Who has kids and pays off their mortgage by age 34? Two Ottawa professionals with a real shot at retiring by 50. What can they teach the rest of us? Scale our ambitions to our income, and use imagination to reach our goals.
Jen and Rick found jobs upon graduating, saved to buy a home costing just more than average, then repaid the mortgage quickly. While starting to raise two children, they also managed to set aside twice their annual income by age 34.
The $192,000 a year they now earn is much more than most. Jen has the security of a government job and pension, while Rick is less secure and well paid as an engineer.
The key to their success so far is “they are masters of their cash flow,” says David Burnie, a certified financial planner and a partner with the fee-for-service firm of Ryan Lamontagne Inc. in Ottawa.
“A lot of people want it all, and they do it all at once,” he adds. “They have this money-making machine and they just have to fine tune it.”
As smart as they have been, however, Jen confesses: “We aren't quite sure where to go from here. We are also having difficulty figuring out how to invest our savings.”
Burnie worked with them on a realistic spending and savings plan: Put $52,000 of non-registered savings into renovations this year. Save the maximum permitted in retirement and tax-free savings accounts. Save $75,000 for four big trips to Hawaii, Disney World, Europe and Australia over the next decade. Save for the kids' university. Take minimal investment risk and retire at 50, maybe sooner.
Burnie had unexpected advice:
Work from home: Rick lost a higher-paying job, but his current employer asks him to work at home some days. Burnie suggests he work there half-time or more. Then the employer could submit a T2200 form that would make Rick eligible to deduct office expenses as if he were running a business at home. He would save on tax, gas and time commuting or getting the kids from daycare.
Delay RRSP tax rebates: Rick has earned and saved enough to contribute $40,000, or about 50 per cent more, to his registered retirement savings plan before the 2012 contribution deadline. He had planned to use up the extra room gradually, to get the maximum percentage tax refund.
But Burnie says he should dump the savings in there right away and claim the tax deductions over several years, or whenever a bonus would push his income into a higher tax bracket. “RRSPs are not like other deductions. You don't have to use them (as soon as you qualify) or lose them,” says Burnie.
Go slow with RESPs: Any parent with $50,000 of excess cash will save more tax and accumulate more for a child's education, by putting it into a registered education savings plan at once than by saving $2,500 a year for a series if $500 government grants, he says.
Meanwhile, others would be smarter to repay debt and free up their capacity to borrow than to keep cash on hand for emergency. Since he works in a volatile industry, Burnie suggests they keep cash in reserve, and limit their annual RESPs to $2,500 per child.
Ditch workplace insurance: Jen and Rick pay for group life insurance at work. But, if they bought individual term insurance cheaply through their alumnae association, they would have coverage if either spouse lost their job or died while out of the workforce. Burnie also suggests they buy critical illness insurance while young, but they would rather not.
Don't borrow to buy funds: Some advisers would urge clients to use a home-equity loan to buy mutual funds outside of an RRSP or TFSA and write off the interest cost. “(Jen and Rick) don't need to take that risk (of amplifying the risk of stock market losses),” says Burnie.
As early as age 50, Jen's pension would cover half of what Burnie calls the couple's “lifestyle expenses.” If Rick makes the maximum RRSP and tax-free savings account contributions, he will have enough to pay an income equivalent to $33,000 in today's dollars by age 50. Jen's savings, other investments, and government pensions at ages 60 and 67 would provide income and inflation protection.
They need only earn an investment return 2 percentage points higher than inflation, which they could likely achieve with more bonds than stocks in their portfolios, provided they buy low-fee investment funds, he calculates.
Buy student housing: Burnie suggests they aim toward putting 20 per cent down and borrowing to buy a bungalow that is walking distance from a local university or college.
They could invest a further $20,000 to $35,000 to update the kitchen for a family and add an entrance, two apartments, a shared kitchen and bathroom to the basement for students.
monday makeover
The clients
Jen and Rick, 34
Their situation
Parents Jen and Rick were early to find high-income jobs. Hers has more lifetime security than his. By buying an average Ottawa home and repaying the mortgage early, they now have plenty of cash and time to renovate, travel and save.
The strategy
Tune and protect their money-making machine by doing what others would not: Have Rick stay home; pour savings into RRSPs now, take tax deductions later; save slowly for their kids' education, buy a rental bungalow and add student rooms.
Liabilities:
None
Total: $0
Assets:
House $400,000
Retirement savings $111,487
Tax-free savings $46,107
Education savings $19,731
Other savings $252,340
Cars $27,000
Total: $856,665
Annual income
Salaries $192,564
Annual expenses
Income tax $28,540 ( With extra RRSP deduction)
Payroll deductions $8,068
Pension $ 7,723
Daycare $24,756
Home operation/taxes $15,114
Groceries and restaurants $9,000
Transportation $10,334
Personal expenses $9,980
Lifestyle expenses $4,770
Charity $1,000
Total: $119,285
Annual savings
RRSP $19,831
TFSA $11,000
RESP $4,992
Total $35,823
Extra in 2013
(From income/savings)
RRSP $31,889
Renovations $52,000
James Daw is a former Toronto Star columnist and a Certified Financial Planner. Reach him at
