In Montreal, a couple we?ll call Louis, 43, and Patricia, 48, are raising their nine-year-old child. Louis works as a marketing representative for a large hotel, Patricia as an administrative employee of a Quebec university. They take home $6,650 from their jobs each month. They live well. They spend $1,350 a month on food and wine and another $1,100 on travel, and put everything they don?t spend into registered savings.
?We want to retire debt-free and live comfortably in a country place, winter vacations in the south and buy a retirement cottage,? Louis says.
We want to retire debt-free and live comfortably in a country place, winter vacations in the south and buy a retirement cottage
For now, every penny they earn is allocated to good living and registered savings. As a result, they are starved for cash. If they cut their savings, they will impair their child?s education funds or their own retirement. If they cut their spending, they will erode their present standard of living.
Louis and Patricia are getting by with their financial juggling act, but they may find that they cannot continue it if, as they are considering, they buy a cottage and if Louis, who has a gross income before tax of $6,930 a month, takes a 30% to 40% salary cut in a career change he contemplates.
Family Finance asked Caroline Nalbantoglu, head of CNal Financial Planning in Montreal, to work with Louis and Patricia. Her advice ? cut expenses for such things as? food and wine down to $1,000 a month. Current spending on restaurants, $250 a month, entertainment, $200 a month, and clothing, $325 a month, can be cut in half. Cutting $350 a month from the $1,100 they spend each month on travel would push the sums saved to about $1,088 a month, or an astonishing $13,060 a year achieved just by some trimming, the planner says.
Money management
The couple has $30,000 outstanding on their home-equity line of credit financed at 3.5%. They make monthly payments of $400, which will eliminate the debt in six years and three months if interest rates do not rise. They could easily put $300 of the new monthly surplus into the line of credit, bringing payments to $700 a month. That would eliminate it in about 3? years. At that point, their surplus would be the $1,088 plus the newly liberated original HELOC payment of $400 a month for total savings of $1,488 a month. That?s $17,856 a year. They could then open tax-free savings accounts and invest $5,500 each a year. In four years, they would have almost $50,000, enough for a 25% down payment on a $200,000 cottage.
They would then be able to finance the mortgage with payments out of their new surplus. However, if Louis does make a career change with a 30% to 40% drop in income, the buying a cottage would not be possible. They must decide on which it is to be, Ms. Nalbantoglu says.
Louis and Patricia are concerned they will not be able to generate enough money to pay university tuition and costs for their child. Their RESP already has $30,500. If they and Patricia?s parents continue putting $2,500 a year into the plan, achieve a 5% growth rate before inflation adjustment and receive a combination of $500 through the Canada Education Savings Grant and $250 from a similar Quebec fund, they will have about $79,000 in the plan by the time the child is 17.
Retirement
Louis contributes 4% of his gross salary to his employer?s defined-contribution pension plan with a 100% match by his employer. He wonders if he should save fees and put the money he contributes into another investment. In fact, the fees charged are 0.9%, about what private money managers charge. What makes it worthwhile to stay in the employer?s plan is the 100% match. However, it would be wise to sell his aggressive stock funds and, instead, invest his money in a few balanced funds, Ms. Nalbantoglu says.
If Louis remains with his employer to age 65, he will have built up about $491,000 in his pension plan. Patricia also has a defined-benefit pension plan. She contributes 5% of her salary and her employer adds 7.5% of salary. At her age 50, the match goes up to 10%. So by her age 65, the fund will be worth $197,000, which she can use to buy an annuity or to transfer to a LIRA.
Louis can?t take a lower salary in a new job, buy the cottage, live the good life as he and Patricia do now and retire with the present level of spending power. They have tough decisions to make
Each contributes to a personal RRSP. Louis puts $7,000 into his RRSP every year. It should grow to about $600,000 at his age 65. This RRSP capital, combined with his pension plan, will produce $44,000 in annual income. If $11,840 Quebec Pension Plan benefits at age 65 and two years later, Old Age Security, currently $6,540 a year, are added, his total income should be about $62,400 a year at age 67.
Patricia puts $2,960 into her RRSP each year. She should have about $350,000 in her account when Louis is 65. If her company pension, RRSP and LIRA withdrawals at 65 are combined with QPP and, at her age 67, OAS, she should have total income equal to her present gross income of $34,000 a year, Ms. Nalbantoglu estimates. That would produce total family income when both partners are 67 of $96,400 before tax in 2012 dollars. With pension income split, they would have $5,625 a month to spend after paying tax at an average rate of 30%. That?s about what they spend now minus savings and child care costs.
?The challenge for this couple is to be realistic about their power to earn money,? Ms. Nalbantoglu says.? ?Whatever they decide to do must be done with a view to their retirement. Louis can?t take a lower salary in a new job, buy the cottage, live the good life as he and Patricia do now and retire with the present level of spending power. They have tough decisions to make.?
Need help getting out of a financial fix? Email andrewallentuck@mts.net for a free Family Finance analysis.
Source: http://business.financialpost.com/2012/12/21/cash-starved-but-enjoying-the-good-life/
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