Balancing Worthy Causes

Andrew Allentuck

Family has chosen to have less for itself and to give more to others

Boost education savings, enhance retirement funds, cut portfolio risk

Retirement in which current lifestyle can be maintained or enhanced

In Toronto, a corporate manager we'll call Jack, 50, and his wife, Martha, 44, have invested their lives not just in their work and three teenage children, but in the good works of their church. They spend a fourth of their $7,830 monthly take-home pay on good causes, including donations and tuition at a denominational school for their children. The benefits of their good deeds are clearly more than monetary.

"We want to check on what our giving and spending on Christian education for our children implies for our future," Jack says.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with Jack and Martha. His view is direct -- "They could get a jolt at retirement when they realize that they are not adequately prepared."

Jack and Martha are balancing their beliefs and their generosity toward their children -- including $675 per month spent on their sports and another $685 per month on family vacations -- with secure jobs and their $641,000 of assets, including defined-benefit pension plans for each, $80,000 in RRSPs and $45,000 in shares Jack holds in his company. It is substantial capital, yet not quite the level one would expect for a manager well into his career.

Asset Management

Asset management is key to improving the financial outlook for the family, Mr. Moran notes. Jack gets shares in his public company each year. Currently, he has $45,000 in this stock. Keeping the shares, which are 19% of his financial assets, represents an unwise concentration of risk.

Jack's company has been a stock market darling and trades at a premium to the market in terms of its ratio of share price to earnings per share. It has a modest dividend.

Retaining the shares could be a smart move, for the stock may continue to beat the market in coming years. But concentrating his bets by having stock in his employer is not wise. If the company were to get into serious trouble, Jack could lose not only his job, but a major financial asset as well. He would be better off to sell the shares from time to time and invest in a diversified mutual fund or exchange-traded fund, Mr. Moran suggests.

Jack could sell shares to reduce his family's dependence on his company or, alternatively, he could keep the shares and use them to make an "in kind" spousal contribution. That would free up cash he would otherwise use for his RRSP contribution. Assuming that his tax rate is 37%, he would receive a tax refund of $16,650. He has $106,000 of contribution room, so the move would seem to have no downside, the planner explains.

If Jack uses the refund to reduce his mortgage from the current balance of $46,500 to $29,850, he would have it paid off three years sooner than the present five years and 10 months. It would mean the family would be debt-free by Jack's age 54. That would be 11 years before his planned retirement age of 65.

With the mortgage paid off, the couple could allocate the $755 per month they now spend on mortgage interest and principal to savings. If they were to achieve a 3% return on that flow of savings after inflation, the money would add up to $116,000 by the time Jack is 65. Rather than use an RRSP for the money, they could use a tax-free savings account. TFSAs are far more flexible than RRSPs and allow withdrawal at any time without tax, the planner says.


The family has only $11,500 in RESPs. The eldest child, 18, is in a school program in which he is able to work for part of his tuition. A middle child, 16, expects to have a scholarship at university to pay for some costs. The youngest child, 14, will get most of the RESP support. If Jack contributes $5,000 per year from cash no longer used for secondary school tuition, the annual Canada Education Savings Grant would add $1,000. So, when the youngest child is ready for university in three years, funds available would be $32,500 -- enough for at least two years of post-secondary education. Part-time work would add to the funds. Jack and Martha would cover the rest.


At retirement, Martha will be eligible for $548 per month. Jack's company pension is much like an RRSP, to which both he and his employer contribute. By his age 65, he should have $791,200 in his pension and RRSPs, which would provide an annual indexed and fully taxable income of $39,560 per year in 2010 dollars to Martha's age 90, Mr. Moran estimates.

Both Martha and Jack will qualify for full Old Age Security benefits, currently $6,204 per year, when each reaches 65. Jack should receive full Canada Pension Plan benefits, currently $11,210 per year. Martha should receive approximately 40% of the maximum CPP payout, or $4,484 per year.
Adding up their pensions, they should have $68,210 per year. On top of that, they should have additional income from $81,000 of personal RRSPs and $43,000 of Jack's non-registered company shares. Those funds, if allocated to payments that would end when Martha is 90, would lift their pre-tax retirement income to $82,860 per year.

The Family's Future

Jack and Martha have elected to endow their church and its schools rather than maximize family savings. That choice has to be respected, but the result is that the family has only $11,500 in its RESP and only $210,500 in retirement savings, including the value of company shares. Working to their mid-60s will certainly raise their retirement incomes, as will an expected inheritance of $200,000. Even estimating that they boost their financial assets to $500,000, they will have to decide how much of this capital is for them and how much they wish to use to further their beliefs.

After tax, their retirement income would be about $58,000, assuming a 30% tax rate. Currently, they spend $93,960 per year. By their retirement, they will have paid off their mortgage, saving $755 per month, and will no longer pay private school tuition bills or other children's costs. Those savings, $2,730 per month, would reduce total annual expenses by $32,760 per year for projected retirement spending to $61,200 per year. Take off direct RRSP contributions of $11,580 per year and net annual spending falls to $49,620, which is less than their estimated post-tax retirement income. The difference could be used for travel or for additional contributions to their good works.

"Jack and Martha rank their personal values ahead of keeping money," Mr. Moran says. "It is admirable, but the costs are clear. However, chances are that with careful investing and money management, they will be able to serve their goals, their children and themselves fairly well in retirement."

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