LYLE STAFFORD
Cory and Cole have just moved into their forever home and are wondering how to deal with competing demands on their income. They have well-paying jobs, grossing more than $180,000 a year between them and live in a part of the country where houses are not hugely expensive.
"We made the move to be closer to work and school so we could spend more time as a family, not stuck in a car commuting," Cole writes in an e-mail. Cory is 37, Cole 38. Their children are eight and 10. Paying for their children's higher education is among their long-term goals.
Cory is a teacher, while Cole works as a manager in a government agency. Both have defined benefit pension plans. They hope to retire from full-time work at the age of 55 and pick up short-term contracts "as needed." In addition, they want to do a major renovation of their new home in the next three to five years.
"Can we retire at 55 and still be able to afford a good quality of life with travel while financing some or most of our children's education?" Cole asks.
We asked Gina Macdonald, a financial planner at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Cory and Cole's situation. Macdonald Shymko is a fee-only financial planner. Ms. Macdonald holds the registered financial planner (RFP) designation.
What the expert says
Because Cole has only 2 1/2 years of pensionable service so far, he will be 58 before he can retire with an unreduced pension, Ms. Macdonald says, "so 55 as a [retirement] target should be revisited due to the penalty for leaving early." If he retired at the age of 58, he would be entitled to a pension of $2,750 a month, plus a bridge benefit of $600 a month to the age of 65.
Cory's pension statement shows she would get an unreduced pension of $3,220 a month at the age of 55, plus bridge benefit of $275 a month to the age of 65.
Their plan to wipe out their debt by the time they quit working, to keep contributing to their registered retirement savings plans for the next 20 years and to save for their children's education shows they are on the right path, Ms. Macdonald says. She suggests they review their retirement spending needs closer to the time they plan to hang up their hats because a lot could change between now and then. They may find it worthwhile to delay retirement by a year or two to enhance their pension income.
Cory and Cole have a $492,000 mortgage – 91 per cent of their home's value – at 2.29 per cent, amortized over 24 years. By that time, he will be 62 and Cory will be 61. If mortgage rates were to rise to 4.64 per cent – the level of the new government stress test – their monthly mortgage payment would increase from $2,200 to $2,835, Ms. Macdonald says.
"Could they afford a 29-per-cent increase in their monthly mortgage costs? Yes, but they would need to reduce the amortization on their line of credit repayment."
Next, the planner looks at the couple's education savings. So far, they have $27,000 in a registered education savings plan (RESP). The Canada Education Savings Grant provides 20 cents on every dollar contributed to a maximum of $500 a year for each child on an annual contribution of $2,500. The planner suggests Cole and Cory increase their RESP contribution to take advantage of the unused grants. She also suggests they direct the children's birthday and holiday money toward their education savings goal.
"Even though they haven't taken advantage of all the grants since birth, with RESPs you can carry over unused contributions into future years," Ms. Macdonald says. If they have $27,000 now and add $6,000 each year for the next seven years, at a 4-per-cent rate of return, they will have built up around $83,000 by the time their oldest child is 17, she adds.
Cole and Cory have a monthly surplus of $508. Their budget does not allow for vacations. They could use the surplus to pay down their line of credit more quickly, to enhance the children's RESP, for travel, or to build up an emergency fund for unexpected expenses such as home repairs.
"At this point, they should continue to focus on debt repayment and pay off the line of credit [at 5.3 per cent] and car loan [at 2.9 per cent]," Ms. Macdonald says. They are on track to have both loans repaid in slightly more than three years. This will free up $1,900 a month for the home renovation, to catch up on their RESP contributions, to increase their tax-free savings account and RRSP contributions, or to pay off their mortgage more quickly.
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The people: Cole, Cory and their two children.
The problem: Getting their priorities straight.
The plan: Focus first on paying down the line of credit and car loan. Once that is done, the money can be redirected to other needs. Consider working a couple more years.
The payoff: A roadmap to get them to the next turning point in their lives.
Monthly net income: $11,080
Assets: Cash in bank $2,000; residence $539,000; TFSA $46; his RRSP $100,005; her RRSP $13,147; RESP $27,000. Total: $681,198.
Monthly disbursements: Mortgage $2,200; property tax $542; home insurance $125; utilities $362; security $35; telecom, Internet, TV $125; groceries $700; child care $185; clothing $200; pets $20; grooming $25; drinks $50; leisure (restaurants, entertainment, music, reading) $465; transportation $1,314 (car loan, gas, parking, repairs, maintenance, insurance); life insurance $60; line of credit $1,000; private school tuition $392; miscellaneous $230 (donations, gifts); RRSPs $900; RESP $417; pension plan contributions $1,225. Total: $10,572. Unattached savings $508.
Liabilities: Line of credit $35,000; mortgage $492,000; car loan $33,700. Total: $560,700.
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