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financial facelift

-Mark Blinch/The Globe and Mail

Two years ago, Lila and Lorne were thinking of leaving their well-paying jobs in the Greater Toronto Area and moving back to Alberta. They've since changed their minds.

"We've had some positive changes in our life since my initial e-mail," Lorne writes. He found a new job paying more than $115,000 a year, plus bonus. The job comes with a defined benefit pension plan. Lila also has a professional job, so together they bring in about $225,865 a year, including bonuses. Lila has no pension plan. They are both 36 years old.

Their youngest child – their children are 3 and 5 – will start kindergarten next year and their suburban Toronto-area house has gone up significantly in value.

When Lorne left his previous job, he got a lump-sum payment of vacation and banked overtime, which he put in his RRSP. "We are not currently making regular contributions to our RRSP, TFSAs, or children's registered education savings plan and are hoping for some guidance in that regard," Lorne writes. They want to catch up on their unused contribution room once the child-care costs go down, he adds.

Lila would like to reduce her work hours while the children are still young "to improve the family's lifestyle" and retire completely if possible by the time she is 50.

We asked Jason Pereira, a financial planner at Woodgate & IPC Securities Corp., to look at Lorne and Lila's situation. Mr. Pereira holds the certified financial planner (CFP) designation, among others.

What the expert says

Lorne and Lila put repaying their mortgage ahead of tax planning, which works but is "suboptimal," Mr. Pereira says. They could have saved more money by contributing the maximum to their RRSPs and using the refund to pay down their mortgage or help fund the children's RESPs.

In drawing up his plan, Mr. Pereira factors in reduced work hours starting next year for Lila. Her base salary would drop from $82,000 to $50,000 a year. The children's higher education is estimated to cost $30,000 a year for four years for each child, or a total of $240,000. It would be substantially less if the children lived at home while they were studying. Lila would retire at 50, Lorne at 60 with $71,500 a year after tax, plus another $6,000 a year for travel. They would be debt-free.

Crunching the numbers shows the couple will have combined after-tax cash flow of $204,764 for 2017, a figure that will fall in 2018. Income tax of $21,099 a year factors in RRSP refund, child-care and charitable tax credits. Subtracting lifestyle expenses of $122,150 will leave them with free cash flow of $82,614. (For the current year, the planner has included $30,000 in lifestyle expenses for bathroom renovations, a number that does not show up in their monthly outlays in the sidebar.) Of the free cash flow, $8,545 will go to their car loan and $30,676 to their mortgage, leaving $43,393 for savings.

Their savings can be broken down as follows: $20,000 to Lila's RRSP, $10,000 to the children's RESP, $39,355 to Lorne's RRSP and $8,735 to Lorne's work pension, leaving them with a shortfall of $34,697. "The deficit can be covered by the excess cash on hand," Mr. Pereira says.

If they continue this way, they will have the following savings with Lorne retires in 2041: $60,829 in non-registered investments, $2,050,487 in their RRSPs, and $528,651 in their TFSAs, for a total of $2,639,967. They will also have an RESP of $109,923.

Mr. Pereira's forecast assumes a 7.2-per-cent rate of return on their portfolio (80-per-cent stock, 20-per-cent fixed income) while they are working, and 5.6 per cent when they are retired and holding a more conservative portfolio of 60-per-cent fixed income and 40-per-cent equity. "Note that Lorne's defined benefit pension plan supports the taking of more risk personally," the planner says.

Once they begin collecting Canada Pension Plan and Old Age Security, their government benefits plus Lorne's pension will nearly cover their lifestyle expenses, which will have risen in line with inflation, Mr. Pereira says. Lorne's pension at 60 will be $95,330 a year, including CPP bridge benefit, dropping to $79,890 a year at age 65.

Now for some tax planning. They should both convert their RRSPs to registered retirement income funds when they retire and begin withdrawing the mandatory minimum rather than waiting until the age of 72, Mr. Pereira says. (RRSPs must be converted to RRIFs no later than the year the account owner turns 71, but payments can start the following year.) "Doing so will spread the tax bill over a longer period of time and lower the total lifetime tax bill.

As well, they should consider a spousal RRSP "arbitrage strategy," the planner says. Lorne can contribute to a spousal RRSP for Lila up until two years before Lila retires. When she retires, Lila can withdraw the funds and pay tax at her (lower) rate. "Given that she will retire at age 50, her income will be zero."

To illustrate, the planner assumes a spousal RRSP contribution of $20,000. Under current tax rates, Lorne would save tax at a 43-per-cent marginal tax rate on the $20,000 and Lila would pay 8.75-per-cent tax on that amount.

This strategy is limited by Lorne's pension because his pension adjustment swallows up much of his future RRSP contribution room, the planner notes, "but he does have a sizable carry-forward ($91,550) that could be used."


The people: Lorne and Lila, both 36, and their two children.

The problem: Getting their savings back on track now that Lorne has a new job. Figuring out when Lila can stop working.

The plan: Focus on tax-planning, taking full advantage of RRSPs. Lila scales back her work hours next year.

The payoff: Lila can retire at age 50, Lorne at 60. All of their financial goals achieved.

Monthly net income: $17,065

Assets: Cash and short term $54,000; her TFSA $160; his TFSA $330; her RRSP $29,698; his RRSP $180,131; estimated present value of his DB pension plan $14,000; RESP $6,150; residence $1,000,000. Total $1,284,469.

Monthly outlays: Mortgage $2,556; property tax $341; water, sewer, electricity $163; home insurance $80; heat $108; maintenance, cleaning, garden $421; transportation, including tolls $968; grocery store $950; child care, summer camp $1,550; clothing $390; car loan $710; gifts $255; charity $240; vacation, travel $500; other discretionary $200; dining, drinks, entertainment $530; grooming $140; sports, hobbies $115; subscriptions $35; other personal $100; life insurance $60; cellphone $50; internet $85; his pension plan contributions $728; "Latte factor" $300. Total: $11,575. Surplus: $5,490.

Liabilities: Car loan $16,975; mortgage $132,985. Total: $149,960.

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