GEOFF ROBINS/The Globe and Mail
When she first contacted Financial Facelift in July, Margaret was being tempted by a high-paying job that would take her and her family from their comfortable small-town Ontario home to pricey Toronto.
Her husband Mel, who works for a government agency, cringed at the prospect. They were already making good money and have a nice suburban house. As well, they are hoping to have a second child at some point, which will add to their costs.
"He's terrified of being penniless in old age like his mother," Margaret writes in an e-mail. She, in contrast, was ready to "take a leap of faith and move to the big city, with all the opportunities and risks that it presents," she adds. As it turned out, Margaret was able to have her cake and eat it too.
She landed a great job with a Toronto-based firm, but it's the type of work – high-tech business development – that doesn't require her to be tied to an office desk. From her home base, she can travel as the job requires without having to put her family through a move – and take on the burden of a big mortgage.
So now they are looking to build a long-term financial plan that includes saving for their child's education, building an emergency fund, doing some minor work to their home and saving up for possible parental leave. Longer term, they want to pay down the mortgage and build their retirement savings. They wonder whether they can afford a cottage once the house is paid off.
We asked Frank Wiginton, a certified financial planner and author of How to Eat An Elephant – One Day a Month to Financial Success, to look at Margaret and Mel's situation.
What the expert says
Margaret expects to earn $175,000 a year and rising in her new job, Mr. Wiginton notes. She will also get a good signing bonus. The family's spending is modest. If they continue on their current path, "they will have a lot of extra cash flow." They also have a healthy fear of running out of money in retirement.
"The reality is that they could live much higher on the hog than they do now, but they have other goals and do not feel comfortable with debt," Mr. Wiginton says. Their first step should be to review their life and disability insurance coverage, which appears insufficient. Next, they need to focus on mitigating their income tax bill.
Their top short-term goal is to save for their child's higher education. They can easily do this by contributing $2,500 a year to a maximum of $50,000 to a registered education savings plan, raising this to $5,000 a year if they have a second child. They can finance this out of monthly cash flow.
Their second goal is to build up an emergency fund. Mr. Wiginton suggests they transfer the $22,500 they have in non-registered stock investments to their tax-free savings accounts, and continue to contribute the maximum each year to their TFSAs in order to reduce their eventual income-tax liability. They can use Margaret's $20,000 signing bonus to pay for the renovation on the house.
If they continue with their current payments, they will have their mortgage loan repaid in full in 13 years, the planner calculates.
Mr. Wiginton recommends Margaret contribute the maximum amount to her RRSP during her working years (about $24,000 in 2013). Mel has a defined benefit pension plan and a much lower income, "so there is no value in him contributing to an RRSP" – another reason to "max out" his TFSA, the planner says.
If they continue with their modest lifestyle and high income, the couple should have no trouble affording a cottage. In 10 years, they could save up the estimated purchase price of $600,000 without having to borrow, the planner says. That amount assumes a 3-per-cent annual price rise. If they bought that same cottage today at $450,000 using borrowed money, they could have the loan paid off in full in 10 years.
Margaret and Mel also wonder how to invest their savings. They have not had great results in the past. The planner's calculations show that with a 4-per-cent annual return on investments, they can easily achieve their goals and live a comfortable life. They don't have to be too aggressive.
CLIENT SITUATION
The people
Margaret, 36, and Mel, 44, and their young child.
The problem
How to put in place a long-term financial plan that will achieve all their goals without keeping either of them awake at night.
The plan
Continue with their modest lifestyle and they will have plenty of money to put their children through school, pay off their mortgage, save for retirement and even buy a cottage. Review life and disability insurance and keep an eye on the income tax bill.
The payoff
Peace of mind.
Monthly net income
$15,380
Assets
Residence $450,000, her RRSP $32,600; his RRSP $3,120; bank accounts $5,000; stocks $22,000. Total: $512,720
Monthly disbursements
Mortgage $1,410; other housing $890; transportation $415; groceries $600; child care $850; clothing, dry cleaning $260; gifts, charitable $100; vacations, travel $250; dining out, entertainment $600; personal grooming $120; pets $80; sports, hobbies $25; life insurance $100; communications, cable, Internet $150; RRSP $1,000; educational $200. Total: $7,050.
Liabilities
Mortgage $200,000 at variable rate.
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Special to The Globe and Mail
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