Dilemma for Millennial Couple, Able to Sock Away More Than $30,000 a Year, Is Where to Put the Savings

Situation: Childless couple 30 and 28 want to pay for home and save for retirement

In Saskatchewan, a couple we’ll call Eric, 30, and Jessica, 28, have been married for five years. Both work in the transportation industry as vehicle dispatchers. Their take-home income, $7,933 a month plus $750 for renting out a suite in their home, totals $8,683 a month, providing a good living in a town where house prices today are what prices in Toronto and Vancouver were generations ago. Their dilemma — where to put savings?

Financial Overview

Eric and Jessica are in a favorable financial position, saving $2,600 a month, thanks to their modest cost of living. For the eight-month balance of 2017, they will save about $20,800 and $31,200 for the full year in 2018. However, they have an outstanding mortgage balance of $353,000. With no children in the immediate future, it is possible to use their savings to create future value for living and retirement.

Debt and Savings Strategy

Their mortgage has a 2.99% interest rate with a 25-year amortization. They pay $1,800 each month. If they accelerate paydown by making an extra annual $5,000 payment on the mortgage, it will be paid off by the time Eric is 47, a reduction from the present schedule that will make the couple mortgage-free when he is 65.

Next, they should put $6,500 into an RRSP for Eric, who does not have one at present, and add $3,500 to Jessica’s modest RRSP. They both have a 34% marginal tax rate, so the savings will be about $2,200 for Eric and $1,200 for Jessica.

Finally, they should put $7,500 for each, $15,000 total into Tax-Free Savings Accounts (TFSAs). Neither partner has one now.

Family and Future Planning

If they do not have children, the money they would have set aside for kids’ cost of living and education will be available for their retirement. Their present mortgage with accelerated payments will be eliminated in 18 years. The money they now pay into the mortgage, $1,800 monthly with no accelerated payments, or $21,600 a year, will be available for retirement savings. Assuming a 6% total annual return, less 3% for inflation, with $21,600 of combined annual savings for 17 years from the end of the mortgage to Eric’s retirement at 65, they would have non-registered savings of $484,150. Annuitized for the next 32 years to Jessica’s age 95, this capital would generate $23,800 a year in 2017 dollars, assuming a 3% return after inflation.

Their two TFSAs, starting from zero balances in the near future and enhanced with the suggested contributions of $7,500 each, and growing at $5,500 per year for each, would have combined balances in 35 years of $727,000. Annuitized to pay out all income and principal in the next 32 years to Jessica’s age 95 with a 3% growth rate after inflation would generate $34,600 per year in 2017 dollars.

Their RRSPs, $4,400 at present and growing with what we can assume will be contributions of $1,000 a month each for 35 years to Eric’s age 65, would add up to $1.5 million on a combined basis, assuming a 3% annual return after inflation. Annuitized for 32 years to Jessica’s age 95, the money, paid out in RRIFs, would generate $73,500 per year.

Conclusion

Add in assumed full Canada Pension Plan benefits of $13,370 each at 2017 rates for Eric and Jessica, full Old Age Security benefits at 65 of $6,942 for each at 65, and add in present rental income of $750 per month, $9,000 per year, and they would have total pre-tax income of about $181,500 a year. With splits of eligible pension income, no tax on $34,600 of TFSA income, and application of today’s age and pension credits, they would not trigger the OAS clawback that presently starts at about $74,000 of income. On their taxable income (everything but the TFSA payouts), they would pay tax at an average rate of 20% and have about $12,700 per month to spend in 2017 dollars.

This detailed financial planning strategy, as outlined by Caroline Nalbantoglu of CNal Financial Planning Inc., helps the couple to confidently move forward with their financial goals.

For more details on this case, you can read the full article in the Financial Post here.