Antonia and Ronaldo, who make $505,000 a year, want to buy a vacation property in the United States and pay for their child's postgraduate education.Chris Bolin for The Globe and Mail
Antonia and Ronaldo have big salaries and big dreams. Ronaldo, 55, has his own communications company. Antonia, 52, works in the medical field. Together they earn $505,000 a year.
In a sense, they are starting over again - both have been married before. They have a one-year-old child. Like so many Canadians, Ronaldo and Antonia have made owning real estate a big part of their retirement plans.
In 2008, they built two houses in Calgary, planning to sell one to pay down the mortgage on the other. But the market weakened and they ended up renting out the second property. Now they'd like to sell it - even at a small loss - and buy a less expensive second property in California or Arizona (in the $400,000 to $450,000 range), which would leave them roughly $300,000 to put against the mortgage on their principal residence. They would use the U.S. rental home for one or two short vacations during the year.
"The objective would be to have the U.S. house pay for itself, or nearly so, and for its value to appreciate in the years ahead," Antonia writes in an e-mail.
Their financial goals include saving for their child's higher education, paying off their debts by the time Ronaldo retires in 10 years and saving for retirement. Antonia has a defined-benefit pension plan that will pay $40,835 a year if she stays in the same job until she retires at age 65; Ronaldo must rely on his own savings. They figure they'll need after-tax income of $120,000 a year.
We asked Ron Graham, financial planner at Ron Graham & Associates Ltd. in Edmonton, to look at Antonia and Ronaldo's situation.
What the expert says
As it stands, the couple's income will exceed their expenses by about $10,000 a month once Antonia goes back to work in June after a year's parental leave, so their goals - which require $9,000 a month - are achievable in theory, Mr. Graham says.
"This may leave them in a tight bind if unanticipated expenses arise," he notes. In reality, they may have to compromise.
Ronaldo and Antonia want to provide post-graduate education for their child. Mr. Graham assumes this will be six years of postsecondary education, which could cost up to $280,000 by the time the child is finished. They have already saved $4,000 and are adding another $2,520 a year to a registered education savings plan. They are contributing $210 a month to the RESP and getting a grant of $40, for a total of $250 per month. This is not enough. To have enough saved by the time Antonia turns 65, they have to save $950 a month, an increase of $700 a month.
Mr. Graham suggests they continue to contribute enough to the RESP to take full advantage of the federal government's Canadian Education Savings Grant of 20 per cent of contributions to a maximum of $7,200.
Then they could set up a separate investment account in their names in trust for the child and contribute $300 a month. Antonia could deposit her universal childcare benefit cheques (another $100 a month) as well as any gifts of money the child may receive over the years. The money could be invested in low-cost equity mutual funds, and any capital gains would be taxed in the hands of the child. If these investments earn more than 6 per cent, then they will have enough saved.
Ronaldo will be getting a lump sum payment of $130,000 from the sale of a former business. They should use the money first to catch up on unused contribution room in their registered retirement savings plans (about $66,000), then their tax-free savings accounts ($30,000), and then pay down debt. They should pay off their line of credit, car loan and RRSP loan as soon as possible because personal loans are not tax deductible, the planner notes. The net proceeds of the rental property sale should be used to pay off their line of credit and the balance to pay down the mortgage on their principal residence.
As for the U.S. investment property, buying it would add to their debt load, Mr. Graham notes. If they do decide to buy, they should do so entirely with borrowed money so the interest is deductible against income and make sure they understand all the various tax implications of renting in the United States.
At 65, Ronaldo and Antonia will each get $11,520 from the Canada Pension Plan and $6,292 from Old Age Security. Their savings are now $656,000. If their current investments grow at an average annual rate of 4 per cent, they will have about $971,000 in RRSPs and locked-in retirement accounts when Ronaldo reaches 65, Mr. Graham calculates.
To meet their retirement goals, they will have to save the maximum in their RRSPs ($560,000 more) and their TFSAs ($173,000 more) - plus an additional $680,000 of retirement capital outside of their tax-sheltered plans. Because they are already saving $28,800 a year, they will have to increase their retirement savings by $66,000 a year or $5,500 a month.
CLIENT SITUATION
The People
Antonia, 52, and Ronaldo, 55.
The Problem
Can they sell their Calgary rental property, buy a sunbelt house, save for their child's education, pay off debt and save enough for retirement?
The Plan
Make much larger contributions to Ronaldo's retirement savings, pay down loans, open trust account for child's education. Tread cautiously with U.S. property.
The Payoff
A comfortable life.
_________________
Monthly net income, including $3,600 rental income: $33,863
Assets: Cash $18,000; Antonia's RRSP $295,000; Ronaldo's RRSP $230,000; Antonia's pension $150,000; home $950,000; rental property $950,000; pending business sale proceeds $130,000.
Total: $2.7-million
Monthly disbursements
Ronaldo's work savings plan $600; his RRSP $1,000; child's RESP $210; stock plan $300; Antonia's pension plan $1,225; groceries $1,250; dining out $500; clothing $1,500; medical, dental $100; child care $2,400; tech tools $150; gifts $150; mortgages, taxes $6,715; home insurance $265; utilities $230; telecom $120; maintenance $200; furniture $200; vacations $800; entertainment $200; hobbies $75; fitness $50; children's activities $50; auto loan $915; auto expenses $510; loan payments $600; disability and life insurance $845; donations $175; memberships $600; office expenses $1,200; group insurance $300. Total: $23,435
Liabilities
Mortgages $1.3-million; line of credit $110,000; RRSP loan $7,000; car loan $30,000.
Total: $1.4-million
Special to The Globe and Mail
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