So many options

Cameron and Taylor like having financial goals.

"We've always had a next goal to tackle, and because it was $25,000 here to pay off and $30,000 there to pay down, they were attainable," says Taylor, a health-care professional who is in her late 30s.

"What we would do is pay off the car loan of $300 a month and once we were done with that, we'd put the payment down on something else."

Now they're debt-free -- except for the mortgage. So that should be their next goal, right?

They're not so sure.

"Now, we're kind of feeling lost," says Taylor, who earns about $34,500 a year working part time. "The mortgage just seems like it's too big to tackle and I just don't know what we should be keeping to save."

They owe about $90,000 on their $200,000 home. And although Taylor says she's a confused about their next move, she has some ideas. "It'd be fun if we can pay off our current home by the time I turn 40 because we bought it when I was 30," she says.

"I would like to pay off the mortgage and I'd also like to buy our next house, too."

They don't want their next home to be a $500,000 home, she says. Maybe it would cost $75,000 more than their current house.

And they'd like to purchase it without needing a mortgage, but they're not certain if that goal is achievable -- especially if Cameron, a miner, retires at 55.

In his early 30s, he earns more than $113,000 a year before taxes and deductions.

"How much would I like in an ideal world to retire? Like a million dollars," she says.

"If I could get a professional opinion that was unbiased, I'd feel better because we feel lost right now."

Uri Kraut, a certified financial planner with Assiniboine Credit Union, says Cameron and Taylor have a large enough cash surplus on a monthly basis to achieve their goal of paying off their mortgage in less than three years.

"Moving 90 per cent of the free cash flow to the mortgage-repayment strategy would have it paid off in two years and about two months," he says.

Their average monthly expenses -- including bills, core costs and discretionary items such as dinners out and vacations -- are about $5,400, while their take-home income is almost $9,000.

That leaves them with a $3,575 surplus a month. After deducting $667 a month for RRSPs and about $583 for miscellaneous spending on occasion throughout the year -- such as the purchase of an iPad -- they're left with about $2,324 to put toward the mortgage.

If they were to continue with their current mortgage payment -- $622 biweekly -- the house would be paid off in about 51/2 years. If they can put about $2,092 a month -- 90 per cent of their surplus, minus the RRSPs contributions and miscellaneous spending -- on the mortgage in addition to their current payments, they will cut the amortization period in half.

"These payments should be arranged biweekly unless they feel that is too aggressive, in which case they could pay a total of only $1,000 biweekly, redirecting $588 to savings," he says.

"Every few months, they could put those savings toward the mortgage if they don't need them and it will have roughly the same effect."

With the mortgage paid, they would need to start saving to buy the new home. Based on a four per cent housing inflation rate, they'll need to save even more to buy a bigger home in four years -- about the time it will take them to achieve this second goal. The price tag for a home equivalent to $275,000 today would be $321,000 in four years. Of course, their current home would be worth more, about $234,000, meaning they'll need to save about $87,600.

Saving the money that had been earmarked for the mortgage -- $1,588 biweekly -- they will have saved enough to buy their new home without a mortgage in a little more than four years from today.

In the meantime, they'd continue making RRSP contributions as well as contributions to Cameron's employee stock purchase plan and his work pension.

In four years, their non-registered savings, his pension and their RRSPs would be worth about $196,000.

"So they're still getting some material growth in assets while they are focusing on paying down their mortgage and saving for a new home," Kraut says.

"If children enter the picture, however, their capacity to save will be reduced and this estimate may vary dramatically."

For one thing, they may want to divert RRSP contributions to RESPs, or they may want to scale back their plan to eliminate the mortgage and save for a new home as quickly as possible.

But overall, the long-term picture is rosy.

Once they're in their new home, they can focus solely on building retirement savings using RRSPs and TFSAs.

Based on a two per cent inflation rate and an average return ranging from 5.1 per cent on their RRSPs and TFSAs and 6.5 per cent on Cameron's company stock, they'll have saved more than $2.5 million by the time he is 55, providing they can continue to save their surplus cash.

In retirement, they'd have an estimated annual net income of almost $69,000, about 63 per cent of current income.

"A pay cut of this magnitude is generally very manageable," Kraut says. If they feel it's not enough, they can hold off retiring for five years, which would increase their income to more than 80 per cent of what they take home today.

On the flip side, if they decrease savings by half, their retirement income would only be 50 per cent of current income.

"The concern is whether this savings strategy is sustainable and what changes will occur between now and 23 years into the future that may affect their ability to save," he says.

That's because about $800,000 of their estimated retirement savings would come from redirecting housing payments of about $41,000 a year ($1,588 bi-weekly) to a TFSA/RRSP strategy.

"Most of these choices will be in their control, such as deciding how badly they want early retirement in lieu of the benefits of enjoying something now -- a question we must all answer daily."

giganticsmile@gmail.com

Cameron's and Taylor's finances

ñü INCOME

Cameron: $113,004 ($6,517 monthly net)

Taylor: $34,594 ($2,476 monthly net)

ñü EXPENSES

Monthly: $6,669 (includes RRSP savings and miscellaneous lump-sum discretionary, non-monthly)

ñü DEBTS

Mortgage: $89,728 owing at 2.64 per cent, fixed, one-year term

ñü ASSETS

Cameron non-registered employee stock purchase plan: $5,059

Cameron RRSP employee stock purchase plan: $3,699

Cameron RRSP: $27,731

Cameron TFSA: $9,922

Cameron pension plan: $21,394

Taylor RRSP: $16,242

Taylor TFSA: $7,647

Home: $200,000

Total: $291,694

ñü NET WORTH: $201,966

Republished from the Winnipeg Free Press print edition July 14, 2012 B10