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When he bought his first home recently, Timothy says he felt like he was starting a new chapter in his life.

He’s 31 years old, single and works for the federal government. Now he’s the proud owner of an Ottawa condo valued at $227,000 with a $167,000 mortgage. If he continues to work as a public servant, he will retire with a fully indexed public service pension plan.

Now that he’s feeling financially established, Timothy is more aware of the potential claims on his paycheque.

“I’m wondering how to balance my goals of saving for retirement (the future), saving to travel (near future), possibly buying a car one day, budgeting for day-to-day purchases such as clothes and toys like a new laptop,” Timothy writes in an e-mail.

We asked Terry Gibson, vice-president of E.E.S. Financial Services Ltd. of Markham, Ont. to look at Timothy’s situation.

What our Expert Says

Timothy is off to a good start, Mr. Gibson says. He has secured a foothold in the real estate market, historically a “wonderful hedge” against inflation.

To do so, he withdrew $20,000 from his registered retirement savings plan under the federal Home Buyers’ Plan. This, plus some savings and a loan from his parents, enabled him to put 25 per cent down on his condo, which cost $227,000. The larger down payment will make up for the loss of tax-deferred growth on the money he withdrew from his RRSP, the planner says.

Timothy chose a variable rate mortgage, which has certainly paid off for homeowners in recent years, Mr. Gibson notes. But if interest rates start to rise, Timothy “would be smart to add a provision in his savings strategy for periodic lump sum payments toward his mortgage,” the planner says.

This way, he will reduce the amount of interest paid over the length of the mortgage and will be able to pay off his mortgage sooner.

Timothy has $16,100 of available RRSP contribution room for 2009. Although, it’s not practical for him to fully utilize his contributions this year, he should take advantage of this available RRSP contribution room over the next few years, Mr. Gibson says.

If Timothy contributes $6,333 annually to his RRSP ($5,000 contribution plus his required $1,333 repayment under the home buyers’ plan), he would use up his current available RRSP room in four years.

Because he is a member of a generous defined-benefit pension plan, Timothy’s ability to generate future RRSP deductions will be restricted to about $600 of new RRSP room each year, the planner estimates.

“If we extrapolate these contributions and add them to his current RRSP and locked-in RRSP holdings, assuming a growth rate of 6 per cent, his RRSP at age 60 would be worth $266,500 and would supplement his pension with an income of about $21,000 annually.”

Timothy plans to contribute $5,000 a year to his TFSA, which could finance some of the holidays and toys he wants to buy, Mr. Gibson says. Once he has caught up with his annual RRSP and TFSA room, and paid off the remainder of his home buyers’ withdrawal, Timothy will have enough money to build his non-registered investment portfolio or make lump sum payments toward his mortgage.

The trick is knowing when to favour one over the other. It’s the old question, should I save and invest or pay down the mortgage?

With interest rates so low, Timothy can likely earn higher returns by investing, Mr. Gibson says. When and if interest rates move higher, “the pendulum will shift and he should start reducing his mortgage.”

The tipping point would be when his mortgage rate approaches the 5-per-cent range. At this level, the after-tax rate of return Timothy would need to equal the after-tax cost of his mortgage would require a fairly aggressive, and riskier, investment strategy.

Timothy also plans to take advantage of a plan at work that allows employees to put a portion of their annual earnings toward financing a sabbatical.

“By the time he embarks on his journey, there should be sufficient funds available in his TFSA to supplement his reduced employment income,” Mr. Gibson says.

Still, it’s important for Timothy to set priorities in his wish list because spending his savings on one thing – a computer, for example – might limit his ability to do another, such as take time off work to travel.

“His goals are attainable but as his funds are limited, he must plan ahead.”

Then there are the unknowns. Retirement for Timothy is many years away, Mr. Gibson notes.

“As well as we might plan, there are always aspects of life we cannot envision – family responsibility, poor heath, changes in employment status,” he says. These unknown factors demand that people continually adjust and re-evaluate where they are heading.

Special to The Globe and Mail

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