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Glenn Lowson/The Globe and Mail

With the mortgage on their Southern Ontario home paid off, Judy and Jasper can see the day when they will be debt free. All that's left is their car loans. They are about to shift to the saving stage.

He is 48, she is 43. They have two children, ages 5 and 7. After staying home with the children for a few years, Judy plans to return to work part-time this year, which will add substantially to the family's cash flow. Jasper earns $140,000 a year, plus a bonus, working at a tech firm. As well, his employer contributes $4,200 a year to Jasper's group RRSP at work.

Their short-term goal is to build an education fund for their children so they can afford a "good university education," Jasper writes in an e-mail. Longer term, they want to "build a comfortable retirement nest egg." Their goal is to retire at age 60 and to make family vacations part of their planning.

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Jasper is relying on his investment portfolio – which is invested entirely in stock mutual funds – to finance their retirement goals. He aims to make 10 per cent to 12 per cent a year after expenses.

"Please advise if my investments are the right choice for me," Jasper writes. "I keep too busy with the job to be an active trader of stocks."

We asked Jason Pereira, a fee-based financial planner at Bennett March/IPC, to look at Judy and Jasper's situation.

What the expert says

Jasper's target return, while high, is possible, but only with a 100-per-cent equity portfolio and a lot of volatility, Mr. Pereira says. Jasper admitted he didn't like the idea of his investments potentially being down 30 per cent or more at some point and taking several years to recover, Mr. Pereira says.

When they retire, Judy and Jasper will have $54,000 a year in after-tax expenses to cover, plus another $10,000 a year for family vacations. For their children's education, they will need $8,000 a year for tuition and $12,000 a year for housing and food for each child. Hence, four years of study would require $160,000.

The family has two cars. The first is to be replaced every seven years and cost $60,000, according to the planner's assumptions. The second is to be replaced every 10 years and cost $25,000.

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Currently, Jasper is left with $85,890 a year after income taxes and maximum contributions to his RRSP, Mr. Pereira says. Debt payments of $22,105 and lifestyle expenses of $64,120 result in a monthly deficit of $335. Jasper has $18,000 in cash, which he could use this year to cover the deficit, contribute the maximum of $5,000 to the children's registered education savings plan, contribute $5,500 each to his and Judy's tax-free savings accounts and add to their joint investment account.

Next year, their car loans will drop to $4,918 and be paid off, the planner notes. That, plus Judy's income of $20,000 a year after tax, will increase their cash flow by about $40,290. "The surplus should go, in this order, to: the RESP, their TFSAs and their joint savings. He is already contributing the maximum to his RRSP," the planner notes. They would also be able to add to their travel budget.

Ambitious though it may be, Jasper's retirement plan works, allowing him to retire at age 60 and cover $64,000 a year of expenses in today's dollars, Mr. Pereira says. By then, they will have accumulated $2.59-million in savings.

"The plan works but is highly sensitive to market returns," he says. "Even a 0.5-per-cent lower rate of return results in a shortfall at [his] age [of] 86." Because of this, Mr. Pereira does not recommend Jasper retire at 60. If they choose to work until Jasper is 65, they will have accumulated $4.3-million in assets.

"In this scenario, even if returns are 2.5 percentage points lower than projected, the plan works." That's because they will have an additional five years of savings, a shorter retirement and the children will be out of school by the time they retire. Jasper could retire at the age of 63 if the returns meet the planner's projections. Mr. Pereira assumes a target return of 8 per cent a year with a 3 per cent inflation rate, for a real rate of return of 5 per cent.

Instead of having all stocks, Jasper should shift to 20 per cent bonds, with the bond component increasing as the years go by. "The return in turn drops to 7.4 per cent when the portfolio is increased to 40 per cent bonds, then 6.6 per cent at 60 per cent bonds and finally 5.8 per cent at 80 per cent bonds," Mr. Pereira says.

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Jasper, the main breadwinner, has no will or power of attorney, the planner notes. He should see to this immediately. As well, Jasper should arrange more life and disability insurance coverage than he has through work.

As for their investments, Jasper and Judy hold a mix of equity and sector-specific funds. "They should abandon the sector-specific funds because of the risk and invest in broad market equity funds instead," the planner says. Their non-registered account should focus on tax-efficient investments such as corporate class mutual funds, exchange-traded funds and stocks.


Client situation

The people: Jasper, 48, Judy, 43, and their two children, 5 and 7.

The problem: Are they on track to finance their children's higher education and retire when they're 60?

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The plan: Once the car loans are paid off, plow everything into savings and plan on working until they are at least 63. Gradually add some bonds to their all-stock portfolio.

The payoff: Financial security, well-educated children and a comfortable lifestyle.

Monthly net income: $8,865

Assets: Current and previous group RRSPs at work $99,595; cash in bank $18,000; his TFSA $33,727; her TFSA $33,320; his RRSP $365,993; her RRSP $7,710; RESP $46,403; residence $575,000. Total: $1.18-million

Monthly disbursements: Property taxes $480; insurance $130; maintenance and improvements $490; utilities $835; security $30; gardening $440; groceries $800; clothing $100; personal care $50, medical and dental $30; dry cleaning $20; entertainment, dining out $325; memberships $120; gifts $50; charitable $30; discretionary $85; travel $200; auto insurance $260; maintenance $70; fuel, oil $480; public transit, taxis $210; loans $1,842; RRSPs $1,358; group RRSP at work $350; RESP $415. Total: $9,200 Deficit: $335

Liabilities: Car loans $26,500

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Read more from Financial Facelift.

Want a free financial facelift? E-mail Some details may be changed to protect the privacy of the persons profiled.

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