Settle career plans - then invest

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Sally and Wes have solid careers with good salaries and generous indexed pensions ahead of them - but at a price.

They are both officers in the Canadian Armed Forces. She is in Alberta, he's in Afghanistan.

The possibilities before them are so varied they're uncertain about their next move, Sally writes in an e-mail. They have a house in Alberta with a mortgage but they'd like to get a toehold in their hometown of Toronto. They have a bit of cash and wonder if they should buy a rental property in Toronto, pay down the mortgage on their home or invest. They'd like to have children in two or three years.

Perhaps their greatest uncertainty is their careers.

"We both enjoy our occupations and plan on staying in the military for the medium to long term," writes Sally, who is 27. Both she and Wes, who is 28, can retire with full pensions after 25 years of service.

They have been in the military for nine years already, four of which were in university. They're not sure they want to hang in for another 16 years or so. They wonder what would happen to their financial situation if they chose to pursue other careers such as teaching or business.

"How can we save for further education in five years if we choose to change occupations and need more training such as teachers' college or an MBA?" Sally asks.

We asked Kurt Rosentreter, a senior financial adviser at Manulife Securities in Toronto, to look at the couple's situation.

What the Expert Says Sally and Wes need to settle their career plans before they have children or consider buying a rental property, Mr. Rosentreter says.

As it stands, they are on track for $80,000 a year or more in annual pension income, indexed for inflation, before they are 50 years old, he notes.

"These sweet pensions are almost impossible to match in other, regular careers in Canada." Going back to school would cost money, both in terms of lost income and less long-term financial security, he notes. Still, the military does have its drawbacks, he acknowledges.

"You have to be comfortable with the danger element."

If a job change is on the horizon, it would be better if only one person went back to school and the other continued with the stable income and pension, he says.

"If both of you return to school, the maximum pensions are lost and you effectively start over at 30 years old." As for the rental property, the big question is how Sally and Wes would manage it when they live in another part of the country. Some rental properties have been gold mines in recent years because of low interest rates and rising house prices, Mr. Rosentreter says.

But if Wes and Sally are planning any big changes, like having children or going back to school, they should wait until they regain their financial footing before making such a big investment, he says.

So what to do with the $50,000 in cash they will have saved by December from Wes's overseas bonus?

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It depends on whether one or both of them is planning to go back to school, Mr. Rosentreter says. If they both are, he suggests starting a savings fund for school costs, putting away $15,000 a year each in a high-interest savings account.

The couple's financial quality of life will depend on their salary levels in their new careers, he says. "Safe to say that you will work until a much older age than your current track."

If Wes and Sally decide later not to change jobs, they could use the money in their savings fund to repay their Home Buyers' Plan loan, buy a new car or pay down the mortgage even faster (they already are doubling up on their payments).

He advises shifting the assets held in their investment accounts into tax-free savings accounts to benefit from tax sheltering, and viewing this money as an emergency fund. In the year before they plan to have a child, they could put away $5,000 to $10,000 to supplement Sally's employment insurance benefits during maternity leave.

The $60,000 a year Wes and Sally figure they'll need in retirement will rise with inflation over the years, Mr. Rosentreter points out. It may be reasonable today, "but in 30 years when [they]retire, the same quality of life may cost $100,000 a year."

Finally, he suggests adding some blue-chip dividend paying stocks to their investment portfolio and reinvesting the dividends. Like real estate, rising dividend income is a good hedge against inflation.

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