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Rafal Gerszak/The Globe and Mail

Tess and Vince are 35 with two children, 4 and 6.

Tess recently went back to work after spending a year and a half at home with the children, so the cash is flowing more freely.

"Now that Tess is back to work, how should we allocate any extra money that we may have?" Vince asks in an e-mail. "Should we be saving, or could we take a little extra money now to enjoy ourselves and take a vacation here and there?"

Together, they bring in $233,500 before tax, including Vince's bonus. They also are enjoying a relocation perk – a subsidized mortgage loan for $477,000 on which they pay only 1-per-cent interest.

"How much of a priority should it be for us to pay down the mortgage more quickly than our normal payments?" Vince asks. They wonder, too, how much they should be saving for the children's higher education – and their own eventual retirement.

"Are we even close to on track for saving for retirement, or are we totally lost in terms of how much we really need?"

We asked Ngoc Day, a fee-only financial adviser at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Tess and Vince's situation.

What the expert says

"Tess and Vince are good savers, which will stand them in good stead to achieve their goals," Ms. Day says. Vince contributes $1,750 a month to his employer's defined contribution pension plan (similar to an RRSP), as well as making contributions to his registered retirement savings plan and tax-free savings account.

For the three more years their mortgage rate is subsidized, increasing their payments is not a priority, the planner notes.

They recently borrowed on their line of credit to prepay their child-care expenses and thus get a 10-per-cent discount.

"Their priority right now should be to pay down their line of credit," Ms. Day says. At Vince's marginal tax rate of 43.7 per cent, the line of credit interest (prime plus two percentage points, or 5 per cent) is equivalent to an 8.9 per cent rate of return on investment, she notes.

Vince could sell the stocks in his non-registered account (about $6,700) and draw on their monthly surplus ($2,300) to repay the credit line right away.

For next year's child-care payment, they could set up a separate savings account earmarked for child-care expenses and direct $1,500 a month to it.

They should set up a family registered education savings plan and make catch-up contributions of $5,000 a year per child (next seven years for the older child, next five years for the younger one) to take full advantage of the federal government's Canada Education Savings Grant, which is equivalent to a 20-per-cent guaranteed rate of return on their investments, Ms. Day says. To fund this year's contribution, Vince could take $10,000 from his TFSA.

They are currently contributing $650 a month to his TFSA. They should stick to this budgeted saving and accumulate funds in his TFSA for a car purchase in a few years so they may not need to take out a loan at that time, the planner says.

Vince is on the right track taking full advantage of his defined contribution pension plan, but any remaining RRSP contribution room should be directed to a spousal RRSP for Tess "to equalize their proportional share of the family's assets," she says.

Vince and Tess set their retirement spending goal high – $145,000 after tax – substantially more than they are spending now if mortgage payments, RESP contributions and child-care expenses are deducted.

"They would have to save about $123,000 a year in order to retire at the age of 60 (their target) and have $145,000 in after-tax income."

To maintain their current lifestyle, they will need only $71,400 after tax, or about $85,000 before tax, the planner calculates. That assumes they split their pension income.

Are they on track?

Assuming 3-per-cent inflation and a 5-per-cent (average annual) long-term rate of return on their assets, Vince and Tess might need to save about $52,000 a year to meet the lower goal. This is achievable because monthly surplus, TFSA, RRSP and DC contributions add up to $56,000 a year.

"That leaves them with about $4,000 a year for other goals such as increased holiday travel." Even so, they might be wise to curb their holiday spending for a while longer and shore up their savings instead so they can make a lump-sum principal payment in 2017, when their mortgage subsidy ends and the rate rises.


Client situation

The people

Tess and Vince, both 35, and their two children, 4 and 6.

The problem

How best to use the increase in income now that Tess is back at work.

The plan

Pay off line of credit, set up children's RESP, shift RRSP contributions to spousal plan for Tess and consider making a lump-sum payment to mortgage when subsidy ends.

The payoff

A realistic view of what they can afford and what they have to save to reach their goals.

Monthly net income



Cash in bank $2,000; home $950,000; his stocks $6,700; his TFSA $17,000; his RRSP $158,521; her RRSP $35,000; his DC pension $175,000. Total: $1.3-million

Monthly disbursements

Living expenses (food, clothing, medical, help, haircuts) $1,750; housing (tax, insurance, utilities, repairs, phones) $1,117; mortgage payment $2,141; child care $1,500; leisure $710; travel $750; transportation $475; health care $173; miscellaneous $150; RRSP $801; TFSA $650; his DC pension plan $1,750. Total: $11,967. Surplus $2,373 (from which $833 would go to RESP)


Mortgage $477,000; line of credit $8,000. Total: $485,000

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