Allan, 47, and Liza, 47, have two kids, a mortgage-free home, a cottage and a rental property, all in Southern Ontario.Nick Iwanyshyn/The Globe and Mail
Allan and Liza believe they’re on track financially for the long term, but they’d like to free up some cash flow now so they can take a family vacation each year. They are both 47 years old with two children, 12 and 14, a mortgage-free home, a cottage and a rental property, all in Southern Ontario.
Allan has an executive position in finance, paying $120,000 a year, and Liza earns about $118,600 a year working as a government scientist. Liza is part of a defined benefit pension plan, indexed to inflation, while Allan has a group registered retirement savings plan (RRSP) to which both he and his employer contribute.
“We would greatly appreciate some guidance on how to adjust our financial strategy to achieve more breathing room in our monthly budget without jeopardizing our long-term objectives,” Liza writes in an e-mail. They want to free up $5,000 to $8,000 a year mainly for travel. They also want to help pay for their children’s higher education. And they plan to retire in about 12 years and maintain their standard of living, indexed to inflation.
“Would it be prudent to use our tax-free savings accounts to pay off the mortgage on our cottage more quickly?” Liza asks. Or should they lower their contributions to the children’s registered education savings plan (RESP)?
We asked Jeff McCartney, a certified financial planner at Objective Financial Partners Inc. in Markham, Ont., to look at Allan and Liza’s situation. Objective Financial is an advice-only financial planning firm.
What the Expert Says
Liza and Allan would like to retire at age 57, once their kids have graduated from university, Mr. McCartney says. With lifestyle spending of about $94,000 per year after-tax, excluding savings, “this should not be a challenge for them,” the planner says. That number also excludes cottage mortgage payments of $2,280 a month.
“Their diligent savings approach has left them with a comfortable nest egg diversified across RRSPs, tax-free savings accounts (TFSAs), and a locked-in retirement account (LIRA) from Allan’s previous employer. In addition, Liza is entitled to a defined benefit pension at age 57 that will pay her $76,000 per year plus a bridging benefit of $14,800 until age 65. Allan pays a percentage of his salary into a growing group RRSP, which his employer matches up to 3 per cent.
“Combine that with future Canada Pension Plan and Old Age Security benefits and their retirement is looking quite secure,” Mr. McCartney says. “This will allow them to tackle some of the financial constraints they feel today.”
When can Max, 54, and Erica, 42, leave their high-stress jobs and work part time instead?
Liza and Allan would like to support their children through college or university. The cost of post-secondary education is expensive; however, there are many factors to consider, the planner says. If their child is going to go away to university, and they’d like to pay for all of it, then it’s not unreasonable to budget $25,000 a year to cover tuition, books, accommodation, food, etc. “If the children were to go to a local university and live at home, that number can almost be cut in half because they’ll save so much on rent,” he says. If their children were to go to college rather than university, tuition would likely be reduced by more still.
Allan and Liza are contributing $600 a month to the children’s RESP, which is now worth $104,000. Continuing with this approach puts the family on track to have $23,000 per year, per child, for a four-year program, Mr. McCartney says.
If they were to decide that they would like to fund only $15,000 per year per child, having the children fund the difference through summer jobs and part-time work, they could allocate their funds elsewhere, “giving them some of that financial flexibility and potential vacation funding they’re looking for”, the planner says. “In that case, they could reduce their education savings by $500 per month – or $6,000 a year – to just $100 a month and be able to achieve that more modest goal.”
Or they could use their TFSAs to pay down the cottage mortgage. If they withdrew $160,000 from their combined TFSA balances before their mortgage term renews in March, they could pay off most of the $187,000 mortgage. The remaining balance could be moved onto their line of credit and paid off by early 2026 by continually making the same monthly mortgage payment amount, Mr. McCartney says.
Once the mortgage is paid off, it will free up an additional $27,000 per year in cash flow that can be reallocated to lifestyle, education or retirement. “They really don’t need to allocate any of that additional money to retirement to successfully retire on their current lifestyle,” Mr. McCartney says.
Based on their current trajectory, they appear to be on track to retire as early as 55, the planner says. Alternatively, they could retire at their target age of 57 and spend an additional $8,000 a year without putting their financial well-being in jeopardy.
Their long-term financial health was tested against a what-if scenario that assumed a 40-per-cent stock market crash in their second year of retirement and lower returns than expected while increasing their life expectancy from age 90 to 95, the planner says. “Regardless, their retirement success remains intact,” Mr. McCartney says. “Further, a Monte Carlo simulator analysis, looking at a 1,000 different rate-of-return possibilities per year of life, demonstrated that Liza and Allan’s financial well-being can withstand a high level of rate of return volatility.”
Given their increased cash flow post cottage mortgage payout, strategically, they may wish to redirect some of that towards their kids, Mr. McCartney says. For example, given the price of real estate these days, many Canadians are pondering how to help their children get started in their first homes. The First Home Savings Account (FHSA) is a registered plan which allows individuals, as first-time home buyers, to save to buy their first home. Once their children turn 18, they will qualify for the $8,000 per year that can be made in FHSA contributions up to its lifetime limit of $40,000.
“Many people find this to be an efficient way of estate planning, effectively giving their kids a portion of their estate long before they pass away and at a time when their children need help the most.”
Although Liza and Allan have both had wills prepared because their children are minors, Liza and Allan might want to establish a trust in their wills to allow them to appoint a trustee or trustees to manage the children’s funds on their behalf. “That could include a staggered distribution to their children rather than having the entire estate given to them when they turn 18 and are not yet financially responsible.”
Client Situation
The People: Allan and Liza, both 47, and their two children.
The Problem: How to arrange their finances to allow for more “breathing room” without jeopardizing their education savings and retirement goals.
The Plan: Use their TFSAs to pay down the cottage mortgage and continue making payments at their current rate until the loan is paid off. Consider lowering their RESP contributions.
The Payoff: Goals, short and long term, all achieved.
Monthly net income: $13,500. Assets: Savings account $3,000; his group RRSP $106,000; his LIRA $79,730; RESP $104,000; his RRSP $174,310; spousal RRSP $7,670; her TFSA $80,485; his TFSA $77,265; family home $950,000; cottage $700,000; rental property $650,000. Total: $2,945,960.
Estimated present value of Liza’s DB pension: $647,325. This is what someone with no pension would have to save to generate the same cash flow.
Monthly residence outlays: Property tax $400; water, sewer, garbage $80; home insurance $185; electricity $135; heating $110; maintenance, garden $640; cottage carrying costs (mortgage $2,280; property tax $335; electricity $70; maintenance $665; ) $3,355; net rental property loss $410; transportation $975; groceries $1,735; clothing $300; line of credit $500; vacation, travel $100; children’s activities $865; dining, drinks, entertainment $250; personal care $75; club memberships $45; golf $60; pets $250; sports, hobbies $60; subscriptions $85; bank fees $35; health care $15; life insurance $95; phones, TV, internet $210; RRSPs $500; RESP $600; her pension plan contribution $1,205 Total: $13,275. Monthly surplus goes to spending.
Liabilities: Cottage mortgage $187,580 at 4.45-per-cent variable; home equity line of credit $3,500; rental property line of credit $194,855 at 1.86-per-cent fixed. Total: $385,935.
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