With a toddler at home and a second child arriving soon, Sandra and Stan are wondering how to manage lost income during parental leave without going into debt. He is 49, she is 41.
Although their combined income is “healthy,” they struggle to have much left over each month, Sandra writes in an e-mail. “I squeaked through mat leave without incurring debt, but my expenses haven’t yet adjusted to the addition of daycare costs,” she adds. Sandra plans to take parental leave this year, after which daycare costs for the two children will total $21,600 a year until 2022.
Luckily, their parents are stepping in with a $200,000 gift – an advance, perhaps, on their inheritance. They wonder how to “best use the money to balance short-term needs and long-term future planning.”
He works for the government, earning about $107,000 a year. She works for an industry association, earning about $91,000. He has a defined benefit pension plan, while she has a defined contribution pension plan.
Their short-term goals include replacing their car. They also want to visit Sandra’s parents overseas for a couple of months and eventually take the kids to Disney World.
Although retirement is not on their radar yet, Stan hopes to hang up his hat at the age of 64. Sandra, who is eight years younger, would retire at 60. Their goal is maintain their standard of living.
We asked Jason Pereira, senior financial planner with Woodgate & IPC Securities Corp. in Toronto, to look at Sandra and Stan’s situation.
What the expert says
Thanks in part to Stan’s pension, which will pay him $72,624 a year at the age of 64, the couple will be able to meet their goals, Mr. Pereira says. That includes retiring as planned with $78,000 a year after-tax, a travel budget of $3,360 a year, car replacement every five years starting this year ($30,000), putting their children through university at a cost of $30,000 a year for four years for each child ($240,000 in total) and a Disney vacation in 2024 for $12,000.
Mr. Pereira starts by preparing a cash-flow forecast starting with the current year. This year they will have a combined after-tax cash flow of $317,365, including the $200,000 gift. That also includes Sandra’s salary for one month, mat leave benefits and the Canada Child Benefit. Their taxes factor in the tax savings from pension and registered retirement savings plan contributions. From that, the planner subtracts lifestyle expenses, leaving $213,039. He subtracts $30,000 for a second-hand car, a mortgage prepayment of $35,143 and life insurance of $3,090.
The remaining cash ($144,806) goes to savings: Stan’s pension plan, Sandra’s pension plan, in which her employer matches her contributions, Stan’s contribution to a spousal RRSP for Sandra (which he has yet to open), a contribution to the children’s registered education savings plan, a top-up of their tax-free savings accounts and the balance of $42,076 to a joint investment account.
By the time Sandra retires in 2037, they will have $1.55-million, assuming a rate of return on investments of 5.6 per cent (or 3.6 per cent after subtracting inflation), Mr. Pereira calculates. “They really only need a rate of return of 1 per cent to be successful.” Their savings will last to the age of 95.
Looking ahead, the planner recommends they prepay as much of their mortgage principal as is permitted each year on the anniversary. When the mortgage comes up for renewal in 2022, they should liquidate their TFSAs and pay off the balance, he adds.
Because Stan is eight years older than Sandra, he should max out his RRSP room with contributions to a spousal RRSP for her. He will have to convert his existing RRSP to a registered retirement income fund at the age of 71 and begin taking mandatory withdrawals in the year he turns 72. Establishing a spousal plan for Sandra, who is eight years younger, will give them the flexibility to postpone withdrawals from Sandra’s spousal plan if they choose to until she is 72.
He recommends Sandra make no further contributions to her RRSP. Given her income, her pension contributions are sufficient to keep her within a reasonable tax bracket, the planner says.
They should continue to contribute to the RESP for the children to take full advantage of the federal government grant, putting in $5,000 a year from 2019 to 2030, $3,500 in 2031, $2,500 in 2032 and $1,000 in 2033.
Once they are debt-free, all surplus cash flow should go to their TFSAs, the planner says. Stan’s should be topped-up first because he is older and may well die first, he notes. When someone dies, any unused TFSA contribution room is lost.
The people: Stan, 49, Sandra, 41, and their children
The problem: To arrange for Sandra to take a year off with the children without having to go into debt.
The plan: Some of the parents’ gift goes to expenses and a lump-sum payment to the mortgage principal, but a substantial amount goes to TFSAs and non-registered investments. Stan contributes to a spousal RRSP for Sandra.
The payoff: Knowing they have nothing to worry about.
Monthly net income after pension contributions (past year): $10,605
Assets: His TFSA $14,066; her TFSA $36,182; his RRSP $182,543; her DC plan $36,500; estimated present value of his DB pension $505,000; RESP $2,524; residence $575,000. Total: $1.35-million
Monthly disbursements (2018): Mortgage $1,145; property tax $535; home insurance $115; utilities $400; maintenance, garden $80; transportation $945; groceries $1,200; child care $900; clothing $210; gifts, charity $350; vacation, travel $280; house cleaning $255; dining, drinks, entertainment $120; personal care $50; club membership $15; sports, hobbies $100; subscriptions $20; recreation $130; doctors, dentists $500; drugstore $50; life insurance $230; phones $330; TV $105; RESP $100; TFSAs $300. Total: $8,465. Surplus of $2,140 goes to saving, including RRSP.
Liabilities: Mortgage $241,000
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