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financial facelift

Glenn Lowson for The Globe and Mail

Between them, Don and Carman earn $176,000 a year, but with daycare, a mortgage, two cars and tuition expenses for their part-time studies, they find they have little left each month for savings.

Carman is a teacher, Don a consultant working from home. They are both 37.

Lately, they've been at odds about where to allot scarce resources. He favours paying down the mortgage on their Southern Ontario house as quickly as possible, while she prefers contributing as much as possible to his RRSP because he has no company pension.

While their advanced studies will likely lead to higher income in future, "we are always pinching pennies to come up with the tuition each semester," Don writes in an e-mail. He worries how they will fare when interest rates start to rise.

"In preparation, I have forgone any contributions to my RRSP, instead allocating additional funds to the mortgage each month," Don says. "This is a bone of contention between the two of us." One point they do agree on – the need to save for their children's higher education.

Looking ahead, Carman would like to quit work at 55, while Don plans to work longer. When they retire, they plan to downsize the house and drop one car. Their retirement spending goal: $75,000 a year.

We asked Grant Henri, vice-president and financial planning specialist at RBC Wealth Management, to look at Carman and Don's situation.

What the expert says

Don and Carman are doing all the right things, Mr. Henri says. They are saving what they can, their expenses are reasonable, they have no debt other than their mortgage, they have begun saving for their children's education, they have life insurance, a line of credit for emergencies and wills and powers of attorney for property and personal care.

"They just happen to be at the stage in their lives when cash flow is under the most pressure" – two young children and a new home. Although they are not making as much progress as they would like, once the child-care costs diminish and their income rises, they will have more room to both save and pay off debt.

"The key issue at hand is to determine the optimal use for their surplus cash flow," which Mr. Henri estimates will be between $10,000 and $15,000 a year once their eldest child starts school and child-care expenses drop. The money they have to save and invest includes the $3,600 a year they are contributing to their RRSPs and tax-free savings accounts now, as well as the tax refund (about 30 per cent) they receive on their child-care expenses. Competing demands on this surplus include lump-sum mortgage payments, contributing to a registered retirement savings plan, tucking away more in the children's registered education savings plan or contributing more to their TFSAs.

The planner suggests they first make RESP contributions of $2,500 a year for each child in order to get the 20 per cent matching federal government grant. "This is a very attractive investment for them." He does not suggest they contribute more than that for the time being.

With the remainder of the surplus cash flow (between $5,000 and $10,000), the planner suggests they make RRSP contributions for Don. "This should result in tax savings at a fairly high rate given Don's marginal tax rate," Mr. Henri says. He recommends they forgo TFSA contributions for the time being other than possibly using their TFSAs for emergency funds.

For Don's tax refund from the RRSP contribution, the planner recommends one, or some combination of, the following: buying private long-term disability coverage if their own coverage is inadequate or has significant limitations or conditions; make additional RRSP contributions; or if their mortgage loan is causing anxiety, make a lump-sum payment.

"However, with a current [mortgage] interest rate of 2.2 per cent, this would not be a priority right now if they feel comfortable with their current level of debt."

As for their retirement goals, if they are both willing to work to age 60, without taking into account any increased income they may earn, they could surpass their spending target, generating the equivalent in today's dollars of $80,000 a year after tax. Inflation is estimated to lift this amount to $136,000 by then, with about $95,000 coming from Carman's pension. That includes a permanent pension of about $84,000 partly indexed, plus a temporary bridge supplement of about $11,000 payable only until she turns 65.

This would be in addition to saving $20,000 a year each for four years ($160,000) for their children's university education and paying off their mortgage in full. Mr. Henri's calculations assume an average annual rate of return on their investments of five per cent. If Carman retires at 55 and Don at 60, they would be able to look forward to spending the equivalent in today's dollars of about $72,000 a year, just slightly short of their original target, as well as meeting their other goals.

Client Situation

The people

Don and Carmen, both 37, and their children, 3 and 5.

The problem

Whether to pay down the mortgage quickly or contribute as much as possible to Don's RRSP.

The plan

Contribute to RESP for children to take advantage of government grant, then to Don's RRSP, and use tax refund from RRSP contribution to pay down mortgage, improve insurance coverage or make further RRSP contribution.

The payoff

Harmony between them knowing they are taking best advantage of government breaks for RESPs and RRSPs to achieve all of their goals.

Monthly net income



Home $500,000; commuted value of her work pension $178,000; his RRSP $76,440; her RRSP $5,845; tax-free savings accounts: $1,435 (excludes RESP of $23,545). Total: $761,720

Monthly disbursements

Mortgage $1,330; property tax $460; maintenance $300; utilities, insurance $310; auto lease $545; car insurance $165; fuel $400; auto maint. $170; groceries $870; child care $1,950; clothing $320; gifts $85; charitable $20; vacation $50; grooming $265; dining out $375; entertaining $120; hobbies $60; subscriptions $85; life insurance $120; disability/critical illness ins. $85; phones $220; cable, Internet $240; RRSP $200; tuition $325; TFSA $100; her DB pension plan $675; other $60. Total: $9,905


Mortgage $336,350 at 2.2 per cent variable over 35 years.