Kelsey and Taylor earn high incomes — Kelsey, a consultant, makes $180,000 a year, and Taylor, a banker, makes $150,000. But Taylor has recently been thinking about going back to school.
“Taylor is interested in taking a part-time master’s program related to psychotherapy and is considering a career change to that field,” the couple says. They’ve calculated that “tuition costs are around $45,000 over a three to four year period and salaries in that profession are lower than in banking.”
“What would we need to have in order for such a career change to be financially viable?” they wonder.
The couple lives in Milton with their kids and want to ensure they are “able to fund a vibrant lifestyle for our kids during childhood — extracurricular activities, annual family vacations, Christmas and birthday presents, etc.”
“Our young son is autistic,” the couple adds. “We want to ensure he can be provided for throughout his life. He has heightened needs but it is a realistic goal that he will be able to live independently once he reaches adulthood.”
The couple has more than $300,000 in savings: $217,561 in RRSPs, $63,557 in TFSAs, $58,211 in RESPs and $421 in an RDSP. But they want to know “which registered accounts should be prioritized for investing?”
What is the best financial plan forward for this 36-year-old couple? We asked them to share their monthly and weekly expenses with an adviser to get a better sense of their spending.
The expert: Jason Heath, managing director at Objective Financial Partners.
Kelsey and Taylor both have high incomes and spend generously on their kids’ extracurricular activities and family vacations. Their balance sheet — their assets minus their liabilities — looks good. But they are not sure what Taylor’s career change could mean for their future.
The best way to plan out different scenarios for Taylor’s career change, saving targets, and an eventual retirement is to develop a retirement plan. Professional Certified Financial Planners (CFPs) use financial planning software to do this because it is not quite as easy as just saving a certain percentage of your income or targeting a certain amount of investments.
It depends on whether you plan to downsize your home, when you want to retire, whether your expenses will change in retirement, if you expect an inheritance, your investment risk tolerance, and so on.
What I can say at a high level is that Kelsey and Taylor’s situation looks good. They have a strong balance sheet for 36-year-olds with decent home equity, savings in different accounts, and a defined benefit pension for Taylor. I think they have afforded themselves the opportunity to consider expensive schooling and a career change for Taylor.
It sounds like they have mostly maximized their registered retirement savings plan (RRSP) room which makes sense at their income levels. Their tax savings for RRSP contributions is in the 40 per cent range — slightly higher for Kelsey given a higher income. I would prioritize Kelsey’s RRSP contributions first and foremost as a result, but RRSP contributions generally make sense for this couple. They will hopefully be paying a lower tax rate on their withdrawals in retirement, effectively shifting income from their current high-income years to lower income years.
The registered disability savings plan (RDSP) for their son may be a missed opportunity for them. They can contribute $1,000 a year and get $1,000 of matching contributions from the government. They only have a small balance and since a child is born with autism, they may be able to go back up to 10 years and get $10,000 of government grants by contributing $10,000. It creates the challenge of figuring out how to make their other child whole someday with future financial support for them, but that is a bridge they can cross in the future.
Their kids are clearly a big priority, so I like their focus on continuing to maximize registered education savings plan (RESP) contributions to save for post-secondary education.
The only saving choice that is a bit of a wild card for me is their tax free savings accounts (TFSAs). They have a line of credit balance and are paying 7.2 per cent interest. They would need to earn a higher return than 7.2 per cent on their TFSA savings to be better off compared to withdrawing from their TFSAs and paying down their debt. That percentage of return is a relatively high threshold that would require an aggressive risk tolerance, low investment fees, and probably a combination.
If the line of credit is bugging them, there may also be a non-financial return to paying it down. The TFSAs are also a good source of funds to make my suggested RDSP contributions.
Results: Spending in week one: $7,514. Spending in week two: $3,016.
Takeaways: Kelsey and Taylor say the exercise has given them “some great next steps to consider, especially with the investments we have sitting in our TFSAs.”
“It’s great to have peace of mind that we have the financial ability to change careers and know that we our finances are generally healthy,” they say.
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