Late start means tougher savings slog for couple | Family Finance ...

Situation: Boomers with young child make late start on home, investments
Strategy: Use insurance, pension to boost home down payment, cash flow
Solution: RESP, down payment in place, retirement funds growing

Late to have started a family and late to be buying a home, a couple we?ll call Angus and Catherine, both 47, are struggling to catch up. They want to buy a home, build an education fund for their five-year-old daughter (we?ll call her Mary) and finance their own retirements in 20 years. Though they have appreciably less time for all that than couples who begin to strive toward those goals in their twenties, it is doable.

A marketing manager for a manufacturing company, Angus brings home $5,575 a month based on salary and commissions. Catherine, a teacher, took five years off to raise Mary but plans to return to work in the fall on a part-time basis. She can expect to take home $2,500 a month.

Even after childcare costs, she should be able to add about $1,000 a month to family after-tax income. The following year, she will seek full-time employment, adding $2,500 to $3,000 a month to family after-tax income.

It is a question of setting priorities

?Our goals are to retire in 20 years and then live in a southern climate,? Angus says. ?Of course, we want to help our daughter pay for her post-secondary education and to give her a stake when she goes out on her own.?

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Angus and Catherine. In his view, the goals, including repayment of a loan from a family member, can all be achieved. ?It is a question of setting priorities,? he says.

Angus and Catherine have the resources to make a substantial down payment for a town house they have found. They have $50,000 in cash in the bank. Also, Catherine expects to receive $27,000 from a pension fund payout, $3,500 of which would be lost to income tax, leaving $23,500 for the down payment.

The money could go to Catherine?s RRSP and could be accessed for the down payment. The money has to be in the RRSP for at least 90 days, then can be tapped for a Home Buyer?s Plan payment. RRSP funds, including a bit of growth, would then be approximately $55,000.

The Home Buyer?s Plan route would allow them to use pre-tax dollars for the down payment. That is about a 40% boost in purchasing power, Mr. Moran says. The money will have to be paid back to the RRSP over a 15-year period.

They will be gaining an interest-free loan of their own money but sacrificing tax-free growth in the RRSP. However, given that gains on their home would be tax-free, which beats payments coming out of their RRSP/RRIF that are subject to tax at full rates, it?s not a bad investment, the planner notes.

To be free of their mortgage when they are 65, Angus and Catherine would have to pay it off in 18 years

They have chosen a $375,000 townhouse.

If they tap their enhanced RRSPs for Home Buyer?s Plan loans for $55,000 and add the $40,000 from their bank accounts, they will have $95,000 for a down payment. They can then take a $280,000 conventional mortgage, Mr. Moran says.

To be free of their mortgage when they are 65, Angus and Catherine would have to pay it off in 18 years. If rates average 3.5% for that period, they would need to pay $1,746 a month, assuming payment once a month.

They can make those payments without too much stress, for Angus and Catherine already pay $1,475 a month in rent.

They can make up the difference by saving on their $325-a-month insurance expenses. Angus can replace the existing whole-life policy with term coverage and get coverage for Catherine as well.

Each can have a $500,000 policy. Angus?s premiums? would be $612 a year, Catherine?s $375 a year. That works out to $82 a month, a $243 monthly gain in retained cash that they can direct to mortgage payments.

Taxes and the upkeep of a home would add to their costs, but they will have potential future gains on the home, something renters cannot get, Mr. Moran says.

Education savings

Angus and Catherine have started a registered education savings plan for Mary.

It?s current balance, $5,500, will have to be boosted aggressively. They are currently adding $150 a month. If they make a few small cuts in their budget, they can push contributions to $200 a month.

With $2,400 a year in contributions, the Canada Education Savings Grant will add 20%, or $480, for total annual contributions of $2,880. In the next 12 years until Mary is ready for post-secondary education, the plan, growing at 3% a year after inflation, will have almost $50,000 at the time Mary starts school.

That should pay for four years of tuition at a local university that she could attend while living at home.

Retirement

If Catherine returns to full-time work in the public-school system, she can expect? pension based on 2% of her best five years? income times years of service. If she works to age 65, she could build up 18 years of service. If her five-year average salary is $70,000 a year, she would get $25,200 a year.

Angus should have full age 65 CPP benefits, currently $11,840 a year. Catherine could get 75% of the maximum, or $8,800 a year, based on her work history and the assumed return to full-time work. Each will get Old Age Security at 67, currently $6,540 a year.

These pensions plus the teacher?s pension would produce $58,920 a year. That works out to $4,175 a month after 15% average income tax. That income would cover 2012 expenses net of debt-service costs, education and retirement savings of approximately $3,600 a month.

?It is possible to make a late start on building family financial assets,? Mr. Moran says. ?Angus and Catherine can do it, but it will take a great deal of commitment to the task.?

Need help getting out of a financial fix?

Email andrewallentuck@mts.net for a free Family Finance analysis.

Source: http://business.financialpost.com/2012/09/07/late-start-means-tougher-savings-slog-for-couple/

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