security benefits and U.S. Social Security.

In 2028, their first full year of retirement, their income will come from her pension plan ($32,400), his U.S. Social Security (estimated at $7,200) and their Canada Pension Plan benefits. The planner assumes Pauline qualifies for full CPP benefits and Steven for 75 per cent, less a reduction in both cases for taking them early. Their cash outflows that year, including income taxes, will be $73,897. The shortfall will come from non-registered savings. Once Steven turns 65, he will get $15,000 a year in pension income, and they will begin collecting OAS at age 67 (only 50 per cent for Steven).

The planner’s forecast assumes the couple live to age 90, the cost of living rises by 3 per cent a year and they earn at least 3 per cent a year on their investments.

-----------

Client situation

 

The people

Pauline and Steven, both 46, and their son, 2.

The problem

Figuring out whether Pauline can take a sabbatical year and still retire, along with Steven, at age 61. In the meantime, paying off the mortgage and saving for their son’s education.

The plan

Pauline and Steven appear to be well on their way to achieving all their goals, but they need to draw up wills and powers of attorney and keep a close eye on costs as their investment portfolio grows.

The payoff

Peace of mind.

Monthly net income

$9,190

Assets

Bank term deposits $38,000; their TFSAs $20,000; her RRSP $160,000; his RRSP $3,000; his 401K $250,000 (U.S.); RESP $6,000 (Canadian); residence $390,000; estimated present value of her pension plan $550,000; estimated present value of his pension plan $220,000. Total: $1.64-million

Monthly disbursements

Mortgage $1,500; property tax $200; condo maintenance fee $560; insurance $35; electricity $75; auto insurance $380; fuel $650; other transportation $200; groceries $600; child care, RESP $1,200; gifts, charitable $100; vacation, travel $300; personal discretionary (grooming, dining out, club memberships) $200; life insurance $180; telecom, TV, Internet $200; RRSPs $450; pension plan contributions $765; professional association $55; group benefits $130. Total: $7,780

Liabilities

Home mortgage $167,000 at 3 per cent

---------

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com

Some details may be changed to protect the privacy of the persons profiled.

Follow us on Twitter: @GlobeMoney

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular