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A family moves back to Canada: 'We don't know where to begin'

Kenneth Armstrong/The Globe and Mail

When they moved back to Canada from the United States last year, Pamela and Alex found they needed a whole new financial plan. She is 47, he is 50. They have two children, ages 9 and 13.

They both work in music education, bringing in a combined $171,360 a year before tax including fees from private teaching.

"We are trying to get a handle on how we're doing," Alex writes in an e-mail, "specifically, what we're not doing that we should be doing." They know they need to set aside money for their children's higher education immediately, "but we're new to the system and we don't know where to begin or how much we should be putting away each month."

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They hope their children will follow in their career footsteps, "so we are investing heavily in instruction and intensive music camps," Alex writes. Their short-term goals are the children's education fund, adding a second bathroom to their small-town Manitoba house, setting aside an emergency fund of $80,000 and replacing their two vehicles.

They aim to retire from work in their early to mid-60s with $75,000 a year in spending.

We asked Matthew Ardrey, manager of financial planning at T.E. Wealth in Toronto, to look at Alex and Pamela's situation.

What the expert says

Spending 22 years working in another country has created some planning challenges for this couple, Mr. Ardrey says. First, they need to open a registered education savings plan (RESP) and make catch-up contributions of $50,000 for each child. This works out slightly better than spreading the contributions out to maximize the federal education savings grant, he says. After that, they will need to save nearly $2,000 a year outside of the RESP until their younger child is finished school, he says. That assumes education costs of $20,000 a year for each child, a return on investments of 5 per cent a year and an inflation rate of 2 per cent.

Fortunately, Alex and Pamela have $225,000 in cash from the sale of their previous house. Of the $125,000 remaining after the RESP catch up, they want to set aside $80,000 for an emergency fund, leaving $45,000.

They are aiming to have their $258,000 mortgage paid off by 2023. They can use the $45,000 as part of a lump sum payment when the mortgage comes up for renewal in 2018, Mr. Ardrey says. To pay it off by 2023, they would need a total lump-sum payment of $150,000.

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"They would need to save an additional $105,000 over four years, or $26,250 a year," he says. This money would come from their surplus monthly income of $3,750. The planner's calculations assume the interest rate rises to 5.5 per cent when the mortgage comes up for renewal.

The remaining surplus could go to a new car payment of $350 a month, $600 a month to Alex's registered retirement savings plan and $450 a month to Pamela's RRSP, thus maximizing their RRSP savings.

Alex and Pamela plan to retire when Alex is age 65, Mr. Ardrey says. At 65, Alex will get Canada Pension Plan benefits of $483 a month and Pamela $264 a month. At 67, they will both get U.S. Social Security benefits, $1,565 a month for him and $540 a month for her. They will also get Old Age Security benefits.

Once they have made the lump-sum mortgage payments, they will have an additional $26,250 a year to save, the planner says. He suggests they use this first to contribute as much as possible to their tax-free savings plans, using the remainder to build their non-registered portfolios. When the mortgage has been fully paid off, they will have another $17,000 a year (starting in 2024) for non-registered investments.

According to Mr. Ardrey's assumptions, Alex and Pamela will be able to spend $87,500 in today's dollars when they retire at Alex's age 65. "This is a good cushion over their target," Mr. Ardrey says. That assumes a return on investment of 5 per cent a year and an inflation rate of 2 per cent.

They may decide they could get by with less of a cushion, in which case they could consider directing some of their retirement savings to their renovation goal at some point, the planner says.

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If they haven't already done so, Alex and Pamela should seek expert tax advice on repatriating their U.S. 401K plans to Canada, and on whether they will have to continue to file U.S. income tax returns, Mr. Ardrey says.

As their savings grow, Alex and Pamela should consider switching from mutual funds to an independent investment counsellor, he says.

"If they were able to save one percentage point in investing costs, this would save them about $5,000 a year currently and by the time they retire, almost $25,000 a year."

**

Client situation:

The people: Alex, 50, Pamela, 47, and their two children, 9 and 13.

The problem: How to organize their financial affairs now that they are back in Canada, including saving for their children's education, paying off their mortgage and planning for retirement.

The plan: Take $100,000 from the proceeds of their U.S. home sale and put it away in an RESP. Continue adding another $2,000 a year until the youngest child has finished school. Plan to make a big lump-sum payment when mortgage comes up for renewal in four years.

The payoff: All goals achieved and more.

Monthly net income: $10,675

Assets: Cash $225,000; his registered plan $302,880; her registered plan $165,348; his DC pension plan $22,000; residence $335,000. Total: $1.05-million.

Monthly disbursements: Mortgage $1,405; property tax $340; utilities $445; home insurance $130; maintenance, garden $130; transportation $495; groceries $1,000; clothing, dry cleaning $175; gifts, charity $265; vacation, travel $250, children's camps $390; children's activities $530; entertainment, grooming $305; dentists, drugstore $40; life insurance $45; cellphones $235; cable, Internet $85; pension plans $660. Total: $6,925

Liabilities: Mortgage $258,000 at 3.79 per cent

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com Some details may be changed to protect the privacy of the persons profiled.

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