Small Kids, Big Debts and a 17 Year Age Difference

ANDREW ALLENTUCK
 
In British Columbia, a couple we'll call Steve, who is 62, and Roberta, who is 45, are raising two young children on a combined take home pay of $7,800 a month from government jobs. As well, they have two grown children with careers and families of their own.

"Our concern is setting ourselves up for my upcoming retirement while still raising a young family," Steve says. "How do we prepare for the future while still enjoying the present?"

What our expert says:

Facelift asked Derek Moran, president of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Steve and Roberta. Their challenges lie in their 17-year age difference and their $757,300 of debts.

"Most of their debt is on income properties," Mr. Moran says. "It exposes Steve and Roberta to higher interest rates and the possibility that lenders could call loans in a worsening economic environment."

Debt management has to be the top priority for the couple, the planner reasons.

Steve and Roberta have assets of $1,260,160 including $24,760 of stocks they hold outside of registered retirement savings plans.

First step: Sell the stocks and reduce their $34,020 of credit card debt, Mr. Moran suggests.

Steve and Roberta have $637,000 tied up in two rental properties out of assets of $661,760 that produce current income. That's excessive concentration in real estate. One property, valued at $262,000 yields just $271 a month, consisting of $63 cash and $208 paid to mortgage principal. The other property, appraised at $375,000, produces a better monthly return of $471 plus $713 that reduces mortgage principal.

Mr. Moran suggests selling the first property. Assuming they could net about $250,000 after transactions costs, proceeds of $76,047 left over from paying off their $173,953 mortgage could be used to pay off the remaining credit card balance of $9,260 and to pay down about $66,787 of the $263,237 mortgage on their principal residence. These moves would allow them to shorten the amortization on their home mortgage by 17 years and four months. Their home mortgage would be paid off in 23 years when Steve is 85 and Roberta is 68. By selling their low return income property, they will save $167,400 in interest, Mr. Moran estimates.

The children, ages eight and 14, have registered education savings plans worth $17,900. If Steve and Roberta resume contributions, adding $200 a month for each child, qualifying for Canada Education Savings Grants of 20 per cent of contributions ($480) a child per year, then the parents can give $40,458 to each for post-secondary education, he says.

Steve currently gets $3,768 a year in pensions from a former employer. By age 65, he will qualify for another pension from previous employment of $10,764 per year, as well as full CPP - currently $10,615 a year, and full Old Age Security, at $6,070 a year.

If he is still working at age 65, he will be vulnerable to the OAS clawback that begins at $64,718. His current gross annual income before rental income and pensions is $113,000. If he works past 65, he should defer taking Canada Pension Plan benefits until age 70, generating a CPP bonus. That would generate a 30-per-cent CPP bonus. Deferral would lessen the chance that benefits would be taxed at the highest rate. The risk is that he might die before age 70 and receive no CPP benefits.

Steve's RRSP has $98,000 of assets. If the account grows at an inflation-adjusted rate of 3 per cent a year, it could be worth $131,704 in 10 years. If it grows at the same rate, he may withdraw $9,576 a year in 2008 dollars to age 90. Adding up his company pensions, public pensions and RRIF income, he will have $40,793 plus the pension from his present employer. If he works to age 70 then the sum of his private pensions and deferred CPP benefits deferred rises to $70,793 in 2008 dollars less OAS clawback. Mr. Moran assumes both will live to age 90.

Roberta's work pension will depend on when she returns to full-time work. She has earned a third of the maximum CPP credits but could work and contribute another 22 years. She will be entitled to full Old Age Security at age 65 in 22 years when Steve is 81. If she retires at age 65, her annual income would be $6,070 from OAS plus estimated CPP at 60 per cent of maximum or $6,369, RRSP/RRIF income of $4,813 plus a work pension of $7,440 for a total annual pension of $24,692 in 2008 dollars. At her age 65, they could have a comfortable income and no debt, the planner says.

"This couple have cash flow issues because of the complexity of their investments and problems structuring retirement income," Mr. Moran explains. "Steve should not retire until their personal debts are paid or at least reduced to a level at which interest rate changes will not matter much to their way of life."

Client situation

The People

B.C. couple, he 62, she 45, with two young children.

The Problem

Financing kids' education and retirement.

The Plan

Sell a property, pay off credit cards, shorten mortgage, build net worth.

The Payoff

Money for current needs, kids' education and retirement.

Net Monthly Income

$7,800.

Assets
Principal residence $362,000, Rental property #1 $262,000, Rental property #2 $375,000, RRSPs $144,400, taxable investments $24,760, Steve's pension $54,000, Roberta's pension $9,900, two cars $10,200, RESP $17,900. Total: $1,260,160.

Monthly Disbursements
Mortgages-house & income properties $2,367, property taxes $570, utilities $316, property insurance $193, phones $97, food & restaurants $1,000, auto gas & maintenance & insurance $710, day care $360, clothing $150, entertainment $287, travel $100, Steve's RRSP $300, miscellaneous $600, savings $750. Total: $7,800.

Liabilities
Mortgages $716,400, five credit cards $34,020, line of credit $6,880. Total: $757,300.

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