Winnipeg Free Press > Business > Personal Finance > Money Makeover: With mortgage paid off, two-income couple seeks nest egg

Personal Finance

Winnipeg Free Press - PRINT EDITION

Money Makeover: With mortgage paid off, two-income couple seeks nest egg

By: Joel Schlesinger

Posted: 05/26/2012 1:00 AM | Comments: 0

Mike and Molly have no debts and a net worth of more than $442,000. They’re looking for the freedom to pick up and go somewhere on a whim.

Enlarge Image

Mike and Molly have no debts and a net worth of more than $442,000. They’re looking for the freedom to pick up and go somewhere on a whim. (MIKE DEAL / WINNIPEG FREE PRESS) Photo Store

Mike's, Molly's finances

 

INCOME

Mike: $82,360 ($4,545 a month net)

Molly: $63,739 ($4,118 a month net)


EXPENSES

Monthly: $3,893


DEBTS

None


ASSETS

Home: $320,000

Mike RRSP: $54,462

Molly spousal RRSP: $21,449

Molly RRSP: $46,735

Mike work pension: $1,332 a month

Molly work pension: $472 a month


NET WORTH: $442,646

Mike and Molly are a double-income couple who have learned to make do on just one salary.

Both health-care professionals with two adult children, they have managed their household expenses using only Mike's income of more than $82,000 a year before taxes and deductions.

Molly's income -- more than $63,000 -- has largely gone toward paying off their debts. Now their home is mortgage-free, they're in the black.

"In order to pay off the house, we skipped the saving thing," says Mike, in his early 50s.

They want to use most of Molly's income -- about $3,000 to $4,000 a month -- for saving for the future.

While they've mastered living within their means, they're by no means adept at the art of investment.

They do have RRSPs, about $120,000, because they have been trying to maximize their RRSP contributions as often as they can in the last few years. But they also have defined-benefit pensions, so they don't have much contribution room after their pension adjustment.

In fact, they're largely in the dark about how they are investing their money, leaving that to their adviser -- a friend of the family.

"I think we're moderately conservative," says Molly, in her early 40s.

But Mike says they're moderately aggressive.

All they do know is they're invested in mutual funds they hope will grow enough to fund their retirement, which happens to be another area of uncertainty.

"I guess I could see full retirement when I'm around 60 and he's in his 70s."

Mike says he's eligible for a full pension before he turns 60, but he's uncertain he'd fully retire then.

Their retirement picture -- how they will spend their time -- is foggy, but they do know one thing: They won't be snowbirds.

"We're homebodies," Molly says. "We love cooking and gardening."

Still, they wouldn't mind the prerogative to take last-minute short trips to destinations such as New Orleans -- even before they retire.

"We would like the freedom to just go somewhere spontaneously," Molly says.

Certified financial planner MaryAnn Kokan-Nyhof says Mike and Molly are dream clients -- at least for her.

"They know how much money they make, and spend, and they have good savings habits and goals -- plus they love cooking and gardening," says the financial adviser with MGI Wealth in Winnipeg.

 

For those reasons -- excluding the gourmet, green thumbs -- they've already won half the financial battle. Now they need a strategy to save. And they're on the right track by maximizing RRSP contributions.

Although they have defined-benefit pensions, which when combined with RRSPs and other retirement income can lead to high taxes in retirement, Kokan-Nyhof says it's unlikely their pensions will be large enough to affect substantially income-tested retirement benefits such as the age credit and OAS. Both of these government retirement benefits are clawed back when retirement income is too high.

RRSP withdrawals -- or more precisely mandatory RIF (retirement income fund) withdrawals after age 71 -- are fully taxable. If Mike and Molly's OAS, CPP, investment income and work pensions create a large enough income stream, RIF or RRSP withdrawals might not only trigger clawbacks. Those withdrawals could be taxed at a higher rate than the taxes they would have otherwise paid on employment income if they hadn't contributed that money to their RRSPs in the first place.

But Kokan-Nyhof says this is improbable because Molly's expected monthly payment at age 65 is about $472 and Mike's is about $1,332 a month. These figures will increase with their salaries and years of service -- but not enough to create retirement income tax problems that would outweigh the benefits of RRSP contributions that defer taxes today.

"He is currently in the 39.4 per cent tax bracket, and she is in the 34.75 per cent tax bracket, so there's still a lot of benefit to RSP contributions for them."

If they were expecting to earn much higher pension incomes, building up their TFSAs and then saving in non-registered investments, which can be taxed more favourably than fully taxable RRSP withdrawals, might make sense.

"With $1,332 in monthly pension for him, or $15,984 a year, his marginal rate would still be about 25 per cent," she says. "Buying RRSPs while deferring taxes at 39 per cent and taking them out at 25 per cent tax rate is a 14 per cent return on their money."

Still, Mike and Molly have at least $3,000 a month to save. That's more than enough to maximize RRSPs and catch up on TFSAs. Molly's RRSP contribution limit is $6,225 and Mike's is $3,648. But they each have $20,000 in TFSA contribution room.

If Mike was to contribute the maximum to his RRSP, he would have about $95,000 at his magic 80. The assumptions here are a five per cent annual return with two per cent inflation. In other words, he's earning three per cent a year.

Based on those same assumptions, Molly would have about $248,000 when she reaches her magic 80 in about 17 years.

As for their TFSAs, they would be able to contribute about $11,127 combined this year -- if they're saving $3,000 a month. Next year, they'd have about $39,000 in contribution room. In 2013, they would be able to contribute about $26,000 to their TFSA, leaving them with $12,750 in contribution room for 2014.

So they would be fully caught up by the end of 2014 with about $3,380 that can be invested in non-registered savings. If Mike retires in his late 50s, they'll have accumulated about $101,000 combined in their TFSA. By the time Molly retires in her late 50s and Mike is in his late 60s, they'd have more than $250,000 combined in their TFSAs.

That's tax-free money, which also doesn't affect income-tested benefits.

Then they'd have non-registered savings, about $57,000 not factoring in the effects of taxation. This money should easily cover those spontaneous vacations.

"So everything seems set, but the big monkey wrench in this whole thing is their ability to earn income," Kokan-Nyhof says. "What happens if one of them falls ill?"

She says they should consider buying critical life insurance, which pays a lump-sum, tax-free benefit upon diagnosis of cancer or if they suffer a stroke, heart attack or other serious health problem. For less than $150 a month, they could each be insured for a lump-sum $75,000 -- about one year's salary -- to mitigate the risk of losing an income stream. (They might also want more life insurance since only Mike has a term, $150,000 policy.)

Furthermore, Mike and Molly need to take more interest in their investments.

"They've done all these other things right financially, and maybe they've neglected their investments because they haven't had much to invest -- but they will soon," she says, adding they could easily have more than $500,000 in investable assets in 15 years, provided they invest prudently.

To improve their chances of success, they need to learn about the mutual funds they own. This includes understanding the fee structures and the performance track records. It also means ensuring their adviser is earning his or her keep, helping them average an annual yield on their money of about five per cent.

"It's absolutely critical if they want their plan to succeed to be involved in not just earning and saving the money, but also knowing exactly how they're investing their money."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition May 26, 2012 B13

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Three injured in Ellice Avenue crash

View more like this

Photo Store Gallery

  • Marc Gallant / Winnipeg Free Press. Local- WINTER FILE. Snowboarder at Stony Mountain Ski Hill. November 14, 2006.
  • Someone or thing is taking advantage of the inactivity at Kapyong Barracks,hundreds of Canada Geese-See Joe Bryksa’s goose a day for 30 days challenge- Day 15- May 22, 2012 (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos

Poll

Which of these everyday math tasks could you tackle without a calculator? (Select all that apply)

View Results

View Related Story

Ads by Google