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Mark and Jennifer Cunningham have high hopes for their eight-year-old daughter's postsecondary education. But by the time she's ready for university, they will be hitting retirement. The biggest concern the Toronto couple have is whether they are putting enough money aside for both her education and the comfortable retirement and travel they want to enjoy in 10 to 15 years.
With an annual combined income of more than $100,000, a paid-off 2011 Kia Sportage car, savings of $75,000 and a small investment portfolio, the Cunninghams appear to be in pretty good shape.
They hold a $290,000 mortgage on their home, which is valued at $500,000, but minimal credit card debt. They estimate their non-discretionary spending at $3,500 monthly and discretionary spending at $3,000 or more.
Mr. Cunningham, 43, a supply manager, has RRSPs totalling about $239,000 while Ms. Cunningham, 46, a teacher currently on a disability pension due to chronic fatigue syndrome, has $51,000. Mr. Cunningham contributes regularly to his RRSP, including his entire annual bonus. They've accumulated $10,000 in an RESP for their daughter, and contribute $114 monthly, an amount he says is "probably not nearly enough."
The couple admit they struggle to track their spending and adhere to a household budget, despite their best intentions. They frequently eat out or pick up takeout meals when Ms. Cunningham is often too tired to cook. While the family doesn't spend extravagantly on clothing or furniture, Ms. Cunningham acknowledges she's "an impulse buyer in a gardening store" and enjoys buying gifts for family and friends. The Cunninghams usually take an annual vacation – last year they went to Walt Disney World in Florida – but they collect points to offset travel costs. They also like the idea of a cottage or chalet in their future.
"The biggest obstacle in our way is that we don't know what the target is to save for education and for our retirement," Mr. Cunningham says. "I don't know what our daughter will need nine years from now. I have an idea of what I need for retirement, however I don't know what other expenses may crop up between now and then that may help or hinder me in achieving that goal. I contribute on a monthly basis, but it's nowhere near what I think it should be."
While the Cunninghams have consulted financial advisers, they feel they don't have a well thought-out plan. They're also looking for a good vehicle to help them manage their budget.
"We've done things like using different envelopes of cash and saying, 'Okay, it's $500 for groceries this month,' but on your way home from work, you pick up milk for $4.81 and other stuff and lose track.
"In general, I'm looking for a practical mechanism to manage our budget."
The critique
Planning for retirement and education at the same time would be hard on any family, says Howard Kabot, vice-president for financial planning at RBC Wealth Management. The fact that the Cunninghams are thinking about these issues now is good, but he believes they can afford to do a lot more.
He says the first step is to sit down and look at their finances, either by themselves or with an adviser. What sort of cash flow do they have? Where can they allocate their money and their savings? Once they start to analyze what they need, they can step back and think about what they have to do to get to those goals. Some of it will be savings but it will also depend on the sort of return they project themselves achieving with their adviser.
"What we're talking about is making projections – to project out any number of years based on what the particular goal or objective is," Mr. Kabot says. "If the end goal for retirement is in 10 to 15 years, based on their current savings and the amount they currently have in their RSPs, I'm not sure that they could get there.
"The spouse has a pension coming from her career as a teacher but it's not large. They can't rely on that alone. They should really think about front loading and contributing more to their RSPs than they have been on a monthly or annual basis."
He also advises putting more into the RESP. Since their daughter is eight years old, postsecondary education is about 10 years away. With inflation in education costs running at five per cent a year, he says the couple won't have enough to support four years of university if their daughter chooses to live away in residence.
"You can put up to $2,500 a year into an RESP and get the 20 per cent grant from the government," Mr. Kabot says. "Plus the money grows tax free. They must do that to insure that the education goal they have for their daughter will be met."
As far as their dream for a vacation property goes, Mr. Kabot thinks they should focus more on RRSPs and RESPs.
"Assuming that their first two objectives are retirement and education, maybe once they're feeling better about those in a few years, they could look at this third objective," Mr. Kabot says.
He also observes that their budgeting challenge is distracting them from their long-term goals. Detailed tracking can be difficult and takes some dedication, but he believes they should consider doing that, using their bank and credit card statements as tools at the month's end.
"It's a behavioural finance approach to controlling what we do," Mr. Kabot says. "If you actually sit down in front of your computer or with a pad of paper and enter the information, that could help provide discipline. The debit and credit cards and Excel spreadsheet together can bring discipline to what the Cunninghams are trying to achieve."