National Post (Latest Edition) - Financial Post Magazine - - COL­UMNS & DE­PART­MENTS -

A young cou­ple tries to bal­ance sav­ing for their re­tire­ment and chil­dren’s ed­u­ca­tion with present needs.

Far from the crowds of down­town Toronto, Bill and Toni Jaines,* both 32, face the usual chal­lenges of young fam­i­lies. On a monthly net in­come of $8,800 , they have to pay down their mort­gage, pro­vide money for their chil­dren’s post-sec­ondary ed­u­ca­tion and build up a re­tire­ment fund. The cou­ple has been mar­ried for five years and de­cided last year to buy a house and start a fam­ily. Their first child was born last year and an­other is due soon. “We want to live within our means, have as much op­por­tu­nity as pos­si­ble for our chil­dren and to save for our re­tire­ment,” Bill says.

Fi­nan­cial plan­ning, how­ever, is com­pli­cated by the na­ture of Bill and Toni’s in­come. Bill makes $94,800 a year be­fore tax as an en­gi­neer­ing con­sul­tant for a com­pany that does not match ei­ther pen­sion or RRSP con­tri­bu­tions. Toni, a hu­man re­sources co­or­di­na­tor, works for a com­pany that pro­vides a de­fined-ben­e­fit pen­sion, but her present gross in­come of $50,400 a year will not gen­er­ate a pen­sion suf­fi­cient for the cou­ple’s re­tire­ment. Jug­gling in­come and their bud­get is go­ing to be es­sen­tial.

“They can have it all, but only if they plan how they man­age the stages of their lives” says Derek Mo­ran, head of Smarter Fi­nan­cial Plan­ning Ltd. in Kelowna, B.C. “Debt re­duc­tion has to come first, then they can in­vest in their chil­drens’ ed­u­ca­tions and in their re­tire­ment. Fru­gal spend­ing leaves a sub­stan­tial monthly surplus for sav­ings. More­over, time is on their side. They are tak­ing an ac­tive in­ter­est in their fi­nan­cial fu­tures. Most peo­ple wait un­til it is late. Or too late.”

The cou­ple’s big­gest debt is their $358,000 mort­gage with 23.5 years to go un­til it is paid off at a cur­rent monthly rate of $1,675 . The mort­gage has a present in­ter­est rate of 2.89% and should be paid off by the time they are 56. But if in­ter­est rates rise to 5%, as they even­tu­ally will, Mo­ran es­ti­mates the Jaines will ei­ther have to cough up a third more money each month or ex­tend their amor­ti­za­tion by up to seven years. Such an in­crease may prove prob­lem­atic since there will be in­creas­ing pres­sure on the fam­ily’s in­come as the kids grow up.

Toni makes $3,400 a month af­ter tax when she is work­ing, but she will only re­ceive $1,960 a month in ma­ter­nity ben­e­fits from Fe­bru­ary to July this year, af­ter which

she will re­turn to full-time em­ploy­ment. Bill brings home $5,400 a month af­ter tax. They save about $1,150 when both are work­ing and they have plenty of RRSP space to put that into since Bill cur­rently con­trib­utes just $300 a month even though his an­nual limit is $17,000 and he has col­lected $124,000 of avail­able RRSP space. If Bill puts $1,500 more each month into the RRSP ac­count, he would ac­cu­mu­late $18,000 a year on top of the present bal­ance of $20,000 . His tax re­fund would be about 30% or $5,400 , which could go to their mort­gage debt, short­en­ing the amor­ti­za­tion length to 17.5 years and sav­ing about $42,000 of in­ter­est, Mo­ran es­ti­mates.

The prob­lem, of course, is to find or gen­er­ate that ex­tra money for RRSP in­vest­ment and per­haps a Tax-Free Sav­ings Ac­count. One op­tion is to use the house to gen­er­ate the money by rent­ing out the base­ment (see side­bar). If they can find the money, their RRSP would build up to $800,000 just be­fore Bill turns 60, as­sum­ing steady growth at 3% af­ter in­fla­tion. If they spend this RRSP bal­ance over 30 years un­til they are 90, it would pro­vide an an­nual pre-tax in­come of $39,600 in 2015 dol­lars.

But they also have to con­trib­ute to their chil­drens’ RESP . They have al­ready in­vested $4,000 in their six-month-old child’s RESP and their an­nual con­tri­bu­tion limit will dou­ble to $5,000 when their sec­ond child is born. If they con­trib­ute the max­i­mum for the next 17 years, adding $1,000 in CESG bonuses, and get a 3% re­turn af­ter in­fla­tion, the fund will have $141,000 , enough for tu­ition and books for two four-year univer­sity ed­u­ca­tions if the kids live at home.

Once the Jaines’ chil­dren move out, and as­sum­ing they have paid off their home, their monthly spend­ing of $8,700 would be halved to $3,900 a month. Their ex­penses can be cov­ered if they play their cards right. If Bill and Toni work to age 60, but post­pone tak­ing CPP un­til age 65, then at 60 they would have Toni’s de­fined-ben­e­fit pen­sion of $25,200 (25 years times 2% of fi­nal five years’ wage) and Bill’s $39,600 an­nual RRSP pay­out for a to­tal pre-tax in­come of $64,800 . If in­come is split, they would have $4,750 a month to spend af­ter 12% av­er­age in­come tax.

At 65, each could add Canada Pen­sion Plan ben­e­fits of an es­ti­mated $11,214 for a to­tal in­come of $87,228 be­fore tax. With splits of el­i­gi­ble pen­sion and in­vest­ment in­come, they would have $6,250 to spend each month af­ter 14% av­er­age in­come tax. At 67, each could be­gin Old Age Se­cu­rity and re­ceive, us­ing present rates, $6,765 a year, mak­ing to­tal in­come $100,758 be­fore tax. Af­ter pay­ing 16% av­er­age in­come tax on el­i­gi­ble pen­sion and in­vest­ment in­come, they would have about $7,050 a month to spend. There would be a sub­stan­tial surplus for travel, help­ing their chil­dren or char­i­ta­ble do­na­tions.

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