At 29, Paul has a well-paying job – $95,000 a year – and a house in Alberta with a mortgage. With the market so competitive, he is thinking seriously of getting an MBA to enhance his professional degree. He wonders if he can afford to finance another year of studying.
“I’m wondering if I’m in too much cash to achieve this goal,” Paul writes in an e-mail. He has about $50,000 in cash and short-term deposits. “How can I finance the MBA school of my choice?”
As well, he wonders if he should quit his job to study for a year, or keep working and find a part-time MBA program. “I’m torn about the right financial choice.”
When Paul bought his house, he borrowed $10,000 from his registered retirement savings plan under the federal Home Buyers’ Plan. “Is it a better choice to repay it in one year or to pay the minimum each year?” he asks.
His other near-term goal is to propose to his girlfriend and “start a family in the next two or three years.” Young as he is, he is even saving for retirement and has set a spending goal. Paul feels that the competing choices he faces are common to many young people. “I thought maybe it would be good to have a millennial version [of Financial Facelift],” he adds.
Is he on a solid footing?
We asked Marc Henein, an investment adviser with Scotia Wealth Management in Mississauga, to look at Paul’s situation. Mr. Henein holds the certified financial planner (CFP) designation.
What the expert says
“Paul has a great job for someone his age,” Mr. Henein says. Paul asks whether he should repay his Home Buyers’ Plan loan entirely this year, something he could easily do. “He can, but there is no advantage to doing so,” the planner says. “This is an interest-free loan to yourself.”
Paul has $50,000 in bank accounts and short-term guaranteed investment certificates. He would like to set aside $30,000 for an emergency fund because of the uncertain housing market and the potential for job loss. The remaining $20,000 could go to longer-term savings vehicles.
As it stands, Paul has $36,000 in his tax-free savings account and $2,000 in his RRSP. He has a defined contribution pension plan at work valued at $61,000 . “Paul should ensure he is taking full advantage of the 50-per-cent matching program that exists with his group pension plan,” Mr. Henein says. “This is essentially free money.”
Assuming his employer continues with a 50-per-cent contribution match, Paul works to the age of 60 and his money grows by 4 per cent a year, he can expect to have about $780,000 in RRSP and defined contribution pension plan assets, Mr. Henein says. “Assuming a 5-per-cent withdrawal rate in retirement, Paul can draw $39,000 of income from this portfolio [each year].”
Canada Pension Plan and Old Age Security will likely provide an additional $15,000 to $20,000 a year, bringing Paul very close to his retirement goal of 80 per cent of his current take-home pay, Mr. Henein says.
In regards to his cash on hand, he could contribute half of the $20,000 to his RRSP (he has $31,000 of unused contribution room) and the other half to his tax-free savings account. “The TFSA can be used to fund shorter-to-medium-term expenses, whereas the RRSP will be set up to grow and complement his workplace pension plan in retirement.”
Paul would like to get an MBA to make himself more marketable, the planner notes. “Given the volatile job market, I would suggest he do this part-time and maintain his full-time job.” Now, before he has family obligations, is the best time to pursue this goal, Mr. Henein says. “Giving up your job in this uncertain Alberta economy could lead to a more prolonged time out of work.”
Paul nets $6,700 a month. With expenses of $4,400 a month, he has positive cash flow of $2,300. “This cash flow can more than cover the cost of the part-time MBA over the next few years,” Mr. Henein says.
Perhaps Paul’s biggest question is whether he will be on a solid financial footing to get married and start a family in the next two or three years. “I would say yes, he is doing all the right things financially,” the planner concludes. “One of the biggest causes of marital stress and divorce is money. Paul is proving himself at a young age to be smart with his expenses and is making the right financial decisions.”
The person: Paul, 29.
The problem: Should he pursue an MBA full-time or part-time? Does he have enough money to pay for it? Is he on solid footing to get married and support a family?
The plan: Study part-time. Invest half of $20,000 savings in his RRSP and the other half in a TFSA. Use surplus cash flow to pay for MBA program.
The payoff: A solid financial footing, indeed.
Monthly net income: $6,700.
Assets: House $410,000; cash and short-term deposits $50,000; TFSA $36,000; RRSP $2,000; market value of work pension plan $61,000. Total: $559,000.
Monthly outlays: Mortgage $1,560; property tax $200; water, sewer, garbage $100; home insurance $60; electricity $75; heating $60; maintenance $25; transportation $400; groceries $200; clothing $20; gifts $120; vacation, travel $200; dining, drinks, entertainment $195; club $10; grooming $10; other personal discretionary $55; dental $50; drugstore $5; health, life and disability insurance $145; telecom, TV, Internet $185; RRSP $100; TFSA $300; pension plan $325. Total: $4,400. Surplus: $2,300.
Liabilities: Mortgage $378,605 at 2.1 per cent variable.
Special to The Globe and Mail
Published Friday, Jul. 29, 2016 9:18PM EDT
Last updated Friday, Jul. 29, 2016 9:18PM EDT