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Blueprint lays out solid foundation for future

Short-term, Tina and Mike hope to finish the renovations and save for their wedding. Longer-term, they have plenty of decisions to make.

Paul Darrow for The Globe and Mail/paul darrow The Globe and Mail

Over the past year, Tina and Mike have sold their house, moved to the Maritimes and bought a new home that they are renovating.

Tina got a job with a local newspaper, while Mike is a self-employed building contractor. As they embark on this new stage of their lives, with their finances merged, they have short and long-term goals – and plenty of financial planning questions.

Short term, they hope to finish the renovations this fall with some cash to spare, save more aggressively for retirement and save, too, for their wedding next year, which they estimate could cost $25,000.

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Longer term, they hope to buy a rental property, expand Mike's business and pave the way for Tina to establish her own freelance business. Alternatively, Mike may decide to go back to school to change careers, Tina may opt to get her masters degree and they may decide to have children. (Mike has a 20-year-old son from a previous marriage.)

Their age difference – he is 37, she is 26 – poses challenges and opportunities.

"How can we make our age difference work to our advantage when saving for retirement?" Tina asks in an e-mail. In her new job, Tina will become part of a defined-benefit pension plan. "How can we be sure we're best prepared for what life may bring in the short and long term – marriage, children and continuing to travel?" Tina wonders.

We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Tina and Mike's situation.

What the expert says

With so many things still undecided, Mr. McShane focuses on what Mike and Tina can do now that will serve them well, regardless of how the future unfolds.

First, their cash flow. When the renovations are done, they should use the money left over from the sale of their previous house to make a lump-sum payment on their mortgage and to help pay for their wedding. They will also need a new car soon. Money for short-term needs such as the wedding and car should be kept in a daily-interest savings account so that it can be cashed in easily.

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Paying off the mortgage first, before investing in tax-free savings accounts or non-registered investments, will give them a guaranteed return of 3.39 per cent a year after tax, Mr. McShane notes. If they knuckle down, he figures they will have it paid off in about six years, giving them considerable flexibility if they decide to have children or go back to school.

Mike is drawing a modest salary from his business, which is incorporated. Instead, given his low tax bracket, he might want to consider drawing additional funds beyond what is needed for regular expenses as dividends, paying the tax, making further lump-sum payments against the mortgage and contributing to his TFSA.

"By investing in his TFSA rather than retaining earnings in the corporation, Mike is turning taxable investment income into tax-free investment income," which will benefit him over time, Mr. McShane says.

For their registered retirement savings plans, Mr. McShane suggests they each contribute an amount sufficient to lower their taxable income to about $43,000, continually weighing the benefits of the tax deduction today against the rate of tax they will pay when they begin drawing down their RRSP/RRIF savings.

If Mike decides to take dividends rather than salary, the lower tax rate means he will be able to save more within the corporation. No salary means no new RRSP contribution room, but he will be able to withdraw the money when he wants to rather than being forced to begin minimum RRIF withdrawals at age 72.

Mr. McShane assumes Mike will retire at age 60, when Tina will be 49, and that she will retire at age 60, when Mike is 71. Tina will continue in her current job plus her freelancing and begin collecting her pension early, which will entail a penalty of 15 per cent. This would give her about $35,000 a year. Her pension is integrated with the Canada Pension Plan, so it will be reduced accordingly at age 65. The planner assumes a 4-per-cent rate of return on their investments after fees and 2-per-cent inflation. He also assumes they will switch to lower-cost investments such as low-management-expense mutual funds and exchange-traded funds until their portfolio is of the size when it can be managed using individual securities.

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Client situation

The people

Mike, 37, and Tina, 26

The problem

How to save enough money to satisfy their short and long-term goals.

The plan

Pay off the mortgage as quickly as possible to give them financial flexibility for whatever they decide to do in future. Make Mike's corporate income more tax-effective by reviewing with his accountant the idea of taking dividends instead of salary.

The payoff

A solid footing on which to build financial security.

Monthly net income

$6,845 (variable)


Investment portfolio $83,280; RRSPs $32,585; home $335,000; Mike's retained earnings $90,000. Total: $540,865.

Monthly disbursements

Mortgage $1,055; property tax $333; property insurance $110; utilities $143; cable, Internet $150; food $600; clothing, personal care $100; medical, dental $260; life, disability insurance $292; cellphone $50; entertainment, eating out, drinks $300; help for Mike's son $300; clubs, memberships $45; travel, vacation $400; auto insurance $280; fuel, oil $70. Total: $4,488. Available for saving and debt repayment: $2,357


Home mortgage: $232,600

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