Mark Blinch/The Globe and Mail
Lila and Lawrence are in their mid-30s with a toddler, a suburban Toronto house and a big mortgage. He teaches, earning $96,000 a year, she is a middle manager earning $62,500. Because they are making extra mortgage payments, their budget is tight.
"We are quite late in saving for our retirement as it took us a while to establish our careers," Lila writes in an e-mail. "We have been focusing more on paying down our mortgage." While they do want to pay off their mortgage as soon as possible, "we also want to make sure that we save enough to be able to live comfortably in our retirement," she adds. They are contributing $1,000 a month to their registered retirement savings plans.
Lawrence has a defined-benefit pension plan at work that will pay him well when he retires, provided he stays in the job. Their goal is to retire at age 65 with $65,000 a year after tax plus another $5,000 to $10,000 for travel.
As their child grows older, they will have to pay for sports and music lessons and the like, and eventually higher education. They are saving $100 a month in a registered education savings plan (RESP).
"Are our goals achievable?" Lila asks.
We asked Adam Weinstock, a portfolio manager and investment adviser at Scotia Wealth Management in Westmount, Que., to look at Lila and Lawrence's situation.
What the expert says
Despite what they consider a late start, Lila and Lawrence are in the enviable position of being able to achieve all their short- and long-term goals, Mr. Weinstock says.
Built into their monthly expenses is an additional $1,500 in mortgage payments over and above their regular payment, he notes. "If they continue to pay down their mortgage at the current pace, they can expect to be mortgage-free in about 11 1/2 years."
If they wanted to free up some cash flow, they could cut the extra mortgage payment to $1,000 a month and still have the mortgage paid off in about 15 years, Mr. Weinstock says. This would give them $500 a month that could be used to help meet their shorter-term goals.
With regard to their retirement goals, Lila and Lawrence "find themselves in a privileged position," Mr. Weinstock says. Lawrence has a defined-benefit pension plan that will pay about $51,500 a year. "Assuming he remains with his employer until his desired retirement age of 65, this pension will provide a generous income stream in retirement that will form the cornerstone of their plan."
Lawrence's pension plan can be viewed as a "large fixed-income vehicle," Mr. Weinstock says, allowing them to invest in a portfolio more heavily oriented toward equities throughout their lives. By focusing their savings on "blue-chip, dividend-paying and growing corporations, they can hopefully achieve rates of return that average in excess of 6 per cent" a year. At that rate of growth, and with their current RRSP contribution level, they will amass slightly more than $1.5-million in savings by the time Lawrence retires at age 65 in 2016 dollars.
Mr. Weinstock also looked at what would happen if they achieved a rate of return of just 4 or 5 per cent. "In those cases, they are still able to meet all of their goals both in the short and long term."
Currently, they are directing their savings to their RRSPs, but they should also consider contributing to tax-free savings accounts because they can withdraw their savings tax-free when they retire. Because Lawrence has a pension plan, he should contribute to a spousal RRSP for Lila. "If the rules regarding pension income splitting are ever changed, having funds in a spousal plan would allow them a more favourable tax split in retirement than otherwise might be the case," he says.
Their mortgage will be paid off about the time their son will be starting university. The cash flow that had been going to the mortgage can be redirected to his education costs. Any surplus funds are assumed to be saved and invested under the plan.
"Between Lawrence's pension income and the investment portfolio they will have amassed, they will easily be able to meet their goal of $65,000 net retirement income with at least another $5,000 a year for travel," Mr. Weinstock says.
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CLIENT SITUATION
The people: Lila, 36, Lawrence, 35, and their son, 2.
The problem: Are their goals to pay off their mortgage, help their son through university and save for a comfortable retirement achievable?
The plan: Ease up a bit on the mortgage payment to relieve their feeling of being pinched. Take advantage of tax-free savings accounts. Lawrence should consider contributing to a spousal RRSP for Lila.
The payoff: All their goals achieved with room to spare.
Monthly net income: $9,607
Assets: Bank accounts $20,515; estimated lump-sum value of his defined-benefit pension plan $8,555; his TFSA $80; her TFSA $80; his RRSP $955; her RRSPs $38,815; her stock $4,806; RESP $9,755; residence $600,000. Total: $683,561
Monthly disbursements: Regular mortgage payment $1,835; additional mortgage payment $1,500; property tax $318; home and car insurance $299; life insurance $29; hydro/gas/water $193; home repair and maintenance $355; phone/Internet/cable $208; transportation $318; car maintenance $133; groceries $632; household supplies $250; child care $678; clothing $220; gifts/charity $245; vacation/travel $400; entertainment $198; grooming $15; gym $78; medication $25; RRSP $1,000; RESP $100; pension plan contributions $573. Total: $9,602
Liabilities: Home mortgage $402,463 at 2.59 per cent
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