Winnipeg Free Press - PRINT EDITION

Couple seeks to save enough for child's future and early retirement

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Tory and Ralph have a three-pronged savings strategy for the future. They set aside money every week into their RRSPs, TFSAs and an RESP.

But they wonder if the $750 in savings they're setting aside every month is enough to fund their child's post-secondary education and allow them to retire early.

"We make more than $120,000 a year and want to know if we are saving enough," says Ralph, who is in his early 50s and works in manufacturing, earning about $46,000 a year.

Tory is a teacher in her mid-40s who earns about $81,000 a year and expects a pension of about $3,400 a month at age 60.

Ralph also will have a defined-benefit pension as the foundation of his retirement income, but it will be less than a third of his wife's. For that reason, Tory contributes to a spousal RRSP.

"Is it good for us to be doing that?" he asks.

The couple owe about $79,000 on a mortgage on their home, valued at $385,000, and about $36,000 on a line of credit for the recent purchase of a new car.

By the time they retire, hopefully when Ralph turns 60 and Tory 55, they expect to be debt-free and have a substantial amount of savings in their TFSAs and RRSPs.

At the moment, they have about $91,000 in RRSPs, $6,500 in an RESP and $2,500 in a TFSA. Ralph says they often worry whether they should keep investing in mutual funds or stick with GICs, and if they should focus more on their TFSAs than their RRSPs.

"And how much should we be saving for our child's education if she's going to university in nine years?"

They suspect they should, and could, save more on all fronts, but they'd like a checkup to let them know if they're on course -- or not.

"We don't feel we're in trouble, but we do like to spend money because we do like to enjoy life," he says. "We just want to make sure we're saving the right amounts in the right places."

Certified financial planner MaryAnn Kokan-Nyhof says Tory and Ralph can afford to save more for their future. Doing so would greatly boost the likelihood they will be a couple of very happy, satisfied retirees who can help their daughter pay for much of her advanced education.

"They comment they do not feel like they are in trouble, but they do like to spend money and enjoy life, so I suspect they are not keeping very close track of where they are spending their money," says the adviser with Desjardins Financial Security Investments in Winnipeg.

The tried and true credo of 'paying themselves first' would serve Tory and Ralph well. Although they've already implemented this strategy by making regular contributions to savings and debts, they could do more, because their take-home pay is more than $7,500 a month.

Their expenses, including savings, are about $5,600. So, more than $1,900 a month is going somewhere.

Tracking their expenses would help, but simply increasing their savings rate and then adjusting their spending accordingly might work equally as well.

Any additional money they can set aside will have a big impact. For example, by increasing their RESP contributions to $48 a week from $25 to get the maximum Canada Education Savings Grant of $500 a year, their daughter will have about $43,000 for university by the time she turns 18 -- based on a five per cent annual return -- instead of their current pace of about $26,000.

As for the RRSPs, Kokan-Nyhof says setting up a spousal account in Ralph's name is a sound strategy.

Tory's gross annual income is in a high tax bracket, with 43.4 per cent of every $1 she earns lost to tax, so the up-front savings for every contributed dollar is about 43 cents," she says. "But Ralph is in the 34.75 per cent bracket, so that spousal contribution results in almost nine per cent savings on the difference in tax brackets alone."

The couple will have to save a lot more if they want to retire early, because it's likely Tory would see a substantial reduction in her pension if she retires at 55, while neither one would be eligible for OAS until 67 under the new rules.

"There would also be a big shortfall if Ralph was to retire at age 60," she says. "They would lose all of his working income and only be able to replace it with his $11,480 pension and some CPP, which would be reduced as much as 42 per cent."

With regards to the TFSA versus RRSP dilemma, they should strive to maximize the savings potential for both.

For example, if they can find in their budget an additional $1,000 every month to contribute to RRSPs, TFSAs and non-registered savings, they will have saved more than $117,000 in eight years, based on a five per cent annual return.

To do this, they would likely have to invest in mutual funds instead of GICs, probably in a balanced portfolio with 50 per cent exposure to the stock market and 50 per cent to fixed income.

Kokan-Nyhof says they will have to really examine the cost of retiring early, particularly if Tory chooses to take her pension before age 60, because her income accounts for two-thirds of their cash flow. That kind of drop in monthly income may come as a big shock.

They should also consider protecting their working incomes in the meantime, taking a closer look at their workplace disability insurance plans.

Kokan-Nyhof says it's likely they should at least strengthen Tory's insurance coverage, because her income represents nearly $800,000 of wealth in the next decade.

"If Tory was to die prematurely, the family would suffer economic hardship."

Critical insurance might be worth the cost, too.

"According to the Canadian Cancer Society, 40 per cent of women will develop cancer at some point in their lives," she says. "If that happened, do they have a lump sum, tax-free benefit that will pay the family unit while she undergoes treatment and makes a recovery?"

For about $200 a month, Tory could buy $100,000 of critical insurance coverage that pays out on diagnosis of a major illness.

"Or it would pay the entire amount of the premium back at age 65, about $54,000 -- if there was no illness."

Kokan-Nyhof refers to it as "RRSP insurance" because many people without this coverage are often forced to draw on their RRSPs early to cover expenses while ill.

Although the couple should have enough additional money in their budget to cover off the risks with comprehensive insurance and increase their savings, if they do decide to stick with their current savings plan -- and continue to spend freely -- they can always consider retiring a little later.

"If they wait until Tory is 60 to retire and Ralph is 69, then they will have adequate retirement income -- more than $5,915 a month in gross income, excluding their savings," she says.

"Without debt payments and savings contributions their expenses would be about $4,300 a month, so with their RRSP and TFSA savings, they should have more than enough for those big-ticket expenses like vacations."

Republished from the Winnipeg Free Press print edition March 8, 2014 B12

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