Monica and Blake live in Vancover, where housing costs are over the moon.Dushan Milic/The Globe and Mail
As the primary breadwinner in her family, Monica is facing a paradox. The 47-year-old public-sector employee says her biggest financial concern is not owning her own home. Yet living in Vancouver, with its absurd housing prices, she doesn't necessarily want to.
"We've stayed away from real estate because to stay in Vancouver it would be out of our reach," says Monica, who has a husband and an eight-year-old son. "I'm not crazy about a condo, and that's about all we could likely afford, even in the suburbs. I don't want to be house-poor."
Given that she and her writer husband, Blake, 50, have deliberately chosen not to pursue property ownership, she feels they should be concentrating on setting money aside for their golden years. At that point, she'll collect a pension of about $4,300 a month.
On top of the $1,850 they pay monthly to rent a house and $270 a month to lease a car, they put some money away regularly into their son's registered education savings plan (RESP), which will total about $7,000 by the time he graduates from high school. To date, Monica has turned to her bank for financial advice, and her registered retirement savings plan (RRSP) consists of that institution's balanced funds.
While Monica admits feeling somewhat discouraged about her financial future, she isn't ready to give up on getting her house in order just yet.
"Since we don't own our own place, I think we should be saving more money, but I feel like we're always behind," Monica says. "I'm reading a book by Gail Vaz-Oxlade called Never Too Late[Take Control of Your Retirement and Your Future] that talks about saving for retirement even if you're starting in your 40s. I'm watching [Ms. Vaz-Oxlade's TV series] Til Debt Do Us Part.
"I hate owing money," she adds. "2013 will be the year of financial organization."
To help her reach that goal, we sought the advice of Brett Simpson, accredited financial adviser with Rogers Group Financial in Vancouver, and Adrian Spitters, senior financial planner with Assante Capital Management in Abbotsford, B.C.
THE BASICS
Combined income of about $121,000.
$42,000 in Monica's RRSP.
$10,000 in savings.
$5,000 in credit-line debt.
$7,000 in RESP, the value in 10 years, invested at a monthly rate of $40.
Both advisers said Monica and Blake should sit down with a certified financial planner from outside their bank to identify goals and to go over an investment policy statement and risk-profile analysis. Both also said the couple should pay off that credit-line debt with their savings.
Brett Simpson's tips
Diversify the portfolio. "Their RRSP investing should diversify around their Canada-centric human capital and pension entitlements by investing globally to equities," Mr. Simpson says. "Their bank branch may never plan holistically from the satellite-level view to account for assets outside the branch. This can minimize the value Monica and Blake receive for what they spend."
Boost savings via RRSPs. "While lending guidelines often target a maximum of 25 per cent of gross income spent on housing costs, they are spending only 18 per cent, yet they are saving only 1.5 per cent of gross income in addition to Monica's pension contributions," Mr. Simpson notes. "This means more income is going to current lifestyle and will likely mean a bigger drop in future to sustainable retirement levels."
To do that, he suggests directing all of their savings to a spousal RRSP in Blake's name, with Monica as contributor until they use up all of Monica's annual RRSP room, only then contributing to the RESP. "The tax savings to Monica are greater than 40 per cent per dollar contributed, while the RESP grant is only 20 per cent," Mr. Simpson says. "The spousal RRSP withdrawals could be used for education funding in a crunch, but more importantly provide an income source to Blake in retirement without relying solely on the qualifying pension income that can be split up to 50 per cent from Monica's pension and RRSP sources to lower their joint tax burden."
Get life insurance. Monica should have approximately $1.5-million in total life insurance, while Blake should have $250,000 to $500,000 to protect Monica's ability to work with after-school care covered if he should die prematurely. A 20-year term would be appropriate for Monica while a 10-year term will cover Blake until their son is 18. "They should ensure they have powers of attorney naming each other and wills appointing guardians for their son and creating a tax advantaged testamentary trust for his support just in case," Mr. Simpson says.
Adrian Spitters's tips
Set up a tax-free savings account (TFSA). "She and her husband each have a contribution limit as of Jan. 1, 2013, of $25,500," Mr. Spitters says, adding that Monica should put the remaining $5,000 of her savings after paying off the couple's credit-line debt of $5,000 into that TFSA. "Since withdrawals from a TFSA are tax-free, she could also use her TFSA as an emergency fund," he notes. Plus, he says the couple should max out their TFSA contributions before investing in RRSPs. "Even though she receives a tax refund when contributing to an RRSP and earns tax-deferred compounding inside the RRSP, in retirement the amount of tax paid when withdrawing funds from the RRIF [registered retirement income fund] may be higher and affect her Old Age Security benefits. Withdrawing funds from a TFSA will not affect her OAS benefits."
Establish a more aggressive portfolio. "Morningstar ranks her RRSP portfolio as low to medium risk," Mr. Spitters says. "Looking at her income level and current retirement savings her lifestyle expenses are leaving little in the way of savings. Her expected pension of $4,311 per month in today's dollars will be insufficient to meet her lifestyle needs in retirement. She will need to increase the risk profile of her portfolio to generate a higher rate of return to ensure she meets her retirement goals. Since she already has a pension that is by nature conservative she can afford to be a little more aggressive in her retirement portfolio."
Consider buying a home – later. "While owning a home mortgage-free in retirement should be one of her financial goals, I recommend that she continue renting for the time being," Mr. Spitters says. "Home prices are at historic highs and are already showing signs of correcting, while stock markets are still considered cheap by historical standards. Therefore she is better off to continue to rent for the time being and invest as much as she can afford in a well-managed equity portfolio. There may very well be a time where she can purchase a home for significantly less than a home costs now."
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