Tahir and Paula, aged 45 and 44, have three children, aged 9, 13 and 15. Their financial picture includes:
- a combined household income of $132,000
- total savings of $350,000 in their company pension plans
- a $165,000 mortgage.
The couple also recently inherited $150,000 after the death of Paula's mother. On the advice of their lawyer, they met with a financial planner to discuss ways to invest this money and build more wealth.
Their top three goals were to:
- Pay off their mortgage.
- Pay for their children's education after high school.
- Retire by age 60.
How could they best use their savings and inheritance to build more wealth and achieve their goals? For instance, would it be better to pay off their mortgage? Or should they save and invest the money for their retirement? The financial planner reviewed the couple's total financial picture. She put together a plan that linked up all areas of their finances so that they could see how one area impacted on another. For instance, they could see how paying down the mortgage changed the savings they would have at retirement. The plan included 'what if' scenarios to change the picture if they didn’t like what they saw.
Tahir and Paula's plan: The financial planner showed them that with today's low mortgage rates, they would do better to save and invest their inheritance. The couple settled on a financial plan which enabled them to:
- Invest their inheritance to avoid unnecessary investment risk while creating sufficient income to fund their early retirement.
- Cut their spending so they could save some money each month in a Registered Retirement Savings Plan (RRSP). This would help them build savings faster for retirement. And, they would lower the income tax they pay each year.
- Contribute their tax savings to a Registered Education Savings Plans (RESP) for the children's education costs. These plans would allow them to earn government grants to top up their savings.
With this plan, Tahir and Paula would be financially independent at age 60, instead of waiting to retire at age 65.