At middle age, balancing the costs of raising kids, paying for a house and keeping something for retirement can be daunting. That's the dilemma of an Ontario couple we'll call Henriette and Josh, both 45, and both at mid-points in their careers in communications management. The problem — they are generous to a fault to their three children.
They spend $9,600 a year on gymnastics lessons for one child, $6,000 a year to keep the family clothed and groomed, and $17,800 a year to keep them fed. They also shelter them well.
Moving into their new house in 2009 was a joyful experience. The kids, then aged 7, 9 and 13, needed more space. However, the house, with a $440,000 price tag at purchase, a $170,000 jump over their old house, needs work. They need a new roof at a cost of $4,000 and new windows that will add $17,000 to their expenses. Add in property taxes that now tally $4,800 a year and the family's after-tax income, $82,800 a year, or $6,900 a month, is stretched to make ends meet.
“The prospect of future repairs makes us wonder if we should downsize and have a higher quality of life, even if less space,” Henriette says. “We want to retire at 60. Can we do that and keep the house”
Family Finance asked Benoit Poliquin, a chartered financial analyst who heads Exponent Investment Management in Ottawa, to work with Henriette and Josh.
“The problem they have identified is real,” he says. “They have three choices: Earn more, spend less or retire later than 60.”
It is possible to manage expenses. Food and restaurants at $1,440 a month could be trimmed, but the largest discretionary item in the family budget is gymnastics instruction for one child at $800 a month. It's a focus of family life, but the cost, 12% of after-tax income, is substantial. The costs will end in three years. But Henriette and Josh have to weigh what might be a reduction in spending on one child's activity with the larger problems of educating all three children, of housing costs and, eventually, of their own retirement.
Their first priority in terms merely of time is to pay for part or all of their kids' post-secondary education. They have $25,000 in their family registered education savings plan and add $130 a month plus $26 from the Canada Education Savings Grant. Assuming they can generate a 3% return over the rate of inflation, the plan will have $36,204 in four years when their eldest child is ready for university. That won't pay for more than a year or two of study at a local university. The RESP savings rate has to rise to $625 a month. That rate plus 20% from the CESG would generate annual RESP savings of $9,000. At the 3% rate of growth, in four years the kids would have $66,900. Then, maintaining annual contributions at $2,500 per child after CESG contributions stop when each child is 17, they would be able to pay tuition or at least a good deal of it and so cover costs, providing the children go to local institutions and live at home.
Where will the RESP savings come from The obvious answer is gymnastics lessons. If money is diverted to the RESPs, the kids' post-secondary educational costs will be substantially covered. They will have to maintain the same cash flow, $625 per month, until the youngest child, now 10, finishes a four-year university course in 2024. At that time, the parents will be 57.
They will not have been able to boost retirement savings, but they will be able to draw on the defined-benefit pension plans each parent has. Josh, a long term employee of a large public utility, can expect $1,800 a month in 2012 dollars at age 65. Each will receive Canada Pension Plan benefits — $473 for Josh and $411 for Henriette. Each will receive full Old Age Security benefits of $540 a month at age 67.
RRSP savings, which they can boost after 2026 when educational expenses stop when they are 59, could grow to $12,000 a year from the present $1,800 a year. In six years, that would add $72,000 plus interest to the present balance of $108,000. In total, Henriette and Josh would have $330,900 if they retire at 65 or $375,140 retirement capital if they delay retirement or perhaps do part-time work that maintains $12,000 a year of retirement savings to age 67.
If they take the latter course, then, at 67, they would have income from retirement savings of $11,254 a year, two OAS benefits totalling $12,960 a year, two CPP benefits totalling $10,608 a year, and Josh's company pension of $21,600 a year, all in 2012 dollars for total pre-tax retirement income of $56,422. After tax at an average rate of 10%, they will have $50,780 a year to spend for a comfortable though not lavish retirement.
It will be tough to meet all goals — raising the kids, paying for at least some of their post-secondary education and funding their own retirements on their present incomes. But they can do it if they cut $9,600 a year on gymnastics lessons and perhaps make a few economies in their other spending.
“This family needs to do strict budgeting to make it through the years until the kids are done with post-secondary education,” Mr. Poliquin says. “There is no other way to put it. But if they can impose those controls, they can meet all of their goals. Retirement at 60 is not going to work. But at 67, when OAS begins, they can have a comfortable life.
“This is a tough call,” Henriette says. “We have to discuss gymnastics instruction with the kids, an expensive extracurricular activity we clearly cannot afford. We think they will understand that their post-secondary education is at least as important.”