A couple we'll call Fred, 42, and Martha, 36, have a comfortable life in eastern Ontario. They have a $300,000 house with $62,780 equity, four preschoolers, and good careers, his in publishing, hers in health services. They have paid off most of their $100,000 student loans and focused on their task of raising four children, ages 5, 3, 2 and newborn. Their monthly take-home income, $9,700, covers expenses with few frills. Their problem in a nutshell: how to pay off their remaining debts of $272,720 while funding their children's education and saving for retirement.
Fred and Martha are part of Generation X, the post-postwar boomers born from the mid-60s to the mid-80s who are living with the opportunities of accessible university education and the costs of attending. Both have advanced degrees. Their financial assets are just $147,820.
“We spent a total of 12 years in university, and since graduation we have paid down our student debt to $35,500, all the while getting married, buying a house, cars – used, of course – and having a family,” Martha explains.
Family Finance asked Benoit Poliquin, president and lead portfolio manager of Exponent Investment Management Inc. in Ottawa, to work with the couple. He sees the issues as impermanence of income (because Fred works on contracts), getting a larger house, paying off student loans and their $237,220 mortgage debt, and socking away money for retirement. Neither Fred nor Martha has a defined benefit pension plan.
Maternity leave“We'll begin with Martha's maternity leave,” Poliquin says. “She will be able to stay at home and thus eliminate childcare costs, $1,200 a month, or $14,400 for the year.” The couple can also eliminate $540 monthly RRSP contributions, $6,480 for the year, and $625 monthly RESP contributions, $7,500 for the year, for $13,980 during her roughly one year of maternity leave; for an overall total of $28,380.
After Martha's return to work, roles would be reversed until the youngest child is in full day kindergarten. Martha, who earns $120,000 a year before tax, would remain the principal breadwinner while Fred, who earns $48,000 a year before tax, could work at home – it's common in his field – and take over childcare. That would save $1,200 a month. Household income would be reduced, but cost savings would be dramatic.
Revised childcare benefits provide $160 a month for each child under age 6, and $60 a month for children 6 to 17. Four children under 6 will generate $640 a month, or $7,680 a year. These payments can be directed to the family Registered Education Savings Plan.
The RESP will attract the Canada Education Savings Grant of $500 or the lesser of 20 per cent of sums contributed, per child. The total added to the family RESP will be $9,216 per year.
Sums will drop as each child passes age 6, but by then the parents should be able to put $833 a month, or $10,000 a year, into the plan and attract $2,000 a year from the CESG.
Using the current balance of $36,830 and adding $12,000 a year for the average of 15 years to each child's age 17 (the CESG stops at the 18th birthday), the fund, growing at three per cent a year after inflation, would have about $287,000 and provide $71,640 in 2015 dollars for each child's post-secondary education, Poliquin estimates.
Home and debt
Once Martha returns to work, the couple should be able to afford to add $1,000 a month to their mortgage payments. Remaining student loans totalling $29,500 being paid down at $530 a month will be paid off in four and a half years. That money can then go to a larger house or to retirement savings. The larger house is the more immediate need. If a total of $1,530 is added to present mortgage payments of $1,020 a month, the total, $2,550, would support a loan of $600,000 at three per cent with a 30-year amortization.
Their equity in their house, $62,780, would support a high ratio mortgage with 10 per cent down. The cost would be a 2.4 per cent charge on top of the mortgage for a total loan of $614,400. The payments would be $2,600 a month. If they were to move up to the larger house later this year, the 30-year mortgage would be paid off by the time Martha is 66. However, a more modest move, say to a house with a $400,000 price tag financed with present home equity and a mortgage with a three per cent interest rate, would push payments to $1,200 a month for 24 years. The mortgage would be paid in full when Martha is 60.
Fred and Martha would like to retire at 60. We'll use Martha's age, 36, which would make retirement take place in 24 years. The couple already has financial assets other than RESP funds of $110,990. Part of that is a $44,600 employment-related RRSP through which the employer matches contributions up to 3% of gross income. Martha has suspended RRSP contributions while on mat leave, but she can resume them in 2016 after she returns to work.
If she adds $3,000 a year to her RRSP out of annual bonuses of $2,000 to $4,000, which the employer then matches with another $3,000, and if Fred and Martha continue to add another $6,480 a year, total $12,480 annually after a one-year suspension during Martha's maternity year, their RRSP accounts, currently a total of $106,990, growing at three per cent after inflation will have $628,300 in 2015 dollars when Martha and Fred start retirement at Martha's age 60. That capital, still generating three per cent a year, would provide $28,400 in pre-tax payments for 35 years, when all capital and income would be exhausted.
On top of that investment income, the couple would receive Canada Pension Plan benefits of 100 per cent of the present maximum of $12,780 a year for Martha and 75 per cent for Fred. Fred could start his benefits at age 60 in 18 years with a 36 per cent reduction for pre-tax income of $6,134 a year before tax. Martha's benefits at her age 60, four years later, would work out to $8,179 a year.
When Martha turns 60, the couple would have pre-tax income of $42,713. If eligible pension income is split, the couple's average tax rate would be five per cent; their after-tax income would be $3,380 a month.
If their expenses, currently $8,050, are reduced by eliminating interest on mortgage and other loans, childcare costs, RRSP and RESP savings and disability insurance premiums, the cost of running one car, $250 of home repairs and life insurance (since the kids would be independent), then monthly expenses would drop to $3,365 and be covered by income.
At 67, each would receive OAS of $6,765 a year, making total pre-tax income $56,243, or about $4,220 a month, after 10 per cent average income tax. “With kids gone and expenses down, it would be a secure retirement,” Poliquin says.