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financial facelift

<137>Financial Facelift (Moe Doiron/The Globe and Mail)<137><137><252><137>Moe Doiron/The Globe and Mail

'We are a typical family of four living in a home we own with the bank in downtown Toronto," Halle writes in an e-mail. She and her husband, Hank, are in their late 30s with two young children.

They both have "pretty good jobs" with a combined income of more than $180,000 in the health care sector. But Hank's contract may not be extended when it comes up, "so there may be some time on employment insurance if he cannot find something else," she writes. Their 12-year-old car is expensive to maintain, but they are reluctant to replace it, riding their bikes or the subway to work. They have a mortgage and some investments as well as a small line of credit. They have begun saving for their children's education.

"On paper it looks okay, but we always feel stretched and have not had a proper vacation in years," Halle adds. When their children are both in school and their daycare costs drop, they'd like to buy a cottage on the East Coast – they figure they can get one for $120,000 – and a new car, "but we're not sure if we can or if it would be better to pay down our mortgage faster instead."

They hope to retire at 60 with an annual budget of $85,000 after tax. Fortunately, Halle has a defined-benefit pension plan at work. We asked Gina Macdonald, a fee-only financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Hank and Halle's situation.

What the expert says

Retiring at 60 with $85,000 a year after tax is not feasible based on their current assets and capacity to save, Ms. Macdonald says flatly. Retiring at 65 may be.

Halle's pension entitlement at 65 will be $46,813 a year, compared with $37,825 if she were to retire at 60. If they wait until they are 65, their investments will have another five years to grow. To generate the desired income, they will have to have about $3-million in savings by that time. The planner assumes a 5 per cent average rate of return and an annual inflation rate of 3 per cent.

"The jump in retirement income is significant given that they may live 30 to 35 years after retirement, and the fact that the pension is not indexed," Ms. Macdonald says. To achieve their goals, they will need to direct at least $2,500 a month to debt repayment and retirement savings between now and the time they quit work.

Out the window, too, is their dream of buying an East Coast cottage. This goal conflicts with their long-term retirement income goal. "Not only will they require a cash outlay to purchase a vacation home, but there will be additional ongoing costs such as hydro, insurance and maintenance and repairs."

If they decide they need a new car, "it's best to pay off their

line of credit first," the planner says. Based on their current expenses, they may have about $1,200 a month they could put toward this goal.

"If they redirect their tax-free savings account deposits, extra savings capacity ($1,200), along with their current line of credit payments of $750 a month, they should be able to pay off their $15,000 balance in roughly seven months." The planner suggests they then buy a good used car.

Once the credit line is paid off and the car has been replaced, Halle and Hank could then direct their savings of about $2,225 a month to additional registered retirement savings plan contributions on top of the $275 a month they are contributing now.

They are both in a relatively high tax bracket with substantial unused RRSP contribution room. If they contribute as much as possible to their RRSPs, they could use their tax refunds to pay down the mortgage more quickly, thus reducing their exposure to possibly higher interest rates in future.

It does not make sense for them to contribute to their tax-free savings accounts right now, Ms. Macdonald says. With a 3.98 per cent mortgage and a 38 per cent tax bracket, they would need to earn a guaranteed 6.5 per cent or more on their investments for investing to make more sense than paying down the mortgage.

Ms. Macdonald suggests they stick with their current $225 a month contribution to the children's education saving until they can afford to contribute more. In the meantime, they could ask friends and relatives to give money for the children's RESP at birthdays and holidays, she says.

Client Situation

The people

Hank and Halle, both 38, and their two children, 5 and 2.

The problem

Figuring out whether they can pay off their debts, buy a new car, save for their children's education, buy a modest cottage and retire at age 60 with $85,000 after tax.

The plan

Forget about the cottage. Focus on paying off their line of credit, contributing to their RRSPs and using their refunds to pay off the mortgage more quickly. Then shift their attention to saving more for retirement.

The payoff

A comfortable retirement with a mortgage-free home to fall back on.

Monthly net income



Bank accounts $4,000; residence $565,000; her locked-in retirement account $57,000; her RRSP $48,000; his RRSP $33,000; RESP $1,500; her employer pension plan $306,000. Total: $1,014,500

Monthly disbursements

Living expenses (food, clothing, grooming) $1,090; mortgage $2,050; other housing $715; child care $1,550; leisure $1,055; travel, vacation $125; transportation $410; children's RESP contribution $225; life, disability insurance $115; telecommunications, TV $190; RRSPs $275; her pension contribution $1,000; TFSA $275; line of credit $750. Total: $9,825. Surplus: $1,200


Mortgage $345,000; credit lines $15,000. Total: $360,000

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