Carol and Casey are in their mid-30s with good, professional jobs, two young children, a suburban home with a mortgage and a share in an investment condo.
He earned more than $130,000 last year. Her pay while she was working full time was $85,000. That has dropped to $15,130 while she is on maternity leave. With the children so young – ages 1 and 3 – she would like to take a couple more years off or work part time until they are in school.
Their main goals include funding two-thirds of their children's higher education, building an emergency fund, paying off their mortgage by 2030 and financing retirement by Casey's age 65. "There is also a desire to move to a property with a pool," Casey writes. They plan to rent out their condo once it is completed in 2018.
Carol contributes to a defined benefit pension plan, while Casey has a defined contribution pension plan – both pensions include employer contributions. He also contributes about $1,000 to an RRSP every month.
"We try to invest and save for the future, but have a hard time understanding what we should be doing in order to set us up for success in retirement," Casey writes. "Are we saving enough money for retirement?" Their spending target is $90,000 a year after tax.
We asked Andrea Thompson, a Certified Financial Planner (CFP) at Coleman Wealth of Raymond James in Toronto, to look at Casey and Carol's situation.
What the expert says
Casey and Carol should have no trouble retiring by Casey's age 65, Ms. Thompson says.
"It is very likely that they will be able to both retire at 55. However, due to the uncertainty that comes with a long time horizon, it should be monitored over time as their life evolves."
Here's how the numbers stack up. Carol is projected to get an annual pension of $44,833 at the age of 55, plus a bridge benefit of $6,699 until she is 65. They will begin collecting Canada Pension Plan benefits and Old Age Security at 65. By the time Casey is retired at 65, they will have saved nearly $1.6-million in non-registered and tax-free savings accounts. Their RRSP-defined contribution pension plan savings will have grown to $1.8-million, for a total of about $3.4-million. This is based on an investment return of 3.43 per cent a year, net of fees.
Ms. Thompson assumes Carol works part time for three years and then returns to work full time.
If Casey was also to retire at 55, they would have about $850,000 in non-registered/TFSA savings and about $940,000 in RRSP/defined contribution pension savings, for a total of nearly $1.8-million.
Casey and Carol should increase their contributions to their registered education savings plan to $350 a month. As it is, they would fall short of their goal of funding two-thirds of their children's higher education. That assumes costs of $15,000 a year for each child.
Carol and Casey's dream of buying a house with a pool in the $950,000 range would require them to take on an additional $200,000 in mortgage debt, Ms. Thompson says – 40 per cent more than they are carrying now. Once Carol has gone back to work, they should be able to accomplish this goal. To pay off the mortgage by 2030, they would have to increase their payments to $39,000 a year from $25,000 currently. Ms. Thompson assumes the condo will be sold in 10 years and any profit – estimated at $100,000 – would be used to pay down the mortgage on their house.
Once Carol goes back to work full time, they will have a monthly surplus. Any surplus cash flow (after mortgage payments and regular RRSP/pension savings) should first go to maximize their TFSAs to build up their desired emergency fund, then to top up Casey's RRSP and then to a joint non-registered investment account. Given the current low interest rate on the mortgage, there is no current economic benefit to further accelerating payments, the planner says.
"Special diligence should be taken to evaluate whether it makes sense to continue putting funds into RRSPs as they get closer to retirement, as tax-sheltered growth needs to be weighed against the additional tax payable when the funds are withdrawn," Ms. Thompson says.
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CLIENT SITUATION
The people:
Casey, 36, Carol, 35, and their two children.
The problem:
Can Carol take more time off work with the two young children without jeopardizing their other goals?
The plan:
Yes, Carol can take off another couple of years. They can afford the more expensive house after she goes back to work. They need to beef up their RESP contributions for the children's education.
The payoff:
A comfortable retirement at 65 if not sooner.
Monthly net income:
$9,030
Assets:
Bank $20,000; his TFSA $10,000; her TFSA $25,000; his RRSP $80,000; his work RRSP $17,000; his defined contribution plan $5,000; estimated present value of her defined benefit pension plan $192,055; RESP $19,000; residence $750,000; equity share in investment condo $33,400. Total: $1.2-million
Monthly outlays:
Mortgage $2,095; property tax $425; home insurance $135; hydro, water $305; heating $85; maintenance, repair $400; transportation $1,050; grocery store $980; child care $410; clothing $60; car loan $425; gifts, charitable $175; vacation, travel $235; dining, drinks, entertainment $465; club memberships $115; kids' programs $85; health and dental insurance $135; telecom, TV, Internet $150; RRSPs $1,055; RESP $245. Total: $9,030
Liabilities:
Residence mortgage $308,000; car loan $14,000. Total: $322,000
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