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In Vancouver, a couple we'll call Tristan and Linda, both 33, face the reality that buying a house in their expensive city is tough. With a gross income of $119,800 a year, they want to balance payments for a house they have just bought with the expenses they anticipate in having children and planning for their retirements.

"We have been unable to see what our finances will look like 30 years down the road," Tristan says. "Are we on the right track for retirement? We need a realistic view."

What our expert says

Facelift asked Vancouver-based registered financial planner Adrian Mastracci, investment counsel with KCM Wealth Management Inc., to work with Tristan and Linda in order to develop a plan for their future. "This couple deserves praise for starting the planning exercise at their relatively early age," Mr. Mastracci says. "They have made some right financial moves, but there are serious underlying issues of how they will finance the cost of the house they have just purchased."

Tristan, an airline employee, and Linda, who works in high tech, have contracted to buy a home for $514,000 plus $10,000 closing costs on a $462,000 mortgage with a 5.3-per-cent fixed rate for five years. It's a high ratio mortgage with $9,070 of insurance charges built into the amount financed. They have put down $25,000 as a deposit and plan to put another $50,000 into the down payment.

Paying the mortgage will cost them $2,770 a month or $33,240 a year, 40 per cent of their after-tax income. It will be a heavy load to carry, especially in view of the possibility that rising energy prices could force Tristan's employer to downsize its labour force.

The couple needs to set priorities: First, reduce and pay down the mortgage, then save for retirement, Mr. Mastracci says.

They can cut their interest expenses by shifting from a high ratio to a conventional mortgage for not more than 75 per cent of the value of the property to be financed. That would save the $9,070 insurance fee, the planner explains.

To qualify for a conventional mortgage, including closing costs, Tristan and Linda will have to put down another $113,000 on top of the $25,000 deposit they have given the seller. They can raise the sum needed by selling $57,200 of mutual funds in a non-RRSP account, cashing in life insurance with cash value of $5,000, and adding $50,000 cash they have in a bank account. They will be close to the required down payment and could top that up with a line of credit loan at their bank, the planner explains.

Tristan and Linda can finance the balance of the house price on a 5.3-per-cent mortgage with a 20-year amortization. That would cost them $2,563 a month, a few hundred dollars less than the cost of the high ratio mortgage. Or they could aggressively reduce their monthly mortgage costs by selling a condo that they rent out. The investment property has a net cash value of $139,200.

The condo could produce substantial capital gains in future. Those gains are hypothetical. Yet savings through reduction of the interest required to carry their mortgage are certain. Mr. Mastracci advocates certainty, noting that mortgage interest on one's principal residence is not deductible from income tax. Sale of the condo and realization of the $139,200 equity Tristan and Linda have in the property would bring the amount that needs to be financed down to about $245,000. The importance of reducing debt and liberating income paying interest cannot be exaggerated, the planner says.

Tristan is in an unstable industry. He and Linda should try to carry as little debt as possible. Using the same mortgage interest rate of 5.3 per cent and the same 20-year amortization, the monthly cost of a $245,000 mortgage would be $1,685. Compared with the high ratio mortgage, the pared down conventional mortgage would save the couple $10,540 a year, Mr. Mastracci notes. That money could go to the costs of raising and educating the children the couple would like to have at some time in the future.

For now, the couple should be thinking about building up funds for their eventual retirement. They have set a target age of 55 for their retirement. Tristan and Linda are each 33, so retirement planning is a long-term exercise. Mr. Mastracci assumes Tristan will live another 50 years, Linda another 55.

Projecting retirement income, Mr. Mastracci has assumed that investments grow at 6 per cent a year and that inflation runs at an average annual rate of 3 per cent, that Tristan gets full Canada Pension Plan benefits and Linda gets 70 per cent of benefits and that both receive full Old Age Security payments indexed at 2 per cent a year.

The couple would like to retire at age 55 with gross annual income of $80,000. That would require capital of $1.8-million. To build up that sum, they would have to save $2,500 a month in addition to sums required to pay the mortgage. That would be very hard to do on their present incomes, but in theory, it could be done, the planner says.

They can more easily attain the $80,000 retirement income goal in 2006 dollars at age 60. Beginning at that age, Tristan's work pension will add $55,000 in 2033 dollars a year without indexation. The pension will have been seriously eroded by 27 years of inflation to less than half of its 2006 value, the planner says.

They can take Canada Pension Plan benefits at age 60 with a reduction of 0.5 per cent per month for each month prior to age 65 that benefits begin. On that basis, their averaged pensions would be $6,010 each in 2006 dollars. They would need an additional $1,650,000 of capital at age 60 to generate the rest of the income by the same assumptions. This requires that they save $1,300 a month with savings growing at 6 per cent a year, the planner says. Full CPP benefits will be available at age 65. At 65, Tristan would receive $10,100 in 2006 dollars and Linda $7,070 in 2006 dollars, the planner estimates. Their CPP accounts can be averaged so that each receives $8,565 a year.

At age 65, each will receive Old Age Security benefits at a rate of $5,850 per person a year in 2006 dollars. The OAS clawback, which begins in 2006 at a net income of $62,144, would not affect the couple, Mr. Mastracci says. At this point, their total $80,000 retirement income goal in 2006 dollars ($206,000 in 2035 dollars) will require an additional $1,525,000 of capital at age 65 to generate the balance. To achieve this capital, they would have to save $600 a month with savings growing at 6 per cent a year, Mr. Mastracci explains.

The critical issue for the couple is controlling the costs of buying their Vancouver house, Mr. Mastracci says. He notes that they have to borrow from a financial institution, for they used the Home Buyers Plan for a house in Ontario they recently owned before moving west. As their mortgage costs are reduced, they will have the ability to generate increasing amounts of retirement savings. The faster they reduce their mortgage debt, the sooner they will have money to finance registered education savings plans for the children they plan to have.

"For this family, debt reduction is going to be critical. It will make the difference between a strained retirement and one that is moderately affluent," the planner concludes.

"The reality is that we have to take on a heavy load of debt and live with it," Tristan says. "We could live in the suburbs, but we'd need two cars. We would rather put that money into a house that appreciates over time," Linda adds. "The quality of life in Vancouver makes it all worthwhile."

Interested in a free Financial Facelift? Then drop a line to the writer at 444 Front St. W., Toronto M5V 2S9 or

andrewallentuck@mts.net

Client situation

Tristan and Linda, both 33, live in Vancouver.

Net monthly income: $7,483, including rental income.

Assets: House down payment, $25,000; investment property, $265,000; cash, $56,400; RRSPs, $140,600; cash in bank, $85,000; mutual funds taxable, $57,200; vehicles, $30,000; insurance cash value, $5,000.

Monthly expenses: Rent, $1,150; utilities, $220; food and restaurants, $700; car fuel, repairs, $150; home and auto insurance, $250; life insurance, $200; clothing, $300; RRSP, $1,850; miscellaneous, $400; rental property mortgage interest, $1,490; charity, $30; savings, $743.

Total: $7,483.

Liabilities: Mortgage on rental property, $125,800.

Quote: "We could live in the suburbs, but we'd need two cars. We would rather put that money into a house that appreciates over time. The quality of life in Vancouver makes it all worthwhile."