Finding funds for retirement
Seeking guidance on how best to save for the future.
In our Smart Money series, #MillennialMoney, we ask people living in the Greater Toronto Area to record every penny they spend in a typical week. Then, using tips from a financial adviser, we challenge them to cut their spending the following week so they can save more money. Will they fail or succeed?
At 31, Tess has finally finished years of dental school and is pursuing her career as a dentist in Toronto — which offers the high yearly salary of $140,000 a year. She recognizes that it should be no problem saving up for a home with income like that, but currently her life is in transition.
“Last year, my husband, Jin, moved to the U.S. to complete a one-year medical fellowship,” Tess says. This means that for now she’s on her own as she makes concrete savings plans for her future, which includes buying a home where they can settle and start a family soon.
At the moment, Tess is paying more than $2,300 on rent alone and would like to start putting that money toward a real estate investment.
“We would also like to start saving for retirement but have no idea where to begin,” Tess adds.
On a typical day, Tess has a quick breakfast at home before heading to work.“I try to bring lunch on most days,” Tess says. “Once a week I may pick up fast food from McDonald’s which is next to work for lunch.”
On the average weekend, prior to the COVID-19 restrictions, Tess would meet up with her friends once or twice, spending around $30 per meal. The rest of time off she spends doing errands like groceries and meal prep for the week. Also, she’ll sneak in a yoga class or a workout once or twice.
Having lived in Toronto since 2015, Tess says she and her partner want to stay in the GTA to remain close to family.
We asked Tess to share her daily expenditures to get a better idea of her financial habits.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., lays down the advice for Tess.
› She has pretty good cash flow with over $3,000 of estimated monthly savings potential, even after putting aside money for vacations. She has a generous $700 monthly travel budget.
› Given her high income, Tess can really benefit from RRSP contributions. There is only so much money she can potentially take out of her RRSP for her goal of a down payment — the limit is $35,000 — but she’s in a 43 per cent marginal tax bracket, so contributing will save her $43 of tax for every $100 contributed.
› Her savings potential means she should have enough cash flow to contribute to her RRSP and her TFSA, which she should definitely be building up.
› Tess has high insurance costs: $633 per month. I’d be interested to know what coverage she has. She should have professional liability insurance. Personally, she should have disability and possibly critical-illness insurance. Life insurance is less important given that she has no dependents. Her disability coverage should ideally be the “own occupation” variety, so that if she cannot practise dentistry due to disability, her income will be replaced. The terms of a disability policy are really important for a dentist, to ensure the coverage can increase with their income over time and make inflationary adjustments during a disability.
› Tess may have the opportunity to incorporate her dental practice at some point and establish a professional corporation. There are many tax, investment, insurance and estate-planning opportunities to consider for a young professional who can incorporate — it’s a great planning tool in the right circumstances.
› One of Tess’s biggest challenges over time may be avoiding the lifestyle creep that can happen as her income increases during her career. Having a high income can often lead to more discretionary spending, and over time discretionary spending can turn into perceived necessity. Strategies like her budgeting and meal prepping will help her live below her means and balance living for today and saving for tomorrow.
How she thinks she did: Obviously, spending less is great, she says, but the biggest update came following the arrival of the pandemic, which brought her husband home early from his fellowship: they decided to go ahead and buy a house! “We’re excited to start this new chapter of our life!”
In doing the #MillennialMoney challenge, Tess was also able to see that her day-to-day spending was relatively reasonable compared with her income. There was also an extra $600 to $800 saved during lockdown restrictions
Take-aways: Regarding longer-term advice, Tess’s main take-away from the money coach is to contribute more to her RRSPs. This, she says, will give her security for retirement now that she’s already gone ahead and purchased her home.
More specifically, Tess is leaving this exercise with a plan to look into financials to prepare for buying multiple vehicles, as she and her husband have bought a home outside the downtown core. “I need to look into investment options to take increased advantage of my TFSA and RRSP for the future.”
Final takeaway? COVID-19 has given her a new perspective. “COVID-19 has reiterated the importance of saving. Take advantage when cash flow is good to set aside an emergency fund,” she says.