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Pamela and Brad have no real financial worries but they wonder whether they could be doing things better. As it is, they are focusing mainly on paying down their debts.

They are both 38 with two children, ages 8 and 10. Brad, who works for a commercial airline, has a company pension plan. Pamela does not, although her private school employer matches contributions to her registered retirement savings plan. Together, they bring in about $165,000 a year before tax.

In the short term, they want to renovate their London, Ont., house at a cost of at least $60,000. They're not sure whether they are saving enough for the children's education, and ultimately, for their own retirement. Because the children attend the school where Pamela works, they get a break on tuition.

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Brad and Pamela have been paying extra on their mortgage, which has 13 years left to run. It is coming up for renewal soon and they wonder whether they should increase the loan amount to cover the renovations. They have also been striving to eliminate their car loan and line of credit, directing Brad's anticipated $4,000 tax refund and Pamela's $1,500 bonus to this end.

"Are we wise to increase our mortgage to do the renovations and decrease our mortgage payment, say to a 20-year amortization, but make a lump-sum payment at the end of each year?" Brad writes in an e-mail.

"How can we maximize our money to get the most tax back but still achieve our goals?" Brad asks, "contributing to RRSPs, RESPs, paying off the mortgage and still creating savings?"

We asked Linda Stalker, a financial planner at Henderson Partners Chartered Accountants of Oakville, Ont., to look at Pamela and Brad's situation.

What the expert says

Brad is fortunate in having a defined-benefit pension plan that could pay him about $100,000 a year when he retires, Ms. Stalker says. However, his employer is planning to switch to a defined-contribution pension plan, a move that could affect Brad's payout, so their desire to save more in their RRSPs is warranted.

If the couple are set on renovating, the planner says it's doable. Pamela and Brad can increase their mortgage by up to $66,000 without breaching the 80 per cent loan-to-value that would require expensive mortgage insurance, Ms. Stalker notes. Upping the mortgage makes sense given current low interest rates. If they find $60,000 is enough for the renovation, they could use the remaining $6,000 to pay down their line of credit, which carries a 6-per-cent interest rate.

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Pamela is contributing only $110 a month to her RRSP even though she has contribution room of about $675 a month. She should increase her contribution to $337 a month to take full advantage of her employer's matching contributions, Ms. Stalker says.

"By not contributing the maximum, Pamela is missing out on the employer's contribution of $4,050 a year." The planner's calculation is based on an allowable contribution of 18 per cent of Pamela's $45,000 salary, or $8,100, divided by two to reflect her share.

Brad and Pamela are right to be concerned about their RESP contributions, the planner says – they are contributing only $50 a month for each child. In doing so, they are not taking full advantage of the federal government's Canada Education Savings Grant. Under the program, the government kicks in 20 per cent of contributions to a registered education savings plan up to a maximum of $500 a year for each child. To take full advantage of the grant, they should contribute $2,500 a year for each child – more if they want to catch up on previous year's grants, Ms. Stalker says.

Taxpayers with unused room can contribute up to $5,000 a year for each child, but the most they can get in grant money while they are catching up is $1,000 a year for each child. The maximum amount of grant money available is $7,200 a child.

For their emergency fund, the couple should use their tax-free savings accounts. They each have $20,000 of contribution room.

If Brad and Pamela lengthen the amortization of their mortgage to 20 years and raise the principal to $328,000, their payments would be reduced to about $935 every two weeks, Ms. Stalker calculates. That assumes an interest rate of 5 per cent and no extra payments.

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"This would allow them to increase Pamela's RRSP contribution by $227 a month to maximize the employer's contribution, and to increase the RESP contribution by $315 a month to maximize the CESG for each child," she says. They would have another $237 a month to put away for a rainy day.

In short, while paying down debt is commendable, by focusing solely on that goal Pamela and Brad have been overlooking some important planning opportunities, the planner says.


The people

Brad and Pamela, 38, and their two children.

The problem

How to save and spend in the most tax-efficient way so they can meet their seemingly conflicting life goals.

The plan

Increase the mortgage to pay for the renovation, lengthen the amortization to lower the monthly payment and contribute the maximum to Pamela's RRSP and the children's RESPs to take advantage of employer contributions and the federal education grant.

The payoff

Knowing that they are getting the most for their money and ultimately, financial security.

Monthly net income



House $410,000; RRSPs $65,000; RESPs $18,000; value of Brad's pension plan $1,545,000. Total: $2,038,000.

Monthly distributions

Mortgage, incl. taxes $2,650; utilities $455; groceries $800; clothing $475; telecom $450; Brad's meals $400; car payment and maintenance $990; car insurance $280; loan payments $1,000; insurance $180; entertainment $500; TFSAs $500; RRSPs $700; RESPs $100. Total: $9,480


Mortgage $262,000; line of credit $20,000; car loan $16,000. Total: $298,000

Special to The Globe and Mail

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