It sounds like a typical two-income story -- two kids to raise and educate, a retirement to finance and debts to pay. They live frugally but have not made the most of their financial opportunities.
"We are just getting established in our careers," Marie explains. "We are now accumulating extra money for the first time since before we had kids. We want to save for their futures and our retirement, but we would also like to have some money to have fun with our family now. We just don't know what to do to make it happen."
Family Finance asked Caroline Nalbantoglu, a Registered Financial Planner with PWL Advisors Inc. in Montreal, to work with the couple. As she sees it, their problem is that their investments are not structured to produce the results they want.
"It appears that they are investing in a haphazard way. Marie contributes $175 per month to her RRSP, but Jean adds nothing to his. Instead, he makes payments to their Home Buyer's Plan loan once a year in a $932 lump sum at the end of each year. They put $100 per month into their children's Registered Education Savings Plans and $175 into their TFSA. They have a monthly surplus that they use for a little bit of everything." They need to organize their savings and investments. A good way to do that is with priorities based on immediacy of benefits for money allocated, she suggests.
THE FIVE-YEAR PLAN
Year 1 (2011) Boost RRSPs. Marie has a current deduction limit of $12,100 and Jean a limit of $23,500. Neither has maximized RRSP contribution, even though at her marginal tax rate of 45.7% and his rate of 38.4%, it would be advantageous to do so. They can use some of their $23,750 cash balance and their monthly surplus to make contributions to Marie's RRSP. It will generate a larger tax savings than contributions to Jean's RRSP. Marie will therefore get a tax reduction of $5,526. The balance of available cash can go to the couple's Tax-Free Savings Accounts in order to build a tax-efficient emergency fund. Going forward, Marie can contribute $4,511 or $375 per month to her RRSP each year and Jean $4,725 or $393 per month to his. Their total tax savings will be $3,875 per year.
Year 2 (2012) The couple should contribute the maximum amount eligible for the Canada Education Savings Grant to their RESPs. That's $2,500 from the federal government and $250 from the Quebec government for each child. They can make catch-up contributions to the plans. For now, they can contribute up to $417 for their two children each month, a total of about $5,000 per year.
If they do this, their older child's RESP will grow to $67,000 by age 17 and their younger child's to $78,000 by the same age, assuming that investments grow at 6% per year, both numbers in future dollars. The kids' RESP could be averaged to provide each with approximately $73,000 for post-secondary education. That sum would pay for tuition at most institutions in Canada.
Year 3 (2013) With RESP and RRSP contributions increased, the couple's monthly surplus will be reduced to $660 from the pre-plan level of $1,584. Annual savings will now be $660 plus RRSP tax savings, a total of $11,795 per year. That money can go to mortgage reduction. The next year, 2014, and year following, Marie and Jean's tax savings will be $2,061 and $1,814 respectively. If that is added to the accumulated monthly surplus of about $7,200, they will have $11,075 to put into their mortgage, the planner estimates. That will allow them to eliminate their mortgage in 10 years.
Year 4 (2014) Now it is time to examine the family's life insurance needs. Marie and Jean are quite under-insured, given the needs of their children. Marie has group insurance with a death benefit of $190,000 and the couple has a joint and first to die universal life policy that costs $130 per month.
If Marie dies, Jean will get $390,000. After paying off the mortgage, he would have $162,000 left to invest and take care of the children. If he were to die, his coverage would be the $200,000 from their own joint first to die policy and that would not even cover the mortgage repayment. They should increase their coverage to $1-million each with a 20-year level term policy so that coverage would extend to the time the kids are no longer financially dependent on the parents. At the end of the 20 years, premiums would soar, but the amount of coverage they need would decline. Annual premiums for Marie for $800,000 death benefit would be about $900 and a similar policy to cover Jean would cost about $1,000 per year. They are now paying $130 per month for their universal life. The new policies would cost $158 per month and would provide more coverage, Ms. Nalbantoglu says.
Year 5 The couple has reduced risk, paid down as much as half their mortgage debt and increased their financial security. Annual surpluses can be put into their TFSA accounts.
If they have added $4,800 per year for the last four years, they will have $26,100 in their TFSAs, almost all of it representing fresh savings growing at an assumed real rate of 2.5%. The money can be used for further mortgage paydown or for some of the rewards that the couple postponed while investing in RESPs and RRSPs.
THE LONGER TERM
Marie and Jean work for the same company. They each contribute 5% of salary to the company's defined benefit pension plan, but Marie gets a 7.5% boost from the company while Jean gets a 5% boost. By the time Marie retires at the assumed age of 65, she will have $717,000 in her plan and Jean, who will work two more years, will have $517,000 in his plan. Each will be able to convert either to an annuity or to a life income fund. If Marie takes the LIF option and makes minimum withdrawals, she can split pension income with Jean to reduce their combined taxes.
When Marie is 71 and Jean 64, their total income after taxes of $36,620 will be approximately $95,660 consisting of Marie's future pre-tax Quebec Pension Plan benefit of $19,520, pre-tax OAS of $10,898 for Marie, pre-tax LIF income if $44,100 for each and Marc's pre-tax QPP of $13,662, all in future dollars.
Their expenses will have grown appreciably, but child care costs, education and retirement savings will have ended and insurance premiums will have declined or vanished. Any gap in expenses can be closed with TFSA savings, Ms. Nalbantoglu says.
"Frugalness is good, but frugalness with a plan is better," the planner explains. "With the focus that my sug gestions provide, Marie and Jean should be able to attain most of their goals." For the latest updates PRESS CTR + D or visit Stock Market news Today
No comments:
Post a Comment