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For Financial Facelift

Kevin Van Paassen/The Globe and Mail

For city-dwellers such as Iris and Ryan, the birth of a first child often prompts thoughts of leaving urban living behind for less-expensive digs in a small town where they will be closer to family.

But is it worth the likely drop in income and diminished job prospects?

Iris, who is on mat leave with a three-month old baby, has a management job grossing $107,000 a year. Ryan brings in $50,000 annually working as a house painter. They are planning to have a second child and wonder if Iris can afford to work part time to spend more time with the children.

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She is 34, he is 38.

"We are considering moving to a smaller community to be closer to family and use the equity in our home to be either mortgage-free or close to it," Ryan writes in an e-mail. "Is this a good idea?" he asks. They value their home at $675,000. They bring in $8,400 a year renting out their basement apartment, which they would continue to do in their new house if they moved.

They are concerned about earning and saving enough to pay for their children's higher education and to maintain their current standard of living when they retire. Neither has a work pension plan. "How much will we need to set aside annually?" Ryan asks. He is hoping to retire by age 60.

We asked Jason Pereira, a financial planner and investment adviser at Bennett March/IPC Investment Corp. in Toronto, to look at Iris and Ryan's situation.

What the expert says

Selling their home and moving to a smaller town makes sense financially provided they can find work in the new location, Mr. Pereira says. It would also enable Iris and Ryan to pay down a fair amount of debt.

But there is a risk: It will lower their income substantially and may limit their career opportunities, the adviser says.

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"If Iris is confident she can earn the $50,000 that she has projected, then they can be confident the move will not affect their ability to meet their desired goals," he says.

They can use some of the proceeds from the house sale to pay off their debts and help fund their savings, Mr. Pereira says. Their new home will cost about $500,000, so they will have to take a mortgage of about $200,000.

"Once the move has been made, they can use all cash flow [after RRSP and registered education saving plan contributions] to pay down the mortgage. They will be debt-free in 11 years," he estimates. He suggests they contribute $5,000 a year to each of their registered retirement savings plans (currently only Iris has one), rising with inflation. Once the mortgage has been paid off, any free cash flow should go first to their tax-free savings accounts (yet to be opened) and then to a joint investment account.

By the time they retire in 2036, they should have $840,000 in their RRSPs, $523,000 in their TFSAs and $80,710 in their joint investment account, Mr. Pereira estimates. This assumes an average annual rate of return on their investments of 7.4 per cent, or 4.27 per cent after subtracting inflation.

He recommends they open an RESP to take full advantage of the federal education savings grant, contributing $5,000 in 2015 to make up for not contributing in 2014. This will result in a government grant of $1,000. (The grant is 20 per cent for the first $2,500 you save in your child's RESP each year, or $500, up to a maximum of $7,200 for each child.)

Starting in 2016, they should contribute $2,500 a year until the child reaches age 14 (that's per child, taking into account their plans for a second). The year after that, he suggests they contribute $1,000 each. This will bring the total for each child up to $7,200.

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Assuming the savings grow by 5 per cent a year, the children should have about $160,000 available to them. This will cover about three and a quarter years of schooling, so the rest could come from Iris and Ryan's TFSAs or general cash flow. Mr. Pereira's calculations assume tuition of $8,000 a year, rising by 8 per cent a year, and expenses of $1,000 a month for each child.

So can they get by if Iris makes $50,000 a year in the new location? The calculations assume Ryan makes $50,000 a year after the move as well.

Yes, their goals are achievable, Mr. Pereira says. For Iris, to work part-time in their city location could put a squeeze on their finances and endanger their goals, he adds. He notes they are short on insurance and recommends they get as much disability insurance as they can, especially since Iris is planning to change jobs and her new employer may not offer it.


Client situation:

The people: Iris, 34, Ryan, 38, and their three-month-old child.

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The problem: Does it make sense to move to a smaller town to reduce their debt load sooner and improve their cash flow?

The plan: Sell the city home and buy in the smaller town. Pay down all debt except for a $200,000 mortgage. Plan to have the mortgage paid off in 11 years or so.

The payoff: Plenty of money for the children's education and their own retirement.

Monthly net income: $5,885

Assets: Cash $13,000; her RRSP $45,000; residence $675,000. Total: $733,000

Monthly disbursements: Mortgage $1,300; property tax, insurance, utilities $650; transportation $430; groceries, clothing $450; home equity line of credit $200; gifts $50; vacation, travel $200; dining, drinks, entertainment $350; clubs, sports $140; grooming $25; pets $75; other personal discretionary $100; health and dental insurance $125; cellphones $125; TV, Internet $115. Total: $4,335

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Liabilities: Mortgage $280,000; HELOC $28,000; family loan $25,000. Total: $333,000

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