Louise and Larry are in their mid-30s with three children and another one on the way. They describe themselves as a blended family.
She works for the federal government, while he teaches. Their joint income before tax is about $145,000 a year plus $5,200 a year in child support. Both have defined benefit pension plans that will provide the main source of their retirement income “and good job security,” Louise writes in an e-mail.
“Since planning for a fourth child, we’ve been constantly thinking about moving to a bigger home,” Louise writes.
“I’ve become an MLS junkie,” she adds, referring to the real estate board’s multiple listing service.
But they’re worried about taking on a larger mortgage.
“It scares us to carry a lot of debt.”
Their existing home is valued at about $400,000 and they have a $306,000 mortgage. The new home would cost in the range of $550,000 to $650,000.
“Ideally, we would like to stay in our area,” Louise writes.
Longer term, they want to pay their children’s university tuition but are not sure they are saving enough.
]They plan to retire in their early 60s with a target after-tax income of $110,000 a year.
When they do, they would like to travel a few times a year, help their children with a small down payment for a home and cover living expenses for two properties. (They expect to inherit a family farm that they would pass down to the children.)
We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Louise and Larry’s situation.
What the expert says
Louise and Larry are a young couple with many goals, Mr. McShane notes.
“They seem to want to do it all … have more children, move to a larger house, cover university tuition, enjoy a comfortable retirement, help their children with a down payment on their homes, pass the family farm to the children,” he says. Instead, “They should proceed one step at a time.”
Fortunately, time is on their side.
First, they might want to review their lifestyle spending given that their fourth child is due in the spring. It takes a substantial sum to cover expenses for a family of six, especially if the children are involved in competitive sports or other costly activities, the planner says.
With so many different goals tugging at their sleeves, Larry and Louise should concentrate on paying down their mortgage and funding their children’s post-secondary education, he says.
The grandparents are kicking in $400 a year for a registered education savings plan for each child.
To fund university tuition, Mr. McShane assumes they contribute $4,500 a year for each child indexed by 3 per cent a year.
As for the new house, Louise and Larry are generating a surplus of about $21,000 a year.
“This surplus should be directed against the mortgage,” the planner says.
He assumes they move to a larger home costing $650,000, taking on an additional $225,000 mortgage at 4 per cent. Mortgage payments rise to $1,200 biweekly to ensure the mortgage is paid off by the time they retire.
“Based on the assumptions, they can afford to upgrade to a larger home,” Mr. McShane says.
RRSP and TFSA contributions can be deferred for now because the unused contribution room can be carried forward, the planner says.
“Let’s keep in mind they are making contributions to their pension plans, which will provide a healthy income stream at retirement.”
Based on salary increases of 2 per cent a year, she will get pension income of $63,000 a year pre-tax in tomorrow’s dollars, while he will get $48,000 a year after their plans are integrated with the Canada Pension Plan, for a total of $111,000.
Because they are in a second marriage, Larry and Louise need to ensure their wills and powers of attorney are current. They also need to check the beneficiary designations of their life insurance, pensions, RRSPs and TFSAs, Mr. McShane says.
Finally, the planner looks at whether their retirement spending goal is reasonable. His conclusion: “$110,000 after-tax in tomorrow’s dollars is attainable, but they may find when they review their budget that children’s expenses are understated. This would result in a smaller annual surplus and hence less in the way of savings during their working years.
Louise, 36, Larry, 34, and their three children, 10, 7 and 2.
Figuring out if they can afford a larger, more expensive house given that a fourth child is on the way.
Review spending and focus on paying down the mortgage. In three years’ time, move to the larger house and plan to have the mortgage paid off in full by the time they retire.
Financial well being.
Monthly net income
Cash in bank $4,000; TFSAs $3,200; her RRSP $18,590; estim. present value of her DB pension plan $79,000; estim. present value of his DB plan $12,000; RESP $28,935; residence $400,000. Total: $545,727
Mortgage $1,995; property tax $390; water, sewer $55; home insurance $70; hydro $165; heating $80; maintenance and repair $210; garden $50; transportation $505; groceries $850; child care $940; clothing $100; credit cards $75; gifts, charity $150; vacation, travel $200; personal discretionary $525; dentists $100; drugstore $50; life, disability insurance $210; telecom, TV, Internet $150; RRSPs $200; RESPs $375; his pension plan contribution $510; her pension plan contribution $425; professional association $210. Total: $8,590. Surplus: $1,766
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