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Money makeover: A late start on being early

Father of two, 55, hopes to retire soon without condemning wife to 23 more years at work

Hey there, time traveller!
This article was published 13/5/2011 (2289 days ago), so information in it may no longer be current.

Victor and Sabrina aren't your typical parents.

"Recognizing that we did start the family late, the typical plan and advice doesn't really apply to us," says Victor, 55, a manager for a non-profit organization.

 Victor and Sabrina's wild cards in the future will include Sabrina's full-time earnings, plus their savings and spending.


Victor and Sabrina's wild cards in the future will include Sabrina's full-time earnings, plus their savings and spending.

Five days a week, he commutes two hours back and forth to work in Winnipeg.

Sabrina, 42, takes care of their two children -- ages seven and five -- and also works part-time as a doctor at a clinic in the town where they live.

Victor earns $93,000 a year, has a defined benefit pension, about $120,000 in RRSPs and $15,000 in a tax-free savings account.

They have also set aside $4,000 for each child in RESPs.

Victor wants to retire soon so he can spend more time with the children. And then Sabrina will return to work full-time, which would double her salary from current earnings of $52,000 annually.

She has about $28,000 in RRSPs and wants to save more when working full-time. (Right now, they are not contributing to any registered plan outside of Victor's defined-benefit plan.)

Victor says the ideal situation would be if Sabrina can also retire early.

"I don't want Sabrina to have to work until she's 65 just so I can retire," he says.

"Nor do I," Sabrina says.

The couple has no debt other than a mortgage, a $114,000 debt they will pay off in four years.

"We would like some direction whether we're doing the right thing in terms of trying to pay down our mortgage first and when we can even think about retiring," Sabrina says. "I feel like we're floundering financially."

Certified financial planner James Kirk says Victor and Sabrina are on an obviously shortened timeline for achieving their financial goals, which will always give them a sense of being behind.

While many parents at Victor's age would be sending their children off to college, they're only now looking at sending their children to elementary school.

On the plus side, the couple is at the height of their earning capability so they have more capacity to save for their children's education and other goals.

But if Victor plans to retire soon, it likely will result in Sabrina having to work longer than she plans.

"Sabrina is likely to work until her age 65," says the planner with Sweatman Insurance and Retirement Services in Winnipeg. "They do not have 'enough' saved for Sabrina to stop working sooner, unless they live on less in retirement."

And based on their spending habits, that might be a tall order.

"Their income is $7,200 a month after taxes and deductions, but the listed expenses only total $5,920 month," he says.

That's more than $1,200 in spending unaccounted for every month.

"It's a spending gap that would be much harder for them to close when they are living off reduced incomes in retirement."

Still, they can take a few steps now to improve their situation in the future and make early retirement a reality for both of them.

If they want to pay down their mortgage at a faster pace, they don't have too many options since they are already making weekly mortgage payments as well as additional weekly payments on principal.

One option that may help, however, is an all-in-one account -- like the Manulife One product.

"This ensures every dollar they have sitting in their account is working every day to pay off their borrowing," he says.

Basically, all of their earnings go into one account that is also a line of credit against what they owe on the house. Over the long term, their interest costs will be less because they will generally have more money down on the mortgage principal on a monthly basis than they would if they were making regular payments on a normal mortgage.

That is, if they're disciplined.

"Where that goes wrong is for clients who have difficulty exercising financial discipline and they use their house as a bank machine, and they never stop borrowing."

But because they've already showed a strong inclination to pay down debt, these types of products should work to their advantage.

Furthermore, they should also consider cashing out their TFSA and putting that money toward their mortgage since it's a priority.

"Putting the balance against their mortgage gives them a 4.17 per cent guaranteed rate of return immediately," he says. Basically, they save more on their mortgage interest -- charging 4.17 per cent per year -- than they earn in the savings account in their TFSA.

If they need money to replace the furnace, for instance, they can borrow against their home, he says. It's a risk, but at least it is a calculated one that could result in the home being paid off even sooner.

The couple should also look at putting more money aside in an RRSP, preferably in equity mutual funds, to grow the money more for long-term use in retirement.

Kirk says Victor should contribute to a spousal RRSP for Sabrina, using up any remaining contribution room available to him.

"I think the spousal RRSP makes sense for three reasons: One, his income is higher than hers now; two, she doesn't have much in the way of retirement savings, and three, she is 13 years younger than him, providing almost 30 years of tax-deferral."

But the couple also needs to address the risk side of their financial goals. Kirk says it's likely they have life insurance through their jobs, but it's probably not enough to make up for the drop in income if one of them dies in the next few years.

"At their ages, with their lower level of savings and still having a mortgage, they should investigate their options for life insurance to protect each other and the kids, first and foremost," he says.

Term life insurance premiums are affordable within their budget.

"I'd be reluctant to put an amount on it because that's the most important part of the insurance conversation they need to have."

Still, overall, Victor and Sabrina are in good shape financially, and Victor probably can retire early if he chooses. And quite possibly, early retirement is on the horizon for Sabrina, too.

The wild cards going forward are how much Sabrina can earn when she returns full-time, how much they can save, and getting a grasp on their spending so they no longer have $1,200 leaking from their budget every month.

"I think they're spending a little bit more than they think, and depending on how serious they are on retiring in the next 10 years, they're going to need to get their expenses under control."


Victor and Sabrina's finances


Victor: $93,000 ($4,000 monthly net).

Sabrina: $52,000 ($3,200 monthly net).


Monthly: $5,920.


Mortgage: $113,800 owing on home worth $210,000; paying $272-a-week mortgage payments and another $262 a week on principal owing. Four years left on mortgage.


Victor RRSP: $90,000 in conservative portfolio.

Victor work RRSP: $30,000 in balanced portfolio.

Victor TFSA: $15,000 in savings account.

Sabrina RRSP: $28,000 in balanced portfolio.

Victor defined benefit pension: $3,791 monthly at age 55 before taxes and deductions.

Savings: $4,200.

RESP: $4,000 for each child.


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