Financial Facelift

A reality check, with retirement closing in

Special to The Globe and Mail

Claire and Tyler are facing a big expense at a time when they have little – if any – money to spare. He is 54, she is 52. Their eldest child is on his own but their two girls, 20 and 21, are still in university.

“Our fixer-upper house still has to be fixed up,” Claire writes in an e-mail. The cost: $85,000. Claire, who has a clerical job with the municipality, grosses $45,600 a year. Tyler, a tradesman, makes $92,150. Claire asks: Should they use their line of credit to pay for the renovation?

She wants their small, older home on Vancouver Island to be comfortable, “with nice furnishings,” she adds. “We have never purchased anything new, except a couple of bed mattresses.”

Tyler and Claire had a late start as a double-income family, she says. “My husband’s income was sporadic for the first 12 years of our 25-year marriage.” Because of medical problems, she was unable to work outside the home until 10 years ago. They were late to save for retirement as well.

“I see both of us working to 65 with a focus on the house and supporting our daughters’ education expenses,” Claire says. They are paying a third of the university costs, with the rest coming from student loans and the children’s part-time jobs.

Claire thinks being in her 50s is forcing her to take a long, hard view of the family’s finances. As well as the renovation, “I would love to have a holiday in England at some time.” They also want to know if they are preparing properly for their retirement. Her work pension will pay $780 a month at 65. He has an insurance company investment product called Manulife GIF Select, a guaranteed income fund, to which he contributes $10,000 a year.

We asked Eric Davis, an investment adviser with TD Waterhouse in Kamloops, B.C., to look at Claire and Tyler’s situation.

What the expert says

Mr. Davis suggests they take out a new mortgage, rolling their existing $79,200 of debt in with the $85,000 they will need to renovate the house. The new, $164,200 mortgage could be locked in for five years at a rate of 3.29 per cent amortized over the 13 years that at least one of them will still be working. The new payments would be about $1,293 a month, less than they are paying now.

“The monthly saving would add to their cash flow,” Mr. Davis says. Before they begin their renovations, though, Tyler and Claire should build up an emergency fund of anywhere from $15,000 to $30,000, which could be held in a tax-free savings account, he adds. Alternatively, they could wait until their children are finished university and renovate the house then, when they would be in a stronger financial position.

Claire and Tyler prepared their own estimate of retirement income using the Service Canada calculator. At age 65, Claire will get $8,736 a year from the Canada Pension Plan, $6,288 from Old Age Security, $9,360 from her defined-benefit pension plan and $662 from her spousal RRSP, for a total of $25,046 a year.

Tyler will get $6,288 from Old Age Security, $11,520 from the Canada Pension Plan and $30,944 from his guaranteed income fund, for a total of $48,752 a year. This will give them a family income of about $74,000 a year before tax. If they were each to pay tax on their own income, he would pay about $7,400 a year and she would pay $1,340.

Fortunately, they can take full advantage of the government’s income-splitting rules to lower their combined taxes by about $1,000 a year to $7,740. This would leave them with a net income in retirement of $66,060 or $5,505 a month – more than enough to cover their expenses because they will no longer be making mortgage payments, contributing to their savings or helping to pay for the children’s education.

The critical thing is to pay off the mortgage and any other debts they might have in full before they retire, Mr. Davis says. “They need to hit retirement debt-free.” This should be attainable because their cash flow will greatly improve once the children have left home. “However, they may have other expenses in future, such as weddings.”

As for the trip to England, it may have to wait until the girls have graduated and moved out on their own, Mr. Davis says. Claire and Tyler’s goals are attainable, “but not all at once.”

The people

Tyler, 54, Claire, 52, and their children.



The problem

How to come up with enough money to pay a third of the girls’ education costs and a major renovation on their modest home while still contributing to retirement savings.



The plan

Roll existing debt into a new, larger mortgage to cover the cost of renovations, then pay it back in full over the rest of their working lives, estimated at 13 years.



The payoff

A comfortable home, a good start for the children and a financially sound retirement plan.



Client situation

Monthly net income

$9,750



Assets

Bank account $2,500; her RRSP $8,700; his guaranteed income fund $236,000; her pension plan $15,706; residence $325,000. Total: $587,906



Monthly disbursements

Mortgage $1,400; property tax $110; utilities $185; house insurance $110; maintenance $100; car loan $286; car insurance $233; fuel $350; maintenance, parking $125; groceries $950; clothing $40; line of credit $400; gifts, other $175; personal $100; dining out, entertainment $135; pets $50; sports, hobbies $50; subscriptions, other $40; dentists $35; prescriptions, vitamins $30; life insurance $125; disability/critical illness insurance $65; telecom, cable, Internet $378; RRSP $1,135; education costs $415; other saving (slush fund) $450; union dues $380. Total: $7,852. Surplus: $1,898



Liabilities

Mortgage $76,000; car loan $3,200. Total: $79,200



Special to The Globe and Mail

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