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By ANDREW ALLENTUCK
Special to The Globe and Mail
Report on Business
Saturday, October 4, 2008
A couple we'll call Bob and Sherry, both 35, live with their children, ages four and one, in a village on Vancouver Island on an income of $5,057 a month.
Adrian Mastracci, “fee-only” portfolio manager at KCM Wealth Management in Vancouver, says, “This couple can meet their goals within the parameters of their values.”
They have a house worth an estimated $350,000, financial assets - including RRSPs and RESPs - of $51,400, $25,000 in their small businesses, and a plan to home school their children. They have chosen what they consider an ethical way of life, investing in assets that they believe do little wrong. But their moral decisions have a financial cost. Home schooling the children implies that they will have relatively few hours to work in their own businesses.
"Our philosophy supports our way of life, but we wonder what it means for our family's future," Sherry says. "As self-employed people, we don't look forward to pensions. If our current savings arrangement doesn't allow for a reasonable retirement, we will need to consider other options."
WHAT OUR EXPERT SAYS
Facelift asked Adrian Mastracci, a financial planner and portfolio manager who heads KCM Wealth Management in Vancouver, to work with Bob and Sherry. His analysis suggests that, in spite of their preferences for their ethical lifestyle, they must earn enough to pay off their $124,675 mortgage, save for their kids' post secondary education, and build up savings to support a retirement income of $45,000 a year before tax.
"This couple worries that they did not start earning more before they had children," the planner says. "Now they have to make up for lost time. But first they have to pay down their debts."
Their present savings rate can grow when their mortgage, which they are paying down at a rate of $1,200 a month, is eliminated. Assuming that the present interest rate of 4.8 per cent does not increase, the mortgage should be paid off in about 11 years, the planner notes. The $1,200 monthly mortgage payment can then be added to other savings for a total of $27,600 a year, Mr. Mastracci adds.
Assuming that Bob lives another 48 years and Sherry another 53 years, and assuming that inflation runs at an average rate of 3 per cent a year, that invested savings generate a 7-per-cent average annual gross return, and each partner receives 75 per cent of maximum Canada Pension Plan payments, or $7,965 a year, and full Old Age Security benefits of $6,204 a year, then the couple will require about $1.25-million of financial assets at age 60 to pay for their retirement. That sum seems like a lot, but it is in future, inflated dollars. As well, CPP and OAS are assumed to be indexed at only 1.5 per cent a year, leaving a gap that private savings will have to fill, the planner explains.
Bob and Sherry are able to make their frugal way of life work for their retirement. They have the ability to save an average of $1,567 a month, Mr. Mastracci estimates. This is based not only on current savings of $1,100 a month but by including such expenses as home repairs, for which they are temporarily saving $350 a month, and reducing entertainment and travel.
If they can save at this rate for the next 25 years to their age 60, then, on top of their present $69,900 of capital assets (their business value, cash and RRSPs), they can meet their goal of having $45,000 in pretax retirement income. If they can resist retirement until age 65, they would need to grow their savings at a somewhat more easily attained rate of 6 per cent a year, the planner estimates.
Bob and Sherry need to save for their children's post secondary education. They already have $6,500 in registered education savings plans. If they can add $1,500 a year to those funds and attain a growth rate of 3 per cent in real terms for the next 12 years for their older child and 16 years for their younger child, then each can have $25,000 at the start of university; $1,500 a year will generate a Canada Education Savings Grant of 20 per cent of the amount saved.
The family's growing savings can be held in appropriate registered plans using stocks that produce substantial dividends or in blends of government and corporate bonds which, at this time of financial crisis, are producing yields of almost 6 per cent.
The assets can be held in the registered plans and the Tax Free Savings Accounts (TFSAs) that will go into operation in January, 2009, Mr. Mastracci suggests.
"This couple can meet their goals within the parameters of their values," Mr. Mastracci says. "They will have to maintain their frugal ways to do it, but that's their way of life."
"This is reassuring," Sherry says. "It tells us that we can do what is right for our children and still meet our personal goals for retirement. It would be nice to have more in retirement, but we make do now and we can make do in future."
Client situation
THE PEOPLE
Vancouver Island couple, each 35, with two young children.
THE PROBLEM
Planning kids' university education and retirement on modest income.
THE PLAN
Boost savings with mortgage expenses when it's paid, use efficient investments.
THE PAYOFF
Kids' education partly funded, income for modest retirement.
NET MONTHLY INCOME
$5,057.
ASSETS
Cash $24,500, RRSPs $20,400, RESP $6,500, business value $25,000, house $350,000. Total: $426,400.
MONTHLY DISBURSEMENTS
Mortgage $1,200, property tax $60, utilities & phone $175, medical & dental $75, home improvements $350, food $800, entertainment $100, travel $80, clothing $40, RRSPs $350, RESP $200, car gas & repairs $250, auto & home insurance $200, charity & gifts $77, savings $1,100. Total: $5,057.
LIABILITIES
Mortgage $124,675, Home Buyer Plan loan $15,000. Total: $139,675.
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