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Cassie and Cameron are both age 48 and earn a combined $198,000 a year in the education field. They have two children, 15 and 18. The older child will be starting university this fall.

Because Cassie has a chronic illness that could worsen over time, they hope to retire from work in eight years and spend the first few years travelling. Their retirement spending goal is $75,000 a year after tax. Both have defined benefit pension plans.

In the meantime, they are paying down their loans and saving for their children’s higher education.

“While our home in [the Greater Toronto Area] has tripled in value since we bought it, we had to take an additional small mortgage as well as a line of credit to address important structural renovations,” Cameron writes in an e-mail.

“We’ve been working at reducing our mortgage and saving in our [registered education savings plan], but the debt doesn’t seem to shrink,” he writes.

They wonder whether Cassie should take the lump-sum commuted value of her pension rather than a monthly payout to free up more money for travel and perhaps leave a larger estate.

In the meantime, they want to add a small pool or swim spa ($25,000 to $50,000) to help relieve Cassie’s symptoms, and they’ll need to replace one of their cars soon ($30,000).

“What changes would make the best of our situation?”

We asked Stephanie Douglas, partner and portfolio manager at Harris Douglas Asset Management in Toronto, to look at Cameron and Cassie’s situation. Ms. Douglas also holds the certified financial planner (CFP) designation.

What the expert says

Cassie and Cameron want to stay in their house for at least the next 15 years, Ms. Douglas says. They plan to travel at least once or twice a year for the first few years with an estimated travel budget of $10,000 to $12,000 a year, in addition to the $75,000.

Cameron and Cassie’s spending target will have increased to $88,000 (with 2 per cent inflation) by the time Cameron retires in 2027, the planner notes. They can achieve this goal without having to sell their home thanks to their pension plans. Cameron will get a pension of $55,761 a year starting in 2027. Cassie will get $54,878 starting in 2025, when she retires. This will be more than enough to cover their living expenses. They will begin collecting Canada Pension Plan and Old Age Security benefits at age 65.

“However, they would need to draw from their assets in the first five years of retirement to support their travel goal,” Ms Douglas says. To this end, she recommends they try to save more while they are working.

Her forecast assumes Cameron and Cassie live to age 95.

With their current mortgage payments, they would not have their debt paid off until 2042, she says. If they want to pay it off before they retire, they will have to increase their payments. They have been focusing on paying down their second mortgage, but she suggests they put more money toward their line of credit instead because it has a higher interest rate.

“Once they have paid off the mortgages and line of credit, they could put more funds toward savings, which could help fund their travel spending goal,” the planner says.

“I suggest they look through their budget and find areas where they could reduce costs while they are still working,” Ms. Douglas says; for example, cutting back on eating out and/or alcohol could save them up to $6,000 annually. They could also consider trimming their travel budget for the next few years.

“This would also help them save for their short-term goals of building a pool and buying a new vehicle instead of having to liquidate their savings.”

With regards to their investments, Cameron and Cassie should take a closer look at the fees they are being charged on their mutual funds – some as much as 2.46 per cent. They should aim to keep their fees less than 1.5 per cent, she says.

“At their level of investable assets, they should consider low-fee exchange-traded funds that are in line with their risk tolerance." As it is, Cameron has a registered retirement savings plan that is almost 60 per cent in cash, and a tax-free savings account with a value of roughly $21,000 that is all in one security, Ms. Douglas notes. “This would represent almost 40 per cent of their total investable assets [excluding their RESP account] in one security.”

She suggests they look at diversifying their investments to reduce the risk in their portfolio, and that they consolidate their accounts in one place to make them easier to manage.

Cameron and Cassie are contributing $5,040 a year to their daughter’s RESP, more than is needed to take advantage of the Canada Education Savings Grant. (They get a grant of $500 a year on the first $2,500 they deposit.) It would be more tax-effective to save the extra funds in a TFSA instead, she says.

While the extra funds would grow tax-free in the RESP account and contributions can be withdrawn tax-free, any income earned would be taxed when the funds are eventually withdrawn from the account, she says. If they put the extra funds into a TFSA instead, they would not have to pay any tax on withdrawals.

Cassie wonders whether she should take the commuted value of her pension. She’d need a rate of return of about 5 per cent a year to avoid a shortfall if she lives to age 95, the planner says. “Obviously, a higher rate of return would make taking the commuted value more appealing, but this comes with an increase in risk.” Given their limited investment knowledge, Ms. Douglas is concerned they may not be comfortable with the ups and downs of the financial markets.

As for leaving a larger estate, if Cassie were to die first, Cameron would have a higher income from receiving 60 per cent of her pension – the survivor benefit – than if he received funds from Cassie’s lump-sum pension money, the planner says. The funds from her pension plan could be transferred tax-free to a life income fund for Cameron. The planner assumes his spending would be reduced to 70 per cent of their joint retirement spending target.

Because Cameron would be withdrawing a significant amount from this LIF if he lived to age 95, it would be worth roughly $100,000 at that point and would be fully taxable to his estate.

At age 95, they would still have their house, which would be worth about $2-million.

Client situation

The people: Cameron and Cassie, both 48

The problem: What can they do to ensure they can afford both their short- and longer-term goals?

The plan: Look closely at their budget to find ways to cut back. Be more proactive with their investment strategy to lower costs and improve net returns.

The payoff: With luck, the retirement they hope for, with $10,000 to $12,000 annually for travel in the first few years.

Monthly net income: $12,833

Assets: House $800,000; combined RRSPs $35,974; Cassie’s retirement gratuity $37,300; Cameron’s TFSA $21,000; RESP $70,100; commuted value of Cameron’s pension plan $516,919; commuted value of Cassie’s pension plan $737,339; cash $3,000. Total: $2.2-million

Monthly distributions: Mortgage, property tax, property insurance, utilities and repairs $3,481; transportation, gas, car insurance, maintenance, parking $895; groceries $785; clothing $336; vacation $1,400; gifts $85; entertainment, dining out, alcohol, hobbies, personal care $810; pet expenses $130; alcohol and tobacco $275; health-care expenses $472; life insurance $171; line of credit $500; phone, internet, cable $411; charitable donation $25; other discretionary $150; RRSP, RESP and pension plan contributions $2,490. Total: $12,416

Liabilities: First mortgage $87,222; second mortgage $79,463; line of credit $45,000. Total: $211,685

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

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