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Dan and Karen are excellent savers, but worry they might be making mistakes on their road to retirement.Glenn Lowson/The Globe and Mail

Dan and Karen have good jobs, a house in a Toronto bedroom community and three growing children to eventually put through university. Not saddling their children with student debt is a key priority for the couple.

Dan is turning 46 soon, Karen is 51. Their children are 10, 13 and 14. Dan grosses $120,000 a year, while Karen – who stayed home and raised the children for 13 years – brings in $72,000 a year. They spend a substantial sum commuting, paying road tolls and maintaining their vehicles, as well as on their children’s competitive sports.

“We never seem to have enough money to make ends meet,” Karen writes in an e-mail. “We live frugally, we price-match our groceries, we cut the [cable] cord years ago,” she adds. “How do we save for our children’s education, save for our retirement, pay off our HELOC [home equity line of credit] while completing home repairs and renovations, replacing our vehicles and supporting our children’s recreation habits?” Karen asks. “Are we making mistakes that we aren’t seeing, or is it a matter of choices?”

They will be getting an inheritance of $150,000 some time over the next year and are wondering how best to use the money. Longer term, they both hope to retire at the age of 60. Their retirement spending goal is $68,650 after tax ($80,000 before tax with income splitting giving them $40,000 each).

We asked Michael Cherney, an independent Toronto financial planner, to look at Dan and Karen’s situation.

What the expert says

Dan and Karen are excellent savers, Mr. Cherney says. They are catching up on their registered education savings program (RESP) contributions, tucking away $13,800 a year. The grandparents add another $1,800 a year. As well, they are paying down their debt to the tune of $8,400 a year.

Short term, they are planning some minor improvements to their house. They want to replace their aging vehicles with at least one electric car, the planner notes. In his calculations, Mr. Cherney assumes that Karen lives to the age of 95 and Dan to 90, inflation averages 2.5 per cent a year and their investments earn a rate of return of 4.5 per cent.

In his plan, Mr. Cherney has Dan and Karen taking the following steps. They use $100,000 of the inheritance to pay down the line of credit, and buy two gently used cars with the remaining $50,000. They redirect the $500 a month Karen is contributing to her tax-free savings account (TFSA) to debt payment, bringing the annual total to $14,400. “This should allow them to retire the debt within six or seven years.”

Further, they stop making RESP contributions once they have maxed out their Canada Education Savings Grant (CESG). “This reduces total contributions from $150,000 to $108,000,” the planner says. They can achieve this within another two-and-a-half years. (While taxpayers can contribute up to $50,000 a child to an RESP, the contributions needed to get the maximum CESG of $7,200 a child are $36,000, or $108,000 for three children. Their contributions to date are about $78,000, with the balance in the RESP being the CESG grant plus growth of the investments.)

Then they redirect the $13,800 that was going to the RESP to Karen’s registered retirement savings plans (RRSPs), starting with her spousal plans. This will yield a tax saving of $4,000 to $6,000 a year that can go to other financial goals.

“In nine years, several things happen,” the planner says. Karen retires and the last child leaves home for university or college. They have no more debt. Karen’s lost employment income (about $54,000 after tax) is at least partly offset by a combination of no debt payment ($14,400), reduced sports activities ($10,000), lower clothing expenses ($5,000), lower vehicle-operating expenses ($8,000) and reduced RRSP contributions ($7,000), for a total of $44,400. “The difference can be made up in small ways, such as part-time work.”

Dan continues working until he turns 60 in 2033. Karen begins collecting Canada Pension Plan and Old Age Security benefits, and Dan takes reduced CPP.

“With these steps implemented, they can achieve a lifetime retirement income of $52,660 a year after tax ($60,000 before tax), indexed to inflation,” Mr. Cherney says. That’s far short of their goal. To reach their initial target of $68,650 a year after tax, Karen would have to work to age 65. She’d retire at the same time as Dan. In the meantime, she would have to “save every penny of her take-home pay, first in their RRSPs and then in their TFSAs,” the planner says.

In addition, when they retire they would have to downsize their home to one that is 40 per cent less expensive and likely move to some locale farther from Toronto. They would then invest the net difference (after all costs) of $300,000 in current dollars in their TFSAs and non-registered portfolio.

If Karen and Dan are content with the lower after-tax income of $52,660 and staggered retirement, they don’t have to downsize, the planner says.

Client situation

The people: Dan and Karen and their three children

The problem: How can they best use their inheritance and meet a raft of competing financial obligations?

The plan: Focus first on paying down the line of credit. Contribute only enough to RESP to take full advantage of federal grant money. Consider working longer and downsizing to a less-expensive home.

The payoff: Their retirement spending goal achieved

Monthly net income: $11,565

Assets: Cash $800; her locked-in retirement account $31,645; his LIRA $62,760; her spousal RRSPs $126,755; his RRSP $123,900; her TFSA $6,245; his TFSA $160; his group RRSP at work $40,000; RESP $119,425; residence $850,000. Total: $1.36-million

Monthly outlays: Property tax $385; home insurance $145; utilities $265; maintenance and repair $465; vehicle insurance $145; fuel $495; vehicle maintenance $980; groceries $1,215; clothing, shoes $805; line of credit $700; gifts $315; vacations, travel $350; personal care $25; dining out, entertainment $655; golf $585; pet food, vet bills $270; children’s sports, hobbies $910; life, health insurance $170; cellphones $145; internet $55; RRSPs $400; RESP $1,150; TFSA $500. Total: $11,130

Liabilities: HELOC $181,655

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Some details may be changed to protect the privacy of the persons profiled.

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