With the birth of their first child, Louisa and Len sense they are at a turning point in their lives financially. Goals and aspirations are jostling for priority – spending, saving, paying off debts.
He is 46 and earns about $65,000 a year in a technology job; she is 38 and earns $79,000 in marketing. Both have company pensions, Louisa a defined benefit plan, Len a defined contribution one.
“We’re trying to understand how best to juggle mortgage payments, retirement savings, child education savings and the big question: When can we retire and how much do we need?” Len writes in an email. They hope to retire at age 65 with after-tax income of $75,000 a year – enough to travel once or twice a year.
Their aspirations include buying a larger home in the expensive Toronto market where they live and having another child.
“What will having a second child in the next two years do to all of this?” Len asks.
We asked Jason Heath, a fee-only financial planner and managing director of Objective Financial Partners Inc. in Toronto, to look at Len and Louisa’s situation.
What the expert says
There’s no doubt this couple has done well to get where they are currently, with a net worth of nearly half a million dollars, Mr. Heath says.
“However, while goals are good to have, they have some lofty ones,” the planner says.
Louisa and Len are saving about $1,530 a month through their company pension plans and registered retirement savings plans. They are also paying $500 a month on their $39,000 line of credit.
This $2,030 per month could be easily consumed by costs for their new baby, Mr. Heath says.
“Day care alone could cost more than this, let alone diapers, clothing, toys, activities, medical costs and education savings,” he says. “I see the next few years as being pretty tight for them just with the birth of their child.”
Len and Louisa want to have another child in a couple years, pay down their line of credit and move into a bigger home.
“I just don’t see how all of those things can happen based on their current budget,” the planner says. They are going to need new cars in the next few years and then there are ongoing home repairs like roofs and furnaces that tend to throw budgets for a loop, he notes.
Using conservative assumptions about future costs for the children, Mr. Heath says Len and Louisa are more or less on track for retirement at age 65 and can afford their goal of a $75,000 retirement lifestyle in today’s dollars.
“That said, the next five to seven years may require a little help from their line of credit, contrary to their goal of paying it off in the short-term,” Mr. Heath says. As for the larger, more expensive home, “I’d be inclined to caution against it.”
He suggests Louisa and Len set priorities rather than trying to do everything at once. “I think a potential move to a larger home needs to be placed on the backburner, at least for the interim.”
Before Louisa and Len get too far ahead of themselves, “I’d prefer they settle into parenthood and determine what their new budget looks like,” he adds. “Things can change when a family is growing and when new priorities are being established.”
The couple’s more immediate concerns should be drafting wills and powers of attorney to get the family’s estate planning up-to-date, the planner says.
Len’s long-term disability insurance coverage is a little low at just $1,000 per month. His after-tax income is about $5,000 per month, “so I think this is an area to target.”
Both appear to be a little bit under-insured on life insurance – by $250,000 to $500,000 depending on the percentage of the family’s current lifestyle they wish to replace, Mr. Heath says.
Len, 46, Louisa, 38, and their baby.
Sorting out how to pay down debt, move to a bigger home, perhaps have a second child, save for the children’s education and save for retirement.
Set priorities and consider postponing the purchase of a more expensive home until the financial demands of having children become more apparent.
Peace of mind that comes from not biting off more than they can chew.
Monthly net income
Cash in bank $2,300; stocks $18,660; her RRSP $22,150; his RRSP $86,000; her work pension plan (estimated present value) $65,900; his work pension plan $19,000; home $700,000. Total: $914,010
Mortgage $1,845; property tax $310; other housing $580; transportation $360; groceries $300; clothing $100; line of credit $500; gifts, charitable $75; vacations, other $225; dining out, entertainment $300; other personal discretionary (grooming, pets, sports, subscriptions) $660; dentists, drugstore $25; life, disability insurance $140; telecom, TV, Internet $180; RRSP $100; other saving $1,430; group benefits $115. Total: $7,245
Mortgage $418,950; line of credit $38,780. Total: $457,730
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