Recently married, Carla and Melvin want to upgrade their living conditions. It's not that they've been living in squalor. In fact, the 30-something couple came into the relationship on firm financial footing, each owning a home and earning good incomes.
Carla, a mail carrier, recently sold her home, making a small profit of $15,000, currently sitting in a TFSA.
She moved in with Melvin, a nurse, who expects when he sells his home to have about $130,000 or more to add to a down payment on a new home.
The couple want to buy a house worth between $350,000 and $400,000, but they wonder how the increased price tag will affect their ability to save for the future.
"It always comes down to how much should we be saving for retirement," Melvin says. "We're curious how much we should be putting into an RRSP versus what kind of mortgage we can afford."
But the couple, who earn a combined annual gross income of more than $130,000, have other concerns.
"How would retiring at age 60 versus age 65 affect our retirement income?"
They also wonder whether they need more life insurance coverage than offered through their work.
"And we've been house-hunting for the last month, but there's nothing we've found that we're interested in buying, so we're wondering what to do in the meantime with Carla's $15,000 sitting in the TFSA," Melvin says. "Is there anything better we should be doing with it in the meantime?"
RBC financial planner Ryan Lussier says whether they choose to retire at 60 or 65, they are likely to have their retirement completely funded and then some.
"They're pretty well looked after," he says. "If they had a huge gap between their planned retirement versus what they're getting, then we'd really have to address it right away, but it seems like they're pretty much over-funded, based on their current contributions and spending habits."
Lussier based his projections on their living expenses today, which are about $3,500 a month, excluding car, student and Hydro loans and contributions to savings.
He says they will have an after-tax, inflation-indexed income of about $50,000 a year or about $4,235 a month when they retire at 60.
That's a conservative estimate, too, because Melvin only recently started his job and his pension payment at retirement is based on one year of service.
"He'll have over 20 years of service making more than $70,000, so his pension earnings will likely be much higher."
Given they have little debt other than a mortgage of about $68,000, Lussier says their retirement budget can likely accommodate increases for travel and other goodies because they likely will have even fewer debt payments -- if any -- in retirement.
Even if they buy a new home worth $400,000 today, they will still have a comfy retirement income at age 60.
The one caveat is they should aim to pay off the mortgage before retirement. With a $140,000 down payment on a $400,000 home, they could get a five-year, fixed mortgage at 2.99 per cent, for instance, making $615 biweekly payments. They currently have an average monthly budget surplus of almost $2,685, excluding savings contributions, and that surplus will increase considerably when they pay off the car, student and Hydro loans in the next two years.
Melvin is already making $466 biweekly payments on his current mortgage, so they will be paying about $500 a month more on their mortgage, which should be manageable.
On the insurance front, people generally buy life insurance for two reasons.
"We use life insurance for clients as income replacement or for estate planning," Lussier says.
Life insurance pays a tax-free benefit that can provide liquidity to an estate to cover taxes or to bestow a tax-free gift to beneficiaries.
Because they do not have children, life insurance isn't really needed for this purpose unless they want to leave a legacy to relatives or charity.
When used to replace loss of income, life insurance is an important consideration for families with children. "A lot of people use term insurance for while the kids are around, and once they leave the home, then insurance needs are less."
But both Melvin and Carla have defined-benefit pensions and benefit plans that provide a large measure of financial security if one of them dies. All plans provide a benefit of at least 50 per cent of lost income.
"It could be as high as 100 per cent income replacement."
So the question for them, if they don't have children, is whether they want to leave a legacy. If they do, then life insurance may be an option.
Still, the couple do have a couple of financial sore spots that could use work. They have a considerable amount of monthly cash surplus going forward, so they need a basic savings strategy. Lussier says they should use the following "order of operations action plan."
First, they should make sure they're taking full advantage of every work pension and benefits option offered. Next, they should aim to be debt-free by retirement, paying the mortgage off in less than 23 years. Then any surplus cash should fully fund their RRSPs, but because of their work-pension adjustment, they likely only can contribute about $2,000 each to their RRSPs annually.
"They can invest their tax refunds in the TFSAs and then put any surplus income into the TFSA as well."
Carla and Melvin have $16,000 in their TFSAs at the moment, all in savings for when they buy a home. They don't need to invest it in anything else right now because they want their money readily available. Earning a return on investment is not important. Keeping the capital intact is.
"The markets are extremely volatile, including the bond markets," Lussier says. "Even if you're parking it in a short-term income fund, just remember short-term bond funds in the '80s dropped 12 per cent in six months."
Going forward, however, they should use their TFSA for long-term investing because it will result in much greater tax savings. Over many years, they can save a substantial sum in taxes that would otherwise be payable on earnings from compound interest, dividend payments and capital gains. In contrast, they might save a couple of hundred dollars in taxes in a savings account over a couple of years in a TFSA.
Carla and Melvin should also diversify their RRSP and future TFSA investments. Right now, 84 per cent of their RRSP is invested in gold and energy. They need to diversify their portfolio, because both asset classes are volatile -- a big reason they've lost a lot of money in their RRSP in the last year. As an alternative, they should consider dividend-yielding mutual funds that have good track records of consistently beating the TSX -- there are some out there -- and with reasonable management fees.
"Yield (dividend payment) is your friend," Lussier says. "And it is especially important in this type of environment, where there is very little expected growth from GDP."
Overall, Melvin and Carla really need to only tweak their plan to perfect it.
"They're in really good shape because they have good pensions, they save, they live within their means, and they have little debt," he says.
"Everything is looking really good."