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rafal gerszak The Globe and Mail

When they finish their studies, Cynthia and Tom expect to earn a good income, she as a lawyer and he as a dentist. But they will have paid for it – they'll be as much as $330,000 in debt. Cynthia, who is 24, will graduate this school-year and begin articling in 2012, for which she'll be paid about $50,000. By then she will have drawn at least $65,000 of her $80,000 professional line of credit (a form of student loan offered by banks to people enrolled in certain professional programs). That may sound like a lot, but after her year of articling is over in 2013 she figures she'll be earning $87,000 a year.

Tom, who is 26, will be in dental school until 2015. By then, his professional line of credit will total a weighty $250,000. Part of his tuition ($27,000 a year for four years) is eligible for tuition tax credits. Understandably, they want to pay down their debts and begin saving to buy a home, perhaps in Toronto, where they live now. They also wonder about saving for retirement.

"We're wondering how to go about planning our finances during this period to ensure that we repay these lines of credit as quickly as possible," Cynthia writes in an e-mail. She has some specific questions: Should she pay as much as possible on her line of credit, or should she set aside some income for retirement savings? Should she pay all their joint living expenses while Tom is still in school? And what is the best way to take advantage of the tax-deductible portion of Tom's tuition?

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We asked Warren Baldwin, regional vice-president, T.E. Wealth in Toronto, to look at Cynthia and Tom's situation.

What the expert says

The cost of their professional education will create a major uphill financial burden for Cynthia and Tom, Mr. Baldwin says. Their heavy debt load may make it difficult for them to get an unsecured loan for a second car, for example. As well, they are vulnerable to a rise in interest rates in future.

"If interest rates rise to a point where they are paying 5 per cent on their student debt, the $300,000 would then cost them $15,000 per year in interest or $1,250 per month, just a bit less than the amount that they pay today in rent," he says.

Cynthia should first save up $3,000 to $5,000 for emergencies, the planner says. She should put off contributing to a registered retirement savings plan until her income is higher and she can get more of a tax saving. As for whether she should pay Tom's half of the expenses, it would make more sense for her to concentrate any surplus cash flow on paying her own student loan because it bears a higher interest rate than his: 4 per cent versus about 3 per cent.

The couple should make sure they have enough life insurance to cover their debts so that their loans don't become a burden for their surviving partner or their family.

On the tax front, Tom or a "supporting person" can claim a portion of the tuition costs, depending on the amount of his net income in a given year. The supporting person could be one of his parents or his common-law spouse. The balance of any tuition amount that is eligible for a tax credit would be automatically carried forward for him to use later when he has earned income.

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Drawing up a retirement plan for Cynthia and Tom with so many future unknowns poses some questions, Mr. Baldwin notes. First, when can they afford to start saving for retirement? And second, what would their lifestyle spending be in 2045 when they plan to retire?

Given the financial challenges they face, he estimates it will be 10 years before they can afford to contribute to their RRSPs. After that, he assumes they make the maximum RRSP contribution through to 2045 when they retire. While their lifestyle is modest now, it likely will "move upscale" over the years in keeping with their status as a dual-income professional family, Mr. Baldwin says. He therefore projected their retirement income needs in 2045 based on expenses of $100,000 a year in 2011 dollars. He assumed an average investment return of 5 per cent a year compounded and an inflation rate of 2 per cent.

On that basis, their RRSP assets, including growth, would total slightly less than $3-million between the two of them, split equally, by 2045, he calculates. But their $100,000-a-year lifestyle expense would have risen to nearly $200,000 a year so they would run out of money by the time Tom is 72. In order to make their retirement lifestyle work until age 90 for each of them, they would need to save an additional $1.5-million by the time they retire. If they were able to start that saving right away, then they would need to save $28,000 per year to achieve this goal, he says.

If they are unable to begin contributing the maximum to their RRSPs for 10 years, they will have to plan to spend less in retirement. If this is the only retirement saving they can afford to do, then their lifestyle spending needs at age 60 would have to be reduced to $66,000 a year in 2011 dollars, the planner adds.

Client situation

The people

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Cynthia, 24, and Tom, 26

The problem

Devising a plan to pay down debt, save for a home and also save for retirement.

The plan

Set aside a small emergency fund, start paying down Cynthia`s debt first and then Tom`s. Depending on what happens in between – home, family – they may not be able to contribute to RRSPs for another 10 years, after which they will have to save a substantial sum.

The payoff

Freedom to get on with their careers and their lives without having to worry unduly about how they'll fare in retirement.

Client situation

Monthly net income



Bank accounts $12,300

Monthly disbursements

Rent $1,450; home insurance $50; hydro $25; car insurance $120; fuel, oil, maintenance, parking $210; grocery store, lunches and dining out $600; clothing $200; dry cleaning $100; gifts $50; vacation, travel $200; entertainment $100; personal $190; sports, hobbies, subscriptions $120; cellphone, Internet $185. Total: $3,600.


Her line of credit maximum $80,000 at 4 per cent; his line of credit maximum $250,000 at 3 per cent. Total: Up to $330,000, depending on whether they draw full amount.

Special to The Globe and Mail

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