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financial facelift

-Dave Chan/The Globe and Mail

At 50, Andy is on his own again with joint custody of a young child and more debt than he can comfortably carry. His biggest burden is the mortgage he took on for the house he just bought. He also has a line of credit, high-interest credit card debt and a boat loan.

Andy's short-term goals are to buy a "new" used car to replace his current vehicle, pay off his debts and save for his son's higher education. Longer term, he wants to pay off his mortgage before he quits working and ensure he has enough money to retire comfortably at age 60. His spending goal is at least $40,000 a year after tax.

Then, he will sell his Ottawa home and move to the country, where housing is less expensive and he can live the outdoorsy lifestyle he so enjoys.

"What is the best and fastest way to get out of debt?" Andy asks in an e-mail. "When can I retire comfortably assuming all debt is paid except the mortgage?"

Fortunately, Andy works for the federal government, so he will get a fully indexed pension of $31,596 a year at age 60. (This amount includes a bridge benefit, which will end at age 65.) He will also get Canada Pension Plan and Old Age Security benefits.

We asked Kurt Rosentreter, a chartered accountant and senior investment adviser at Manulife Securities Inc. in Toronto, to look at Andy's situation.

What the expert says

Andy wants to make a home for his son, but buying a house with a big mortgage will leave him cash poor in the short term, Mr. Rosentreter says.

First, he should wipe out his credit card debt, the planner says. "No one should carry debt costing 19 per cent interest – ever." Andy could quit smoking, start jogging for free and put the money saved into eliminating credit card debt, Mr. Rosentreter adds.

Andy is tucking $85 a month into his registered retirement savings plan. "With a lucrative pension that will leave him well set in retirement, he has better priorities for this money," the planner says. He should put it toward paying down his line of credit.

Once Andy has wiped out his credit card debt ($4,000) and line of credit ($14,000 at 6.99 per cent), he should open a tax-free savings account and save an amount equal to three months' pay for an emergency fund, the planner says. This money could be invested in a high-interest savings account.

Andy is not putting aside nearly enough for his son's education. He should contribute at least $2,500 a year to his registered education savings plan to take advantage of the Canada Education Savings Grant. (The federal government will contribute 20 per cent of every dollar – up to $500 a year – for a maximum lifetime grant of $7,200.) Andy should also catch up on unused contribution room.

If he can't come up with the money, Andy should consider selling his boat, paying off the related loan and redirecting the monthly payment of $215 to his son's RESP, Mr. Rosentreter says.

In his budget, Andy allocates no money for gifts, vacations, his son's extracurricular activities, repairs of any kind – car or house – or emergencies. "Is this realistic?" the planner asks. "Because his cash flow is tight, Andy is the perfect candidate to buy a software program and start tracking his expenses monthly."

To speed up his debt reduction, Andy may want to consolidate his credit card and line of credit debts.

"With his career as leverage, he could shop around to renegotiate a line of credit interest rate no higher than prime plus one percentage point," Mr. Rosentreter says.

After Andy has paid down his consumer debts and caught up with his son's education savings, he can tackle the mortgage. "Do not take on more debt of any kind for any reason," the planner cautions. If Andy worked to age 65, he should have the mortgage paid off by then. His pension income will be nearly $40,000 a year, CPP benefits more than $11,000 a year and Old Age Security (at age 67) more than $5,000 a year – all indexed for inflation.

"Retiring at age 60 is not advisable."

Andy could decide to sell his home, pay off his remaining mortgage and hang up his hat at age 60, but his son might still be partly dependent on him. He'd be 17. Andy should revisit his circumstances at that point, the planner says.

"Perhaps he could retire somewhere in between 60 and 65 to ensure he has money to support his son and their joint goals."


Client situation

The people

Andy, 50, and his son, 7.

The problem

How best to pay down his debts, save for his son's higher education and retire in 10 short years.

The plan

Cut spending to the bone, consider consolidating debts and even selling the boat. Once consumer debt is paid off and he has caught up with his son's education savings plan, attack the mortgage.

The payoff

A road map for the next few years and the opportunity to revisit the situation in a decade or so.

Monthly net income



Residence $260,000; RRSP $48,000; RESP $650; estimated present value of defined-benefit pension $172,580. Total: $481,230

Monthly disbursements

Mortgage $1,080; line of credit $200; credit card $100; boat loan $215; utilities $300; transportation $475; groceries $250; childcare and child support $725; personal discretionary $400; drugstore $20; telecom, TV, Internet $145; RRSP $85; RESP $10; professional association $70; pension contributions $450. Total: $4,525


Mortgage $207,900 at 2.99 per cent; line of credit $14,000 at 6.99 per cent; credit cards $4,000 at 19.99 per cent; boat loan $17,500 at 8.75 per cent. Total: $243,400

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