Nicholas is 31 with a good job and an apartment in downtown Toronto.
He hasn't started contributing to his work pension plan yet because he intends to cast it all away in three years or so and go back to the non-profit sector. When he does, he'll take a cut in pay from $100,000 plus bonus now to $75,000 or $80,000 a year.
"Will I be able to afford a home in Toronto and if so, when, and how?" Nicholas asks in an e-mail.
Longer term, he needs to save money for a "secure retirement" because he may not have a pension.
"What can I do over the next three years to maximize my savings and net worth, and how will my savings targets need to change once I'm earning a lower income to make home ownership [in downtown Toronto] and retirement possible?" he asks.
"Is there a benefit to joining the defined benefit pension plan while I'm still employed at this company?" he wonders.
We asked Charles Chan, a financial planner at fee-only E.E.S. Financial Services Ltd. in Markham, Ont., to look at Nicholas's situation.
What the expert says
First, Nicholas should join his company's defined-benefit pension plan, Mr. Chan says. Then, for the next three years, he should focus on putting money into it, his registered retirement savings plan and his tax-free savings account.
"The RRSP and DB contributions are crucial as he is probably in the highest tax bracket he will ever be in," the planner says. Nicholas also needs to build up savings outside his RRSP to put toward a down payment on a home.
The benefits of his work pension plan are many: forced savings, some contribution from his employer, professional investment management and perhaps the option to take the pension plan with him when he leaves in a locked-in retirement account, or at the very least to take a deferred pension.
The plan assumes Nicholas buys a condo in three years for about $369,000 (the average cost of a condo in Toronto). The closing costs are assumed to be $15,000, with a down payment of $74,000, for a total of $89,000 required up front. The numbers used for the condo purchase are meant to serve as an illustration rather than a forecast of what prices and interest rates will be three years from now.
In the meantime, Nicholas will contribute 18 per cent of his gross income to his RRSP while also topping up his TFSA. "He should still be able to save another $21,000 a year," the planner says.
The plan does not include a car, which Nicholas could not afford.
"If he wants a car, he'll have to look into his budget to see where he can cut."
If Nicholas saves at that pace from now to the time he is 35, he should have about $160,000 (in his TFSA and non-registered savings), Mr. Chan says.
Once he has bought the condo, the higher carrying costs, together with his lower salary, "will make his cash flow very tight," Mr. Chan says. His housing costs, including mortgage, will rise to about $2,147 a month from $950 a month now. That assumes a mortgage payment of $1,405 a month ($295,000 at 3.09 per cent fixed for five years and amortized over 25 years).
Nicholas will have about $70,000 left over, which the planner assumes will go to long-term savings. He will continue to contribute $3,000 a year to his RRSP. Nicholas won't be able to save much until his mortgage is paid off at age 60, the planner says.
"He'll have to work until he is 65."
When he retires, Nicholas will have about $500,000 in his non-registered account, mainly from the $70,000 growing at a steady 5 per cent a year for 30 years, and increased savings between age 60 and 65.
His RRSP will be worth about $740,000 by then (mainly from the $21,000 a year contributions he is going to make over the next four years starting this year and growing at 5 per cent for 35 years).
The RRSP, coupled with the non-registered account, should last him until age 82 or so, after which point he will have only his government benefits (Canada Pension Plan and Old Age Security) plus whatever small work pension he gets. He will still have his condo to fall back on.
The person: Nicholas, 31
The problem: Can he afford to take a lower paying job and still buy a home in pricey Toronto – and provide for his own retirement income?
The plan: Save as much as possible for the remaining years he is working, both in and out of his RRSP. Take advantage of his employer's pension plan.
The payoff: A better financial position from which to make future decisions.
Monthly net income: $5,690.
Assets: TFSA $18,690; RRSP $27,545. Total: $46,235.
Monthly disbursements: Rent $870; home insurance, maintenance $80; transit $75; maintaining company car $50; groceries $600; clothing $100; gifts $100; charitable $250; vacation, travel $200; dining, drinks, entertainment $600; pets $25; subscriptions $25; doctors, dentists $50; cellphone $85; RRSP $1,495; TFSA $975; group benefits $55. Total: $5,635.
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