A Growing Family in Need of Discipline


In Toronto, a couple we'll call Henry, a businessman who is 32, and Jessica, who works for a not-for-profit organization and is 33, have been married for three years. They recently bought a $348,000 semi-detached home for their 15-month-old daughter and another child soon to arrive. They are in a transition from living for themselves to living for their children and need to rebalance their spending and saving. When Jessica goes on maternity leave, their incomes will plummet.

"We feel lost and don't know where we should be going financially," Jessica says. "We need to learn. This Facelift is part of that exercise."

Jessica currently brings home $3,538 a month. Mike brings home $2,841 after taxes and deductions. Their combined income, $6,379, is not a great deal in an expensive city. There are tax benefits such as $100 a month for daycare and a $7,000 annual tax deduction for children under seven, but to pay for daycare at $1,060 a month, they have decided to forgo travel and virtually all entertainment. Not only do they face the costs of another child, but their employers have also temporarily suspended their RRSP matching programs - a personal cost of the recession.

What our expert says

Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Henry and Jessica. "We can help them plan their financial lives, but they will need discipline to make it work," he says.

The first challenge will be to get through a year of reduced income when Jessica takes maternity leave after her second child arrives in fall. Her monthly income will fall to about $450 a week in maternity benefits, Mr. Moran says.

There will have to be economies to help the couple get through their period of reduced cash flow. They currently pay $896 a month for two lines of credit and a car lease. They will have to add housing expenses that include $1,551 for their mortgage beginning in November when they take possession of their new home, $250 for estimated property taxes and $300 in estimated utility bills. They have been living with a parent, so the additional expenses that total $2,101 a month will be new spending rather than a shift from paying rent to paying the bank, the planner notes.

There are ways they can economize. Staying at home will make it possible for Jessica to look after the children. That will save $1,060 a month. The new baby and the new house arrive at about the same time.

Each parent could borrow $25,000 and deposit that money into their RRSPs, for which Henry has $40,000 contribution room and Jessica $65,000. After a required holding period of 90 days, they could take the money out via the Home Buyer's Plan and apply that money to increase the down payment on their mortgage. There would be no increase in net debt, but the RRSP contributions of $25,000 each would give each parent a tax refund of at least $5,250, providing cash when they need it most, Mr. Moran says.

They are eligible for a $5,000 tax credit available to first-time home buyers who buy a home after Jan. 27, 2009, the date the measure was introduced as a part of the 2009 federal budget. It can be taken by one spouse and will generate a tax refund of $750, Mr. Moran estimates. That will add to their 2010 cash flow, he says. An Ontario program provides refunds up to $2,000 for land transfer taxes paid by first-time home buyers. Henry and Jessica should ensure that they have applied.

Potential budget cuts could add $400 a month taken from dining out and $50 from $250-a-month clothing. Returning to work would add $1,418 net ($3,538 less two child care bills of $1,060 a child). Some of this money could be used for RESPs, Mr. Moran says.

The couple's retirement pensions will be based on Old Age Security, which pays $6,204 a year at present, and a full or nearly full benefit from the Canada Pension Plan, which pays $10,905 a year at current rates. Their age 65 cash flow would be as much as $34,218 from the two public pensions.
If Mike continues to add $117 a month to his current $3,704 RRSP balance, and assuming a 3-per-cent annual return after inflation, he will have $67,099 at age 60 and $85,463 at age 65. Assuming his employer reinstates the suspended matching program, he would have $127,970 at 60 and $161,389 at 65, the planner estimates.

If Carolyn waits one year to return to work and then resumes her $262 monthly contribution plus company match of $262, a total of $512 a month, she could accumulate $247,427 by age 60 and $320,433 by age 65, Mr. Moran says.
Assuming their employers have matched their RRSP contributions, at 60 they would have a total savings of $375,397, which given the same real return of 3 per cent, could produce an income stream for 30 years of $18,595 a year.

Working to 65 would build total savings of $481,822. That capital could provide annual income of $26,864 to age 90. Adding their public pensions, they would have $61,082 a year of retirement income.

"We must spend less," Jessica says. "We might get promotions and higher wages, but while that is probable it is not certain."

Client situation

The People: Toronto couple in early 30s

The Problem: Tight budget with heavy debt, rising costs and falling income

The Plan: Cut spending, work down debt, consider early return to work for mom

The Payoff: Eventual financial relief, comfortable retirement

Assets: House $348,000; RRSPs: $ 2,504; Cash: $ 2,600; RESP: $ 5,600; Total $358,704

Monthly disbursements:

Mortgage as of 11/09: $1,551; Utilities (estimated) $300; Prop. taxes (estimated) $250; Food & household $600; Restaurant $500; Car lease $296; Phones $80; RRSPs $628; Life insurance $152; Line of credit $600; Daycare $1,060; Credit card interest $100; Gas and car maint. $360; Clothing $250; Entertainment, travel $0; TOTAL: $6,727; (With child care cut $ 5,667)

Liabilities: Mortgage $328,000; Lines of credit $ 38,300; Credit card $6,490; Total $372,790

© The Globe and Mail, Used By Permission