In Montreal, two university professors we'll call Ivan, 38, and Penelope, 40, are plotting their financial future with the care they usually put into their research projects. They have combined annual gross incomes that total $140,000 and their jobs are secure until they retire.
They worry that the costs of living, including saving for postsecondary education for their three-year old son and the $25,000 cost of refurbishing their house, will be too costly. They have taken out Home Buyers Plan loans from their registered retirement savings plans, a debt that they must repay. And though flush with cash as their careers blossom, they feel as poor as the students they used to be.
What our expert says
Facelift asked Caroline Nalbantoglu, a fee-only financial planner at PWL Advisors in Montreal, to speak with Ivan and Penelope in order to sort out their finances and map out their futures.
"Ivan and Penelope have just begun to generate rather large monthly surpluses," Ms. Nalbantoglu says. "In the past, the surplus was used to pay down their student loans -- now fully discharged, to repair their house, and to take vacations."
They should begin by using their RRSP contribution room, the planner says. Ivan has $6,822 of RRSP space and Penelope $7,324. They also have a mortgage balance of $234,000 and the Home Buyers Plan loan that totals $12,450, Ms. Nalbantoglu says. She recommends they use a savings account into which they deposit $115 every two weeks. They should increase their savings by $1,154 for a total of $1,269 per biweekly period. That will produce $32,994 savings a year, more than enough to fill up their RRSP space.
If Ivan and Penelope get moving on this savings plan this fall, by February, 2006, they will have $15,800 in the account, enough to make full use of their RRSP space. Those contributions will produce a $2,900 refund for Ivan and a $3,100 refund for Penelope, the planner says.
They still have to pay off their Home Buyers Plan loans. Each year, they must pay $1,250 to their RRSP. Ivan and Penelope are making a variety of plans for the future. They like to travel. They may want another child within the next two years. They can use the $6,000 tax refund they can generate through their RRSP contributions for travel in 2006, Ms. Nalbantoglu explains. Provided that their house renovations are no more than $25,000, they can finance them with their line of credit and then pay it off with their annual savings, she says.
If Penelope stops work to have another child, she will receive employment insurance benefits for the 52 weeks she is on maternity leave. Once she returns to work, there will be sufficient savings to start another registered education savings plan for the second child.
Starting in 2008, with their house renovations finished and paid for, Ivan and Penelope can put $20,000 a year into accelerated mortgage payments. That will allow them to pay off the mortgage within eight years, the planner says.
After their debts are eliminated, savings should go toward retirement, Ms. Nalbantoglu advises. If Ivan works to age 65, he will receive $79,511 a year from a defined benefit pension plan. Penelope's pension will be $83,770, also from a defined benefit plan. Both sums are in current dollars indexed at 3 per cent a year to reflect salary increases, the planner explains.
Ivan and Penelope will begin retirement as each reaches age 65 with Quebec Pension Plan payouts of $21,000 for Penelope and $21,477 for Ivan, all in future dollars. Their combined pension income in retirement will total $205,758 and their non-registered portfolios will have grown to $850,000, assuming a 5-per-cent rate of growth of assets. These funds will produce $42,500 of future income at 5 per cent a year.
