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Mike and Morley are in their 40s with two children and a serious aversion to debtMark Blinch/The Globe and Mail

Mike and Morley are in their 40s with two children and a serious aversion to debt.

The mortgage they took out to buy their suburban Toronto home 14 years ago "was my first ever debt," Mike writes in an e-mail. When the children came along, they had to borrow on a line of credit to buy vehicles and to help keep themselves afloat during parental leaves.

Although they earn $183,485 between them, "the experience of being in debt has been unbearable," Mike writes. "I have been kept awake by the stress almost constantly," he adds.

So large did the debts loom that every purchase, whether for weekly groceries or family vacations, seemed to be made on more borrowed money, he says.

Now, after years of "suffering, stress and sleeplessness," Mike and Morley hope to have the last of their loans paid off by summer's end.

They have a backlog of household repairs and a couple of older cars that need to be replaced.

"Our house is still furnished with hand-me-downs and basics purchased when we were students," Mike writes.

Can they fix up the house, buy some new furniture, replace their cars and help with their children's higher education without going into debt again?

We asked Matthew Ardrey and Warren Baldwin of T.E. Wealth in Toronto to look at Mike and Morley's situation. Mr. Baldwin is senior vice-president; Mr. Ardrey is manager of financial planning.

What the experts say

Mike and Morley plan to fund 75 per cent of their children's higher education. They have $64,000 saved already and are adding $4,600 a year, which will generate a federal education savings grant of $920 a year. If they continue to save at this rate until the children are age 17, and earn 5 per cent a year, they will have enough to fund $15,000 a year for each child, adjusted for inflation of 2 per cent a year.

With the last of their debts about to be retired, Morley and Mike will have another $26,000 a year to spend or invest. They need to buy two new vehicles at a cost of $30,000 each. They also want to renovate their home, which could cost anywhere from $40,000 to $100,000. The planners assume the couple will replace their vehicles every 10 years and so have factored in savings of $6,000 a year. Morley and Mike have $360,000 in their registered retirement savings plans and tax-free savings accounts. Mike is contributing $7,600 a year to his RRSP and Morley $6,700. They have been adding $4,200 a year to their TFSAs, but they will increase this to the maximum of $5,500 a year each.

In preparing their calculations, Mr. Ardrey and Mr. Baldwin assume that Mike and Morley will live to age 90. The planners also assume the couple will make 5 per cent a year on their investments and the inflation rate will average 2 per cent.

Both will get maximum Canada Pension Plan benefits at age 65 and Old Age Security benefits at age 67. At age 60, Mike will get a pension of $36,600, while Morley will get $33,600. Neither pension is indexed to inflation. When they retire, they want to spend $8,500 a month, or $102,000 a year.

"Based on these assumptions, they would not have enough to meet their retirement goal," the planners conclude. The most they could generate is $89,700 a year in current-year dollars. To reach their goal of $102,000, they would have to save an additional $17,000 a year, rising with inflation.

The planners explored an alternative plan. Once Mike and Morley finish their renovations and buy new vehicles, they could begin saving for retirement in their non-registered accounts in addition to their registered savings.

Starting in 2023, they could save an additional $22,000 a year, which would give them $95,500 a year after tax when they quit working – still a tad short. "By extending their retirement date slightly, they would be able to reach their goal," the planners say.

To improve their investment returns, Morley and Mike could shift from 40-per-cent fixed income to a more growth-oriented asset mix. As well, they should shift from their heavy weighting in Canadian stocks to equal weightings in Canadian, U.S. and international stocks.

They might also consider hiring an investment counselling firm to save costs. "By the time they reach retirement, if they were able to save one percentage point a year off their current investment cost, this would amount to savings of $12,800 a year."


Client situation:

The people: Mike and Morley, 44, and their two children, nine and 11.

The problem: Renovate home, buy furniture, replace vehicles, help finance kids' higher education and save for retirement – all without going into debt.

The plan: Pay for renovation and vehicles with cash. Then save for retirement.

The payoff: No more sleepless nights.

Monthly net income: $11,150

Assets: Cash in bank $6,260; his TFSA $23,000; her TFSA $19,000; his RRSP $183,000; her RRSP $134,800; est. present value of his pension plan $151,000; of hers $131,000; RESP $64,000; home $350,000. Total: $1.06-million.

Monthly expenditures: Property tax $360; utilities $280; home insurance, maintenance $70; transportation $830; groceries $1,250; child care $1,000; clothing $80; line of credit $2,170; gifts $300; $100; vacation $400; cleaning $325; entertainment $450; grooming $80; hobbies, subscriptions $340; personal $190; life insurance $185; telecom $70; RRSPs $1,195; RESP $385; TFSAs $700; group benefits $170. Total: $10,830.

Liabilities: Line of credit $7,000.

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