Simon and Beth are both 30 years old with white-collar jobs in the private sector. She earns $94,000 a year including her bonus, while he makes $69,500.
“We spent our 20s paying down student loans, getting rid of debt and upgrading our skills to get fair-paying jobs,” Beth writes in an e-mail.
They recently moved into a new house in the Toronto area – bought with 20 per cent down – and started their new jobs. Both have work pension plans.
“We want to save as much on taxes in the long run as possible, and would rather use tax-free savings accounts [than RRSPs] to supplement our retirement plans,” Beth adds. Their goals are a mixture of short- and long-term: to save $1.6-million for retirement by age 60, to “comfortably afford” two children and pay for their education, to buy a new car and do some work on their house.
“Before we begin our savings journey again, we want to pay for the added costs of our new home, such as fencing, air conditioning, driveway extension and furniture,” Beth writes. They figure it will cost $20,000. They are also making extra payments on their mortgage.
We asked Jason Pereira, an investment adviser at Woodgate Financial Inc. & IPC Securities Corp., to look at Simon and Beth’s situation. Mr. Pereira holds the certified financial planner (CFP) designation.
What the expert says
Long term, Simon and Beth will be fine financially, Mr. Pereira says, but in the short-run things will be tight because they are just starting out in their careers and they plan to have a couple of children. In his calculations, Mr. Pereira provides for parental leave for Beth at the end of next year and again two years later.
He recommends Beth and Simon take full advantage of all matching contributions by their employers to their work pension plans.
“Not doing so is leaving free money on the table.” The same goes for Simon’s employee share-ownership plan, but: “As soon as [Simon’s] shares vest, sell them,” Mr. Pereira says. “Otherwise they will build far too much exposure to Simon’s employer.”
In his plan, Mr. Pereira increased the couple’s expenses to cover household maintenance, car purchases and child expenses, among other things. Extra mortgage payments will have to be put off for several years because of their other priorities, the planner says.
He assumes they contribute to a registered education-savings plan for their children’s postsecondary education, which is estimated to cost $30,000 a year for each child.
To cover their short-term costs – the new car, the reno, Beth’s maternity leaves – their savings will not be enough.
They will have to draw on their home-equity line of credit to supplement their income from 2018 to 2022, the planner says. This turns around the following year.
“As of 2023 surpluses are used to pay down debt.”
Once they have repaid the credit line, they can begin directing all their surplus cash flow to their tax-free savings accounts to the maximum allowed, and then to their non-registered joint investment portfolio. Focusing on TFSAs rather than RRSPs makes sense for Beth and Simon, Mr. Pereira says.
“Given their incomes and the level of contributions to workplace pension plans, they are already dropping their taxable income out of the top several tax brackets and are at an income where they are likely indifferent to whether they make RRSP or TFSA contributions,” he says.
Another advantage to TFSAs is that “between the renos, car purchases and possible children, they are going to need cash.”
They can withdraw money easily from TFSAs without incurring tax. Over time, their savings will grow.
While it is impossible to look with certainty into the distant future, Mr. Pereira’s plan shows the couple with a combined nest egg of $3.6-million by the time they retire at age 60, comprising their work pension plans, TFSAs and other non-registered investments.
Even if they spend more as time goes by, they will still have enough to retire comfortably, the planner says.
In their first year of retirement, they will get $24,968 in Canada Pension Plan benefits, $41,059 from Simon’s defined benefit pension plan, $69,192 from their DC plans; and $26,442 from their tax-free savings accounts, for a total of $161,661 a year.
Subtract income tax of $19,320 and they will be left with $142,341.
The people: Beth and Simon, both age 30
The problem: Mapping out a long-term financial plan that takes into account short-term spending needs and the cost of raising the two children they hope to have.
The plan: Take full advantage of employers’ matching contributions to their work plans. Contribute to TFSAs so money can be easily withdrawn when needed. Put off making extra payments to the mortgage. Be prepared to draw on credit line during parental leaves.
The payoff: The ability to juggle short- and long-term goals, and the realization they will not be able to achieve everything at once.
Monthly net income: $9,900
Assets: His profit-sharing plan $3,275; his RRSP $5,465; market value of defined-contribution pension (hers) $6,000; (his) $6,390; estimated present value of his defined-benefit pension plan negligible; residence $730,000. Total: $751,130
Monthly disbursements: Mortgage $1,970; property tax $500; water, sewer $50; home insurance $50; electricity $120; heating $100; security $40; transportation $695; groceries $600; clothing $250; gifts $150; grooming $150; clubs $150; dining, entertainment $650; subscriptions $50; vitamins $50; cellphones $140; Internet $80; group insurance $12; travel $335; student loan $125; car loan $380; pension-plan contributions $720. Total: $7,367 Surplus: $2,533
Liabilities: Mortgage $450,000; car loan $13,000; student loan $3,730. Total: $466,730
Special to The Globe and Mail (includes correction)
Published Friday, Dec. 16, 2016 3:11PM EST
Last updated Monday, Dec. 19, 2016 10:28AM EST