A couple with low debt and low debt will shape their future

A couple with low debt and low debt will shape their future

A couple we call Marty and Eve, both 40, are raising three children - two pre-schoolers and a seven-year old in Alberta. They bring home $10,200 a month from their jobs in health care and construction. They have $359,950 in financial assets, including their $62,800 family RESP, plus an $825,000 house and a $77,000 cottage. Their home mortgage is paid and their only debt is a $135,000 home equity line of credit. Financially they have a secure base for the future.

Family Finance asked the head of the Winnipeg office of Ottawa-based Exponent Investment Management Inc., Eliott Einarson, to work with Marty and Eve. An annual work pension of $76,000 from Eve's job is expected to form the base of retirement, but their financial assets are relatively modest. Their low debt load and the fact that their kids are out of the house by the time they finish their post-secondary educations are two things that work in their favor when it comes to their 20 year timeline. Factors that are working against them are Marty's decision to pay dividends rather than salary, thus avoiding contributions to the Canada Pension Plan. He will have a very modest CPP benefit and OAS will not begin until age 65.

Eve earns $60,000 a year before tax or $3,200 a month after taxes and deductions. Marty takes home $7,000 a month after business expenses and taxes. They have a $10,200 per month that allows them to allocate $2,400 toward paying down their $135,000 line of credit. It will be gone in about five years. The cost of child care is $1,200 per month. That will be gone in five years when their youngest is in primary school. They also save $627 per month for the kids RESP, $400 per month in Eve's RRSP and $1,000 in their TFSAs. The balance of spending supports daily expenses. The current balance of the family RESP, $62,800, is growing with contributions of $7,524 and the Canada Education Savings Grant of the lesser of $500 or 20 per cent of contributions per beneficiary, $2,508 in this case times three, total $9,029 a year, will rise to $190,668 in a decade when the eldest child is ready for post-secondary education. The sums available would be $63,555, $73,698 and $90,100 from the eldest to youngest to be available for the younger children, ages five and two. The parents could easily average the sums, so each child would have $75,784. That is more than enough per child for a first degree if they live at home and even some carryover for post-graduate study.

Einarson suggests that their retirement goal is $5,000 per month after tax, but $6,000 in 2022 dollars is more realistic. Their RRSPs have a $275,625 balance, their TFSAs hold $21,150 and their kids RESP has a $62,800 balance. They have $1,156,950 net worth of which the RRSPs and TFSAs, total $297,775, are their dedicated retirement funds. Marty and Eve can add $3,000 to a non-registered investment account in five years if their HELOC is paid off. If they maintain that rate of savings for 15 years and generate three per cent after inflation, they will be able to build up $689,650 in non-registered assets by age 60. That would provide $31,160 after tax for the 35 years to their age 96.

Eve has $169,000 in RRSPs. She adds $400 per month and her employer adds $450 per month. That adds up to $10,200 per year. The RRSPs will grow to $579,300 in 20 years, added to existing RRSP assets. The sum would support annual taxable payments of $26,630 for the 35 years to her age 95, with all income and capital paid out. Marty has $106,000 in his RRSP. This balance will grow to $191,448 in 20 years, assuming a three per cent return after inflation. That sum will generate $8,650 of annual taxable income with the same assumptions. The couple has significant mortgage debt heading into retirement, but the risk should diminish with time.

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Adding up income components at age 60 would have annual RRSP income of $26,630 and $8,650 and $31,160 from non-registered investments. That is a total of $66,440. They would have $59,796 per year if they split their eligible income and 10 per cent average tax. In 20 years, the TFSA will grow to $371,500 with current balances of $21,150 and $6,000 each in annual contributions. The balance would generate $16,785 of tax-free retirement income for the following 35 years. They would have $76,581 annual net income, compared to their other retirement income. That is $6,380 per month, just a little more than their adjusted retirement income target. They can add $7,850 each from Old Age Security plus Canada Pension Plan benefits of $11,000 per year for Eve and $1,450 per year for Marty. They would not count TFSA income and raise their annual incomes to $94,590. After 15 per cent of their TFSAs, they would have $80,401 and $16,785 from their TFSAs, which would total 97,185. That is $8,100 per month. The eligibility splits of eligible income would ensure the avoidance of the OAS clawback. The couple's retirement income would exceed their expectations - with one concern.

Eve and Marty have no life insurance other than a one-year salary benefit through her employer. They would do well to discuss life insurance with some independent agents for a policy for Eve and possibly supplemental life insurance. They could cover needs until the kids leave home in 20 years, or make life insurance part of their investment planning for retirement. The costs would be manageable as the family's needs decline. Einarson explains that it is worth it. Einarson explains that this is a case of steady income, moderate spending and moderate needs. Eve and Marty can have financial security, a comfortable retirement and assure their children of the means for post-secondary education.