After the renos, time to save

In Toronto, Gerry, 55, and Roberta, 54, have put nearly all of their savings into improving their house, reserving just enough money for contributions to their RRSPs and RESPs for their children, ages 20 and 17. They have a few thousand dollars in the bank for emergencies. Each is self-employed, Gerry in management consulting and Roberta in publishing, and neither has a company pension. They have been walking a tightrope between spending for their current lives and saving for their future.

"Since we have moved into our current home, we have been renovating," Roberta explains. "That has eaten up our savings. But we are nearing the end of renos - I hope."

House repairs are not the only pressure that has pushed the couple into a financial bind.

As well, they have to pay the post-secondary educational expenses of their two children. The eldest child is now in university while the youngest may not attend.

On the plus side, the couple have a $190,000 gross annual income. After tax, they have $10,500 a month to spend. Due to renovations that are just about finished, they are beginning to save again after years of neglecting their financial assets. They have RRSPs worth $273,000, RESPs with a $32,000 value and $2,000 in cash.

what our expert says

Facelift asked financial planner and portfolio manager Adrian Mastracci, head of KCM Wealth Management Inc. in Vancouver, to help the couple create a plan that will help pay down their line of credit, add to their RRSPs and RESPs, add to current savings, and target the returns of their investments. They would like to have $80,000 in pretax retirement income, he notes.

"As Gerry and Roberta approach retirement age, they are worried about how well prepared they are," Mr. Mastracci says. "They can save if they discipline themselves, but they have been careless with their money."

Time is on the couple's side, the planner notes. This year, they will reduce annual renovation spending from $60,000 to just $2,000. They want to spend $5,000 on furniture and build a $5,000 travel fund.

They have potential saving capacity, outside of their RRSPs and RESPs, of $5,000 a month. They need a plan for allocating this cash flow, the planner says.

First step: Manage debts. They must pay off their $8,000 line of credit. This can be done in less than two months using cash freed up from house repairs. Then they should defer expenses and buy the furniture over a period of a few years in order to preserve saving capacity, Mr. Mastracci suggests.

Second step: Add to savings. Gerry and Roberta should each put $5,000 into a Tax-Free Savings Account for a travel and emergency fund. That will push each to the maximum 2009 TFSA contribution limit. That would cover a few months of living expenses.

Later, they can add another $10,000 to a taxable savings account for emergencies and travel costs, the planner says.

Third step: Add to RESPs. They should make a final contribution to the family's RESP. It has only $32,000, but they can add additional funds and get one more year of the supplement from the Canada Education Savings Grant.

Fourth step: Add to RRSPs. Gerry and Roberta need to build up capital to supplement Canada Pension Plan payments of $10,905 each and Old Age Security payments of $6,204 per person. These public pensions will add up to $34,218 in current dollars. They will need $45,782 more in annual income to achieve the $80,000 pretax retirement target, the planner says. If they don't contribute any more to their RRSPs, they will have to achieve a 4.7-per-cent real annual return - that's a 7.2-per-cent return before estimated inflation of 2.5 per cent. If they add $20,000 a year to their retirement savings, the required rate of growth drops to a more reasonable 2.6 per cent. If they add $30,000 a year, they would need a 1.5-per-cent annual real rate of return to meet their goal, the planner estimates.

Inflation will be a challenge. Today's $80,000 will be $131,000 if inflation runs at 2.5 per cent for 20 years. At 3.5 per cent inflation, it becomes $159,000, Mr. Mastracci explains.

Increasing their tax-assisted savings should not be hard given their savings rate. Gerry has $85,000 of unused RRSP space while Roberta has $56,000. Gerry should make spousal contributions to Roberta's RRSP until they have equal balances, then they should make equal annual contributions, the planner says.

"This process has been helpful, part from just putting the information together, and part from having a specialist look at our plans," Roberta says. "And this has been the right time to do it."

Special to The Globe and Mail

Interested in a free Financial

Facelift?

Contact andrewallentuck@mts.net

***

Client situation

The Couple: Toronto residents ages 55 and 54 and their two children ages 17 and 20.

The Problem: Spending on renos has slashed savings rate.

The Plan: Pay debt and kids' education and save for retirement.

The Payoff: A return to sound financial budgeting and a focused plan for retirement capital.

Monthly NET income: $10,500

Assets: RRSPs $273,000; RESPs $32,000; Bus. $500,000; Residence $400,000; Car $12,000; Cash $2,000; Total: $1,219,000

Monthly disbursements: Property tax $280; Utilities $370; Renovations $5,000; House cleaning $180; Food $800; Restaurant $300; Entertainment $225; Clothing $150; RRSP $1,000; RESP $250; Gas, repairs $300; Travel $450; Car, home ins $170; Life ins $50; Charity, gifts $300; Pet care $200; Misc. $275; Saving $200; Total: $10,500

Liabilities: Line of credit $8,000