Funding family’s future
A couple of teachers get a lesson in how to strategically invest
The people
Angela and Roy are in their early 30s and work as primary school teachers in Toronto. They collectively earn about $180,000 a year, have two children under age 4 and plan to continue working for another 20 years.
The problem
While the couple save $1,000 a month, they are clueless about investments. They need a strategy for how to get started, the best way to save for their childrens’ education. They have reached out to bank advisers in the past but heard only a sales pitch for mutual funds.
The particulars:
Assets: House: $735,000 Roy’s RRSP: $1,700 Annual savings: $12,000 Liabilities: Mortgage: $392,700
The plan
While Roy and Angela are well off financially in terms of cash flow and pensions, they can do much better with their surplus income, says Robyn Thompson, a fee-based financial planner at Castlemark Wealth Management in Toronto.
The couple feel they want to take on medium risk in their investment portfolio, but want to be better informed about their choices.
For medium-risk investors, Thompson recommends a broad asset mix of 10 per cent cash and riskfree holdings, 50 per cent fixed-income, and 40 per cent dividend-paying equities.
“Historically, the average annualized return for a portfolio with this composition over the past 20 years is 6.67 per cent,” she notes.
Since their defined benefit pension plans will take up most of their Registered Retirement Savings Plan contribution room each year, Thompson recommends Angela and Roy hold their investments in Tax Free Savings Accounts (TFSA).
She suggests they contribute $9,000 a year to their TFSAs until they have maximized their contribution room. Combined, Angela and Roy have $104,000 worth of room in 2017, or $52,000 each, with $5,500 per person annually (indexed) going forward. If they do this, the couple will have approximately $491,500 saved up, assuming the 6.67 per cent annual growth rate of a balanced portfolio.
Thompson notes that if they invested this money in a non-registered or cash account instead, they would have just $358,200, assuming a 35 per cent marginal tax.
“By utilizing TFSAs, they will not only have saved taxes and increased their net worth, but will have built up a source of funds they can use in case of emergencies, unplanned expenses, or renovations to their home,” she says.
The remaining $3,000 of their annual savings should be put toward Registered Education Savings Plans for their children. At this time, two children going to university for four years at age18 and living at home, will cost about $100,000, Thompson says.
“If they keep up with these annual contributions they will accumulate close to $124,000, which includes the $7,200 per child from the Canada Education Savings Grant,” she adds.
Between their workplace pensions, TFSA portfolios and government entitlements like Canada Pension Plan and Old Age Security, Angela and Roy’s retirement income will more than exceed their lifestyle requirements.
But plans can fall awry when estate planning is not completed. Angela and Roy do not have wills, guardians for their minor child, or powers of attorney for property or personal care, and should rectify this immediately. If one or both of them were to pass away suddenly without these documents in place, it means a higher portion of their assets go to the government in the form of taxes.
More important, without a guardian assigned, the provincial government will make the decision for them. “This is never a good outcome,” Thompson says.
The couple is also underinsured. Angela and Roy are both covered for life insurance at three times their annual salary. Thompson says this amount would not be enough coverage to pay off the mortgage and provide income top-up for the surviving spouse.
She suggests they purchase some additional life insurance not connected to their employer’s group insurance.
“This way, even if they change jobs or otherwise are no longer eligible for the employer’s group insurance, they will not lose coverage,” Thompson says.
At their respective ages, a term-20 insurance policy is relatively cheap and is money well spent to ensure peace of mind. A premium for Angela, for instance, would be around $500 a year, assuming there are no health complications.
The couple may also want to consider disability or critical illness insurance since those issues can also derail any financial plan.
To assist them with executing a plan, they should look for an adviser who has at least one designation.
At this time, two children going to university for four years at age 18 and living at home, will cost about $100,000