In British Columbia, a couple we'll call Sam, who is 40, and Margie, who is 37, have recently landed steady salaried jobs. For the past decade, one or the other was in school.
Recently, both obtained full-time, permanent jobs in professions related to the environment. Now they want to make use of their combined annual after-tax income of $76,452 a year for more travel. They don't plan to have children. They want to live for today, but in so doing, they will sacrifice some of the money they ought to save for their futures.
what our expert says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Sam and Margie.
His conclusion - they give travel a high priority, so much so that they would be prepared to work into their late 60s if necessary. "They are so dedicated to the idea of travel that they are even willing to sell their condo and rent, using the equity they extract to pay for still more travel."
Their ability to juggle travel and the other expenses of living is framed by their monthly disposable income of $6,369, and their reported expenditures of $4,192 net of saving. Their theoretical monthly saving rate, $2,177, allows for significant savings or debt reduction in the future.
For now, however, saving for future spending should be less of a goal than reducing their total debts of $275,475, Mr. Moran says. They currently pay $270 a month on their car loan, $920 on their mortgage, and $300 for a condo repair loan for a total of $1,490 a month. At this rate, they will have paid their debts in 25 years, assuming their average interest rate holds at 4 per cent a year. If rates rise to 6 per cent, they would have to pay $1,763 a month; at 8 per cent that would rise to $2,102, the planner estimates.
Odds are that interest rates will rise. The implication is that they will save a great deal of money by accelerating total monthly debt payments by adding their monthly savings of $2,177 to the $1,490 they currently pay on various debts for a total of $3,667. If they raise payments to this level and interest rates hold at 4 per cent, they would clear their debts in 6.5 years. If interest rates rise to 6 per cent, it would take seven years. At 8 per cent, it would take about 7.5 years, Mr. Moran says.
Retirement is far from the couple's present concerns, but it needs to be addressed, the planner insists. Both Sam and Margie should get full Old Age Security, currently $6,204 a year, at age 65. Each should qualify for close to full Canada Pension Plan payments, currently $10,905 a year. That's a base of as much as $34,218 in public pensions in current dollars. Assuming that they require another $30,000 of gross income to meet their needs in retirement and assuming they live to age 90, they would need $579,800 in additional funds to reach that goal, Mr. Moran estimates.
With a 3-per-cent annual return after inflation, they will have to save $1,425 a month on top of present retirement savings of $29,724 a year. However, if they work to when Sam is 70 and Margie is 67, CPP would be deferred and could be as much as $14,831 per year per person under proposed rules that raise the bonus for remaining at work. Under those future CPP rules, income required from their savings would be only $24,500 a year. They would need to build only $415,000 of savings, Mr. Moran says. And they could do this by saving $933 a month to Sam's age 70.
When and how to accumulate those savings is the next issue. Margie, who pays income tax at 29.7 per cent in her bracket, should make spousal contributions for Sam, whose bracket is 20.1 per cent. When Sam's income rises above $41,000 a year, he can then contribute to his own RRSP. Including a company matching program, his current contributions are $552 a month, which should continue until the couple's debts are substantially reduced. For now, it is not feasible to increase RRSP savings, the planner says.
The plan will achieve its objective of providing the couple with about $64,000 of pretax income when they retire, but it will take a special discipline to make it work, Mr. Moran warns.
"We need flexibility for travel," Margie explains. "One or both of us might want to quit our jobs. We like less-traditional financial ideas, even though we recognize that our present debts are a deterrent to our futures."
"We can do estimates and set up debt-repayment and savings targets, but carrying them out is the problem," Mr. Moran says. "One or the other could decide to take a long leave from work, or become ill or disabled. That would wreck their cash flow for debt reduction and saving. And interest rates could rise beyond our projections. If they want financial security in retirement, they will have to focus on building their wealth. There really is no other way."
The People: B.C. residents, ages 40 and 37.
The Problem: Substantial debts block future spending and saving.
The Plan: Pay off the debts and build savings.
The Payoff: Sufficient funds for retirement.
Monthly net income: $6,369
Assets: RRSPs $29,819; car $12,500; condo $270,000 Total: $312,319
Monthly disbursements: Mortgage $920; tax and condo fee $194; condo repair loan $300; food $700; car payment $270; gas for car $80; transit $90; utilities: $284; car insurance. $137; home insurance. $40; recreation $260; travel $300; health $50; pet $80; gifts, charity $187; RRSP $300; savings $2,177; total: $6,369
Liabilities: Mortgage $159,491; condo repair loan $103,484; car loan $12,500; total: $275,475
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