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financial facelift

-Mark Blinch/The Globe and Mail

Chet and Cheryl are professionals in their mid-30s with two children, 2 and 4. Together, they earn more than $200,000 a year. Although Chet thinks they are in good shape financially, Cheryl worries about the future.

"We have delayed budgeting any saving for retirement in order to allow us to pay our daycare fees and pay down our mortgage faster," Chet writes in an e-mail. They have a house in Toronto valued at $650,000. They make extra payments to their $200,000 mortgage and hope to pay it off in seven years. Their second-biggest expense after the mortgage is $1,600 a month for child care.

Chet would like to "add a third kid to the mix" but Cheryl is hesitant. "My wife will not even talk about another child until I can prove to her that we'll be on sound financial footing in retirement should we decide to have another one," Chet writes.

They have two questions: "Can we afford to carry the costs of having a third child once our oldest child is in junior kindergarten?" They would keep the younger child in daycare during Cheryl's maternity leave. Longer term, "What amount should we save (for retirement) considering we both have defined benefit pension plans?"

We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Chet and Cheryl's situation.

What the expert says

Mr. McShane suggests Chet and Cheryl loosen their purse strings a bit.

"The first order of business is to allow for an increase in expenditures to cover vacations and hobbies," he says. While he applauds the couple for being so disciplined, "it is also important to take time out of your hectic schedules to enjoy yourselves." As well, expenses will increase as the children get older and take up sports and hobbies. To allow for more spending, Mr. McShane has added $1,200 a month to the Chet and Cheryl's budget.

Chet has $87,000 of unused contribution room in his registered retirement savings plan. The planner suggest Chet increase his RRSP contribution by about $15,000 a year – the amount needed to lower his taxable income to about $90,000 a year. "This ensures that his contribution will be deducted in a 43.41-per-cent tax bracket."

Even with the added RRSP contribution, they will still have a cash flow surplus of about $17,000 a year. That's after pension plan contributions as well as contributions to a registered education savings plan for their children. Once the mortgage is paid off in seven or eight years, the surplus will increase by $30,000 a year.

The current surplus ($17,000 a year) could be used to help cover the costs of having a third child, Mr. McShane says.

He ran a second set of numbers with higher child-care expenses, discretionary expenses and education costs to cover a third child.

"They are still in very good shape financially and should be able to achieve financial independence as planned," he concludes. "Having a third child would simply mean that their mortgage might be extended out further and their savings program in the short term would not be as robust."

As for how much they should be saving for retirement, Mr. McShane calculates the numbers assuming Chet increases his RRSP contribution by $15,000 a year, as suggested. Savings would be as follows: RESP $5,000; his RRSP and stock option plan $5,700 (including employer contribution); her pension plan contribution $4,600; her RRSP $1,800; his extra RRSP $15,000; his Lifelong Learning Plan repayment $2,300; for a total of $34,400 a year.

The $17,000 surplus would be available to fund their tax-free savings accounts, where they also have unused contribution room. "Of course, a third child would eliminate the surplus," the planner says.

"A priority should be for Chet to direct a portion of the additional RRSP contributions to the stock option plan to the extent needed to get the full company contribution," he adds.

"Chet and Cheryl are in a position to achieve a very solid measure of financial independence at a young age," Mr. McShane says. While a third child will add to their expenses, they are well positioned to take on the additional cost, he adds.

Because their defined benefit pension plans will provide them with a guaranteed income, he suggests the investments in their RRSPs and TFSAs "focus heavily on equities to balance out their overall portfolio." They could use exchange-traded funds or low-cost mutual funds until their portfolio is large enough to diversify into individual securities.

Mr. McShane's calculations assume: a 4-per-cent rate of return on investments; a 2-per-cent inflation rate; that Chet retires at age 65 and Cheryl at age 55; that they replace their vehicle every seven years at a cost of $25,000; and a 2.69 per cent fixed mortgage rate.


Client situation

The people: Chet and Cheryl, both 35, and their two children.

The problem: Can they afford a third child?

The plan: Relax. Ease up on the financial goals. They can easily afford another child.

The payoff: A fuller, richer life.

Monthly net income: $13,285

Assets: Bank accounts $15,000; TFSAs $30,000; RRSPs $50,000; RESP $30,000; principal residence $650,000; estimated present value of her pension $218,000. (Chet has just begun to contribute to his DB pension.) Total: $993,000

Monthly disbursements: Mortgage $2,500; property tax $340; home insurance $120; maintenance $500; utilities $200; grocery store $900; clothing $100; life insurance $160; child care $1,600; Internet $50; entertainment/dining $900; donations, gifts $100; miscellaneous discretionary $1,200 (added by planner); transportation $460; Lifelong Learning Plan repayment $195; RRSPs $1,400; RESP $415; stock option plan $325; pension contribution $385. Total: $11,850

Liabilities: Mortgage $201,870

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