via The Globe and Mail | May 6, 2016
Ann and Bruce are professionals in their mid-30s with good incomes, a house, a mortgage and a new baby. She is on maternity leave; he has a job in the oil patch.
“Working as a professional in the oil and gas industry has awarded me a very good income, but seeing numerous friends and co-workers lose their jobs during the recent downturn has made me very conservative when it comes to financial planning,” Bruce writes in an e-mail. The sooner they can reach financial independence, the happier they will be.
Short term, they want to finish their basement and buy a new car for Ann when she returns to work next year. Medium term, they are considering a second child. Long term, “I did have a personal goal of being mortgage-free by the time I’m 40,” Bruce writes, “but that may have to be pushed back a few years depending on the cost of having children.”
Even longer term, they dream about leaving southern Alberta and retiring in B.C.’s Okanagan Valley. They plan to work to age 60 and then enjoy a comfortable lifestyle. At the moment, though, they feel the short-term demands on their pocketbook might be putting their longer-term goals at risk.
We asked Matthew Ardrey, vice-president of T.E. Wealth in Toronto, to look at Ann and Bruce’s situation. T.E. Wealth is a fee-only financial planning firm and Mr. Ardrey holds the CFP (certified financial planner) designation.
What the expert says
Bruce and Ann can achieve their goals if all goes well, but three risks could seriously disrupt their plans, Mr. Ardrey says. First, they don’t have enough life insurance. Second, they have neither wills nor powers of attorney. Third, their investment portfolio is too concentrated in Canadian equities.
Ann and Bruce have been running a budget surplus of $4,820 a month after all expenses, taxes and registered savings, the planner notes. They figure this surplus will fall to $3,500 a month when Ann returns to work and they have to pay for child care. For the current year, while Ann is on mat leave, the planner assumes the surplus disappears.
They have three short-term expenses to cover: a basement renovation of $60,000, a new car of $40,000 and in-vitro fertilization expense of $30,000 for their planned second child. The money will be spent in 2018 and the plan is for Ann to go on mat leave again in 2019. When she returns to work in 2020, Mr. Ardrey assumes their monthly surplus would be $2,100 due to additional child care expenses. If they direct the full amount of surplus to the above expenses, they will be paid off by 2021.
They are making mortgage payments of $30,000 a year. In his plan, Mr. Ardrey assumes the couple’s mortgage interest rate rises to 5 per cent in five years and stays there for the duration of the mortgage. The mortgage will be paid off in 2028.
Starting in 2029, the planner adds two-thirds of the $30,000 annual mortgage payment, or $20,000, to their non-registered savings. They save $5,500 each to their tax-free savings accounts, plus a one-time contribution in 2022 of $20,000 when the short-term expenses have been paid for. They contribute $2,500 a year for each child to a registered education savings plan. Non-registered savings are $5,200 a year in 2022, $25,200 from 2023 to 2028, and $45,200 from 2029 to 2041. The planner assumes an average rate of return of 5 per cent, inflation of 2 per cent and lifespans of 90 years.
Bruce and Ann plan to spend $70,000 a year when they retire, close to their current spending if savings, debt repayment, child care and travel expenses are removed, Mr. Ardrey says. They want an additional $10,000 a year for travel from the time they retire until they are 80. The plan assumes maximum Canada Pension Plan benefits, but Old Age Security benefits are clawed back because of their high income.
“Based on these assumptions, Ann and Bruce are able to meet their retirement goal with a significant spending cushion,” Mr. Ardrey says. They would leave behind an estate of about $8.9-million, plus real estate and personal effects, upon their death. If instead of leaving an estate, they left only the real estate and personal effects, they could increase their retirement spending from $70,000 a year to $129,400 a year, adjusted for inflation. This is in addition to travel.
They may need it because they may find that if they continue on this “wealth trajectory,” they will end up spending more. The planner assumed increases in spending of $43,600, which is composed of $1,400 a month per child plus $10,000 from the mortgage. These amounts are assumed be spent and not saved. “This gives base spending at retirement of $113,600, which may be much more like reality for this couple.”
The people: Bruce and Ann, both 34, and their children.
The problem: How to meet short-term goals without compromising saving for a comfortable retirement.
The plan: Direct monthly surplus to short-term goals. Once the mortgage is paid off, shift part of the saving to non-registered retirement savings. Draw up wills and powers of attorney and seek an independent analysis of their insurance needs. Create an investment plan to diversify.
The payoff: A steadily rising lifestyle that can be maintained for many years to come.
Monthly net income: $17,568
Assets: Cash $60,000; stocks $28,000; his TFSA $50,000; her TFSA $25,000; his group RRSP $140,000; her RRSP $42,000; his pension plan from former employer $50,000; her employer pension plan $53,000; residence $650,000. Total: $1.1-million
Monthly expenditures: Mortgage $2,525; property tax $375; water, sewer $50; home insurance $130; heat, hydro $200; maintenance $350; garden $50; transportation $495; grocery store $1,000; clothing $350; gifts, charitable $150; additional child expenses $1,400; vacation, travel $500; other house-related $300; telecom, TV, Internet $255; dining, drinks, entertainment $550; grooming $200; club memberships $120; pets $25; sports, hobbies $225; drugstore $50; life insurance $150; disability insurance $350; RRSPs $1,390; TFSAs $900; RESP $208; pension plan contributions $450. Total: $12,748 Surplus: $4,820
Liabilities: Mortgage $307,000