Facelift asked Caroline Nalbantoglu, a fee-only financial planner at PWL Advisors in Montreal, to speak with Ivan and Penelope in order to sort out their finances and map out their futures.
They should begin by using their RRSP contribution room, the planner says. Ivan has $6,822 of RRSP space and Penelope $7,324. They also have a mortgage balance of $234,000 and the Home Buyers Plan loan that totals $12,450, Ms. Nalbantoglu says. She recommends they use a savings account into which they deposit $115 every two weeks. They should increase their savings by $1,154 for a total of $1,269 per biweekly period. That will produce $32,994 savings a year, more than enough to fill up their RRSP space.
If Ivan and Penelope get moving on this savings plan this fall, by February, 2006, they will have $15,800 in the account, enough to make full use of their RRSP space. Those contributions will produce a $2,900 refund for Ivan and a $3,100 refund for Penelope, the planner says.
If Penelope stops work to have another child, she will receive employment insurance benefits for the 52 weeks she is on maternity leave. Once she returns to work, there will be sufficient savings to start another registered education savings plan for the second child.
Starting in 2008, with their house renovations finished and paid for, Ivan and Penelope can put $20,000 a year into accelerated mortgage payments. That will allow them to pay off the mortgage within eight years, the planner says.
After their debts are eliminated, savings should go toward retirement, Ms. Nalbantoglu advises. If Ivan works to age 65, he will receive $79,511 a year from a defined benefit pension plan. Penelope's pension will be $83,770, also from a defined benefit plan. Both sums are in current dollars indexed at 3 per cent a year to reflect salary increases, the planner explains.
Ivan and Penelope will begin retirement as each reaches age 65 with Quebec Pension Plan payouts of $21,000 for Penelope and $21,477 for Ivan, all in future dollars. Their combined pension income in retirement will total $205,758 and their non-registered portfolios will have grown to $850,000, assuming a 5-per-cent rate of growth of assets. These funds will produce $42,500 of future income at 5 per cent a year.
The total retirement income will be $248,258 in future dollars, the planner says. Their expenses will have grown to $61,000 a year, assuming an average annual inflation rate of 3 per cent. They will be well within their income, she says.
At 69, Ivan and Penelope will have to convert their RRSPs to registered retirement income funds. Penelope's will have increased to a value of $233,260, assuming a 5-per-cent annual growth rate. Ivan's will be worth $214,220 using the same assumption. He will also have a money purchase pension fund from an Ontario university for which he worked that will have a value of $87,750, again using the 5-per-cent annual growth assumption. He should roll that pension into a Locked-in Retirement Account in the near future, the planner says.
At age 69, they should roll their RRSPs into RRIFs for their flexibility, Ms. Nalbantoglu advises. The payouts from these funds through RRIFs will initially provide about $25,000 of income in future dollars, she says.
By the time their son reaches 18, his registered education savings plan should have grown to $76,294. Neither Ivan nor Penelope has sufficient life insurance to maintain the other in customary style should either die prematurely, Ms. Nalbantoglu notes. On top of the $70,000 each has in group coverage through their employer, each should buy additional term coverage of $500,000.
Mortgage, $1,560; property taxes, $335; Home Buyers payback, $100; utilities and phone, $388; insurance, $129; transportation, $350; groceries, $600; entertainment, $150; child care, $320; clothing, $100; vacations, $300; miscellaneous, $150; gifts and charity, $50; RRSP, $249; RESP, $185; savings, $2,620. Total: $7,586.
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