A plan for playing catch-up

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Stella and Stan chose to be a one-income family for seven years while their son was young so they fell behind a bit financially. Soon after, they bought a more expensive home, using their savings to keep the mortgage to a minimum.

"As a result, at age 49, we find ourselves behind with our retirement and education savings and would like to know the best course of action to catch up now that we are in the position to make monthly investments," Stella writes in an e-mail. They would like to retire in 11 years when they are age 60.

"We are in desperate need of a plan."

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They are both working and earning good money, with a pre-tax family income of $220,000 plus bonuses and incentives. Their house in the Halifax area is worth $450,000 with a mortgage of $154,000 and they have substantial savings. He works in sales, she works in financial services.

Their son's grandparents have $50,000 invested to help with his education. He is now 13.

We asked Kurt Rosentreter, a senior financial adviser at Manulife Securities in Toronto, to look at the couple's situation.

What our Expert Says Stella and Stan "have an income level that most Canadians would kill for," Mr. Rosentreter says. "They should be able to achieve all of their goals," he adds. "It all comes down to disciplined, controlled spending."

As it stands, their expenses add up to $10,700 a month - virtually all of their after-tax income. They don't seem to have a good handle on where the money is going. This is apparent from Stella's cash flow statement, which shows $2,000 in the "other expenses" category. The number, Stella explains, is for household expenses, home and car repair and maintenance and "probably the original percentage for other areas was a bit low."

"Step 1: Cut your spending," Mr. Rosentreter says flatly. "Make a monthly budget and stick to it."

Stan should use his annual bonus - which is in the $20,000 range - to pay off their line of credit, and then step up mortgage repayments. "General rule: mortgages should be paid off by age 55 at the latest," the planner says.

Given their lifestyle, he recommends they strive to save $1.5-million before they retire. So far, their savings add up to $550,000. With $18,000 a year going into their company registered savings plans, $350 a month into RRSPs, and the couple saving their bonuses and long-term incentives of about $20,000 a year, Mr. Rosentreter estimates they'll be able to reach that goal over the next 11 years, assuming a conservative average annual rate of return of 5 per cent.

However, since their employers may not always pay such large bonuses and incentives, Mr. Rosentreter suggests they increase their personal savings, maximize their RRSP contribution room each year as well as their tax-free savings accounts.

As for their son's post-secondary education, there is already $50,000 in place thanks to his grandparents. The couple has $2,300 in a registered education savings plan and are adding $540 a month starting this year.

The monthly RESP savings should be adjusted to equal $5,000 a year, which will entitle them to a $1,000 government grant, Mr. Rosentreter advises.

An undergraduate degree for a child living away from home could easily cost $80,000.

"With $50,000 plus $2,300 saved already and new annual savings of $5,000 a year, they are in a position to cover all the costs," he says. Because of the short time horizon before their son could start his post-secondary education, the couple needs to "park all the cash in bonds and short-term cash instruments with no volatility," he advises. "Stay away from bond mutual funds."

Stella and Stan wonder whether they should be saving first or paying down their debts. It depends on what interest rate they are paying on their debt and how it compares to what they could make by investing, he says. They are paying interest of 3.89 per cent on their mortgage. (Investment returns, it should be noted, are not guaranteed.)

Finally, the couple should improve what appears to be some bad financial habits, the planner says.

"Stop using debt like a bank account - the line of credit and the car loan. Save in advance for future needs," he says. They can start by building a three-month emergency fund in a savings account that is separate from their regular accounts.

"Create a savings account to save for vacations, home renovations, new vehicles, Christmas," he says. "Set up an automatic savings plan from your bank account for as little as $25 a month and start getting ahead better."

Finally, as Stan's long-term incentive plan vests, he should consider selling some or all of his holdings to pay down debt or to diversify his investment portfolio. The money could also be used to catch up on unused RRSP and TFSA contribution room, Mr. Rosentreter notes. "Then take the tax refunds and pay down debt even faster."

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Special to The Globe and Mail

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