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financial facelift

Evan and Violet are both 27 with good jobs, a big mortgage and their first child on the way.

They hope to have three or four children. They want Violet to leave her $75,000 a year nursing job when the baby is born and stay home with the children indefinitely.

Longer term, they aim to pay off their $717,325 mortgage by the time they are 40, and save for their children's higher education.

"We're trying to plan for living on my salary alone while living in a house we bought in Toronto, [an expensive housing market]," Evan writes in an e-mail. He works as a management consultant, earning $130,000 a year plus bonus – a number he reckons will rise substantially as the years go by.

Their biggest single expense is their mortgage, to which they are making extra payments. They do not have an allowance in their budget for vacations because they use Evan's frequent flyer points, "and we think that with a baby on the way, travel will go down significantly," he writes.

We asked Matthew Ardrey and Warren Baldwin of T.E. Wealth in Toronto to look at Violet and Evan's situation. Mr. Baldwin is regional vice-president, and Mr. Ardrey is manager of financial planning.

What the experts say

Evan and Violet are not a typical young couple starting out on the adventure of life together, the planners note.

"Their high-income bracket creates a unique planning scenario for their financial goals."

The couple has three main goals they want to address over the next 10 to 15 years: For Violet to quit working, to pay off their mortgage and to save for their children's higher education.

First, the planners assessed the couple's projected cash flow. Evan expects that he will retain his job as a management consultant earning $150,000 (salary and bonus) and that his income will rise at a rate of 15 per cent a year.

Their current lifestyle expenses total about $9,000 a month, a number that is estimated to rise by $500 per month for each child.

In their calculations, the planners assume the couple's children will be spaced out over the next nine years.

To take advantage of the Canada Education Savings Grant, Evan and Violet will have to make contributions of $2,500 a year to a registered education savings plan for each child.

Violet and Evan are both making maximum RRSP contributions. Once she stops working, Violet will no longer be generating additional RRSP room. The planners' calculations assume an average annual rate of return on investments of 5 per cent and an annual inflation rate of 2 per cent.

Violet and Evan are making a lump-sum payment of about $24,000 annually to the mortgage, mainly from Evan's bonus. Their mortgage interest rate is 2.9 per cent. When the mortgage comes up for renewal in 2017, the planners estimate the rate will increase to 4 per cent, and to 5 per cent on subsequent renewals. In the plan, the couple's biweekly payments of $1,746 remain constant.

"Based on our analysis, Evan and Violet will not be able to make any additional lump-sum mortgage payments for the next five years, or until 2019," they conclude. "The loss of Violet's income, combined with the additional expenses, will keep them very close to the line on their budget."

As Evan's income rises, though, this will change. In 2019, they will be able to resume their mortgage prepayments, starting with $24,000 the first year and doubling to $48,000 in subsequent years.

"At this rate, by the time they are age 40, they will be mortgage-free."

Mr. Ardrey and Mr. Baldwin offer a note of caution:

"Though they can achieve their financial goals, doing so is solely dependent on Evan's continuing to earn a significant income and achieve significant annual increases," the planners note. "If something were to derail that, they would need to take another look at their financial plan."

One consideration that the couple may be overlooking is insurance. Evan has life insurance coverage of $875,000. If he were to die after they had their fourth child, "it would only be a few years before Violet would run out of financial assets and could be forced to sell the home," they say.

They suggest Evan take out an additional $1.6-million of insurance to cover off family expenses until the youngest child is through school.

The people

Evan and Violet, both 27.

The problem

Can Violet stay home with the children without jeopardizing their goals of paying off their mortgage by age 40 and saving for the children's higher education?

The plan

Stick to a tight budget for a while, deferring extra payments to mortgage principal for a few years. Get more life insurance for Evan. Then, if all goes well, double up on lump-sum mortgage payments in five years.

The payoff

A roadmap showing how their goals can be achieved – and how dependent they are on everything going as anticipated for Evan at work.

Monthly net income



Cash $2,000; his TFSA $7,000; his RRSP $47,500; her RRSP $8,500; estim. present value of her DB pension plan – n/a residence $850,000. Total: $915,000 cct.

Monthly disbursements

Mortgage $3,495; other housing $865; transportation $550; groceries, clothing $575; gifts $1,500; entertainment $455; sports $325; discretionary $25; life insurance $40; drugstore $25; telecom $125; RRSPs $2,915; TFSAs $165; association $15; group benefits $250; misc. discretionary spending $1,000. Total: $12,325 cct.


Mortgage $717,325 at 2.9 per cent

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