Q: I am a 55-year old with three kids who are in university. I have exhausted our RESP savings and am having a cash flow problem. My wife and I have about $250,000 in RRSPs and another $150,000 in LIRAs. We have had some money difficulties over the last couple of years and now have a $450,000 mortgage on a home that is worth around $650,000.
I am a good earner and make close to $200,000 before taxes. I am a psychologist in private practice. My wife works for me and we income-split to help reduce taxes.
The dilemma we are facing is whether or not we should sell our house and downsize into something a little cheaper in order to reduce our mortgage, or use some of the money that we have in RRSPs to pay down the mortgage and help with the kids’ education. Once they are done, we will have a lot more money to put against the mortgage, but what is killing us is the interest on the mortgage.
We are also thinking about building a house and have found a nice lot. We could probably do it for about $500,000.
A: It’s expensive to send one kid to university, let alone three at the same time. I can understand why you’re feeling the pain, David. Kids can only earn so much during the summer and it barely puts a dent in education costs than can easily top $20,000 annually.
Given your family income, they probably won’t qualify for any government grants or loans either.
You could access the money in your locked-in retirement account (LIRA) given that you are over the age of 55. And your RRSP is fair game at any age or for any reason. The question is whether or not you should be tapping retirement funds to pay for your children’s education, David.
I would caution against doing so. The thing is you’re in a high tax bracket of around 50% depending on your province of residence and how much income you pay to your wife. Withdrawing from your retirement accounts may only net you 50 cents on the dollar. This seems like a steep price to pay compared to other options available.
On the topic of income splitting, you may be missing an opportunity. You can only pay a salary to your wife to the extent she is actually doing work for you and even then, she should only be paid an amount that is equal to what you would otherwise pay to a third party.
Depending on your province of residence, you may be able to establish a professional corporation and make your wife and children shareholders of the corporation and pay them dividends without restrictions. In this way, you could accomplish more income splitting with your wife and maybe pay dividends out to your children at a significantly lower tax rate than you and your wife are paying. These dividends could be used to pay for their education. This could result in an immediate increase in your cash flow, David.
Another option could be to refinance your home. If it is worth $650,000, you can generally borrow up to 80% less the value of your mortgage, so $520,000 in total debt less your existing $450,000 mortgage leaves $70,000 available. If you can add $70,000 to your mortgage or access this equity via a secured line of credit at a low rate of interest, this might help in the short-term with your cash flow crunch.
In the long-term, I think a combination of downsizing and budgeting may be advisable. If you’re making $200,000 per year, you’re probably netting over $120,000 annually depending on your salary to your wife, other sources of income and province of residence. I know that university is expensive, but I’m guessing that your basic living expenses are not insignificant either if you have less than 2 times earnings in retirement savings and only modest equity in your home (some or much of which may be due to capital appreciation as opposed to debt repayment).
I think it’s important to assess your retirement readiness and whether or not you need to start reigning in your spending in the years approaching retirement in favour of debt repayment and saving, David. This will help ensure that your quality of life is not significantly different during retirement.
So while there are short-term fixes to your children’s education funding, I think it’s equally important to be selfish and address your own retirement goals here as well.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.