Let’s pretend for a second pop culture icons lived in the real world. They face the same everyday challenges we all do – from getting the kids to school on time, making time for exercise, making sure they walk the dog, navigate professional challenges, get the kids to dance lessons, get groceries etc etc…. It’s so exhilarating that my heart rate is on the rise but an exciting and unlikely hero is about to emerge!
Stay with me here – picture a financial scenario a long… long time ago in a galaxy far… far away. Meet the Skytalkers. Luke, a 45 year old professional chef who has been successful in his trade despite losing a hand in a terrible work accident in his previous profession. Lacey his wife, a 42 year old self-employed business owner with a retail shop in downtown Tatooine. (Leigha is his sister.) Their daughter, little Annie, is 14 and, of course, Luke Junior who’s 7. The family is happy and healthy after the end of the rebellion where Luke played a large role in the victory – and was a hero of sorts.
They’re now searching for a different kind of hero as they’re looking towards retirement. This requires a champion that can bring a different kind of victory. Enter financial consultant – Jedi master in financial peace of mind. The Skytalker’s lives will forever be changed….
Their financial picture
- Luke makes $40,000 per year
- Lacey makes $120,000 per year
- Principle residence $500,000
- Rental property 300,000.
- Current chequing account – $15,000, savings account – $15,000.
- Lacey’s RRSP – $250,000, Luke’s RRSP – $50,000
- Annie’s RESP – $2,000, Junior’s RESP – $1,000
- Principle residence mortgage – $300,000
- Rental property mortgage – $100,000
- Line of Credit (on rental property) – $30,000
- Car loan (a brand new speeder – very nice) – $30,000
Current Savings Strategies
- $600 to Lacey’s RRSP
- $150 to Luke’s RRSP
- $500 to their saving account at the Tatooine Credit Union
The Skytalker’s total Net Worth – $673,000
So where does our hero – the financial consultant start? With a conversation, of course. He finds the Skytalker’s would like to retire by the year 2037 and 2040 respectively, fund an education for Annie and Junior, leave a good amount of assets behind for their kids and fund a retirement income for them both at $5,000 per month. Is this possible? Yes and with analysis – not necessarily “the force” – our hero can find the problem spots in their current strategy and add in vital solutions.
Fund their Retirement
The strategy is to stop Luke’s monthly RRSP contribution of $150 and add a monthly spousal RRSP contribution by Lacey into Luke’s spousal RRSP of $375. We lowered Lacey’s personal monthly RRSP contribution to $375 as well – keeping the same contribution amount in total per month.
Why? Lacey makes 3 times as much as Luke and is in a much higher marginal tax bracket. By having Lacey make the contribution to Luke’s Spousal RRSP it lowers Lacey’s taxable income further and increases their tax savings. In their original strategy, Luke and Lacey would receive tax savings of approximately $3,300 as a result of their RRSP contributions. With this small change the amount increases to $3,663. The extra tax savings are committed to be saved to their TFSA each year.
Our financial Jedi doesn’t stop there. He finds a way to save more by redistributing monthly budget amounts to fund their Tax Free Savings Accounts. First – he changes the rental property mortgage to an interest only payment. They can deduct the interest they pay on the rental property mortgage from their taxable income. He then reallocates the principle that was to be paid on the mortgage to their Tax Free Savings Account (approximately $500). Another $500 that was headed towards Luke and Lacey’s savings bank savings account is redirected to the Tax Free Savings Account. The funds newly directed to the TFSA are invested at an approximate rate of return at 5%. The rental property mortgage balance will remain stationary but the TFSA will grow. Luke and Lacey also wanted to have an emergency fund and that was their savings account – but by investing the emergency fund into an easily accessible TFSA in a moderate risk mutual fund – they will get some return on their investment and still have an emergency fund to draw from if they need it.
Their car (speeder) loan was at a higher rate of interest 4.9%. Our hero suggests they pay down the car loan with their line of credit which is at a lower interest rate of 2.7%. They then use the money that they save on interest (which is already in the budget) to top up their RRSP contributions. Our financial advisor makes sure that Luke and Lacey feel comfortable with these decisions. That’s a big part of our hero’s job. He finds solutions that fit his clients comfort level when it comes to investment risk and the amount of debt they carry.
Fund the kid’s education
Analysis found that the education goals for Annie and Junior weren’t sufficiently being met. Recognizing this – they increased their contribution to Annie’s Registered Education Savings Plan from their disposable income. She is the older sibling and headed to school first so they make the contribution $5,000 per year in order to optimize the galactic education savings grants they can get from the galactic government. (In Canada they are called the CESG – Canadian Education Savings Grant). They also started a monthly contribution to Junior’s RESP to continually take advantage of the government grants. Junior, being 7 years old qualifies for the planetary grant (British Columbia Education and Training Savings Grant) and their financial consultant helps them apply for the extra $1,200 in one-time government help towards his RESP.
This scenario doesn’t have to happen a long time ago in a galaxy far far away… in fact this particular case study is based on a real couple right here on Vancouver Island. Overall – our financial Jedi was able to increase the Skytalker’s net worth significantly by the end of their plan – leaving a generous amount for their beneficiaries. More importantly, the financial consultant didn’t ask the Skytalker’s to contribute anything more to their plan than they were comfortable with in order to achieve their goals – in fact in many cases above they were just reorganizing and reallocating funds that were already committed within their budget. By reorganizing the way they saved they were able to reduce taxes, increase net worth, and fund their retirement and their family’s education. That’s not the force – that’s just smart.
May the financial planner be with you….
Stu Tunheim is a financial consultant with the Investors Group. He can be reached at 250.338.7811.