Situation: Couple, almost 50, has one big income, 3 kids, modest education and retirement savings
Solution: Use cash and non-registered savings for kids, start TFSAs, grow RRSP savings
In Ontario, a couple we’ll call Ralph, 49, a corporate middle manager, and Ellen, 47, a self-employed management consultant, are raising three teens on monthly after tax incomes of $7,900 and $1,000, respectively. Ralph receives annual bonuses that average $18,000 after tax. That pushes total annual income to $124,800 per year after tax.
Ralph and Ellen live far from the red hot property market in Toronto. Their $600,000 house is spacious. They owe $327,386 on a mortgage with a 15-year amortization and $130,000 on their cottage financed with a loan from their parents.
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Family Finance asked Eliott Einarson, a financial planner with Exponent Investment Management in Winnipeg, to work with Ralph and Ellen. “They need to catch up savings for the cost of putting three children through university and their own retirement,” he explains.
The mortgage on their primary residence requires them to pay $475 per week. They add $100 to accelerate payment. With the present payments, $575 per week, the outstanding balance of $327,386 with a 2.49 per cent interest rate will be eliminated in about 13 years when Ralph is 62 and Ellen is 60. Ralph and Ellen pay $600 per month with no interest for the cottage. It will be paid in 18 years.
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Ralph and Ellen have $48,000 in two Registered Educational Savings Plans. They have suspended contributions, thus foregoing the Canada Education Savings Grant of the lesser of 20 per cent amounts contributed or $500 each year. The first child to be put through university is 16. The CESG ends at the 17th year. The value of the eldest child’s RESP is $32,000. It is in a scholarship plan, but they can add to the sum via another RESP account they could open at most financial institutions. Ralph and Ellen should use some of Ralph’s bonus to add $2,500 for the last CESG eligibility year. That would make the fund $35,000 plus a year’s worth of modest growth as the child begins university.
Two other children, ages 12 and 13, have $16,000 in a family group plan. No contributions are being made, however, there are 11 child years (6 years and 5 years, respectively) to go for eligibility. That means there are 11 times $2,500 contribution ceilings to qualify for the CESG, the planner says.
If Ralph and Ellen pony up $2,500 in each contribution year and qualify for the $500 CESG, then the $16,000 balance, which we’ll assume is partitioned $8,000 for each child, will grow to $29,500 for the younger child and $25,600 for the older child, assuming 3 per cent annual growth after inflation.
There is an existing flow of $1,300 per month or $15,600 per year for athletic costs. As each child ends high school, one third or $433 per month, can be added to RESP accounts.
The parents can balance these unequal accounts. They can use the children’s personal savings of $60,000 — with their consent — if needed. The children will have available about $35,000 each for post-secondary education with the potential addition of their own savings.
Ralph and Ellen have no Tax-Free Savings Accounts. With Ralph’s average $18,000 annual bonus added in, they can easily grow accounts to the $52,000 present (as of 2017) lifetime contribution limit. They have non-registered savings of $10,000 which could be a foundation. On top of that, they have annual savings which could be directed to TFSAs, avoiding tax on the same money held outside of TFSAs. They also have non-registered investments of $30,000. There would be capital gains tax to be paid if the assets are sold, but a long-term investment of, say, 20 years with no tax on annual gains of 3 per cent after inflation would easily cover tax due at no more than about 22 per cent of realized gains based on 50 per cent inclusion rate, as present tax rules allow.
The couple can put their $10,000 cash each into TFSAs and add $8,000 per year each for the next 11 years. In that time, the contribution ceiling would rise to at least $112,500 and their contributions would total $98,000. When Ralph is 60, their RRSPs would total about $119,400 each or $238,800 in total. If the TFSAs are paid out in the next 37 years to Ellen’s age 95, the accounts would provide $10,400 per year.
Ralph and Ellen have combined retirement savings accounts which total $486,800. All but $62,800 of that sum is Ralph’s. His job provides a basic 5 per cent contribution by his employer to his plan plus a variable match of contributions up to 4 per cent of gross income with a 50 per cent (2 per cent in this case) match. It adds up to a 7 per cent annual payroll contribution rate based on gross income deducted at source.
If Ralph works 11 more years to age 60, then his contributions with company top-ups based on his basic $160,000 salary would create $11,200 annual contribution to his RRSPs.
It is not tax-efficient for Ellen to make RRSP contributions, but if Ralph does continue to make RRSP contributions of seven per cent of present salary, then present RRSP and LIRA balances of $486,800 would, with a 3 per cent average annual return after 3 per cent inflation, increase to $821,600. If that sum is annuitized so that all capital and income are paid out by Ellen’s age 95, it would provide a flow of $37,000 per year or $3,083 per month before tax, Einarson estimates.
The couple’s non-registered savings with a present value of $90,000 with no further contributions would have a value of $124,600 when Ralph is 60. That sum, annuitized for the next 37 years to Ellen’s age 95 would generate $5,600 per year before tax in 2017 dollars.
Retirement at 60 would end Ralph’s CPP contributions. On that basis, he could expect about 90 per cent of the present $13,370 maximum CPP payout or $12,033 per year. Ellen, with much reduced contributions due to her lower income and uncertain income path, could expect no more than half of the maximum or $6,685 per year. Each partner could receive Old Age Security benefits, currently $7,026 per year, at age 65. The sum, $85,770, with splits of eligible pension income and no tax on TFSA income, would be taxed at 13 per cent. The couple would have $6,360 per month to spend, more than enough when the kids are gone and debts paid.
Retirement stars: Three retirement stars *** out of five