Winnipeg Free Press - PRINT EDITION

Double trouble

What impact will twins have on free-spending couple's ambitious financial goals?

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Rick and Teresa make for an income-earning power duo.

Their money wherewithal is such the birth of their first child had virtually no impact on the spending habits they had previously enjoyed as a double-income-no-kids household.

Earning more than $190,000 annually, the 30-something couple have no need to budget and yet, they still manage to aggressively pay down debt, save for retirement and travel -- a lot.

"Last year, we went to Minneapolis, New Orleans and New York," says Teresa, who earns about $55,000 a year in marketing.

Yet for the foreseeable future, Rick and Teresa don't expect to be travelling all that much because they're now expecting twins.

"We're still a little shell-shocked," says Rick, a health-care professional who earns about $138,000 a year.

A big concern for them is whether they will be able to continue their ambitious financial agenda. The couple want to have their mortgage paid off in about five years, paying $800 a week with about $183,000 owing. Following that, they had intended to focus on investing for freedom 55. Already, they've been contributing $150 weekly, as well as large annual lump-sum payments, to an investment portfolio worth about $220,000.

Their investments comprise mostly of adviser-chosen, individual stocks with about $10,000 in TFSAs, $17,000 in an RESP, more than $100,000 in RRSPs and about $70,000 in non-registered investments.

The non-registered portfolio even includes several thousand dollars worth of flow-through shares that provide Rick with taxable deductions.

"We definitely try to live within our not-so-limited means," he says. "But I can't say we spend a lot of time worrying about finances."

With a two-for-one birth pending, however, they're not certain they can continue to be as laissez-faire about spending and their long-term goals.

While the couple have daycare spots ready, about $271 every two weeks per child, Teresa is contemplating whether to go back to work part-time or full-time after a year of maternity leave.

"We realize we're in a good financial situation," she says. "But the biggest question going forward is how will twins change things?"

Certified financial planner Ryan Challis with Nakamun Financial Solutions in Winnipeg says Teresa and Rick will be cutting it close financially if they continue with their ambitious savings and debt-repayment strategies once the twins arrive.

"The margin of error is so small that it would have been highly likely for it to go off track."

As it currently stands, they spend about $7,608 a month, including debt and savings payments. But that sum doesn't include their annual lump-sum RRSP payments.

With child care, grocery and diaper costs expected to increase substantially, they would be hard-pressed to keep up even on their current monthly net income of about $8,600.

It will be much, much tougher to keep pace when Teresa is on maternity leave for a year when she is earning less than half the $2,960 she currently takes home every month.

Something will likely have to give.

"It would be very tight while she is on mat leave -- no vacations, no discretionary dinners out because they will have to scale back spending by almost $20,000 a year."

But once Teresa returns to work, even part-time, their budget will have much more leeway.

Regardless, they should consider pushing back early retirement to age 60.

"While technically they may have been able to do this (retire at 55), I highly suspect that the amount of money they will have accumulated will not be enough to sustain their existing lifestyle and what they aspire for in retirement," he says.

Although they could cut their spending dramatically to stay on track, the alternative is likely a more comfortable fit for them.

"It's likely that with some proper financial planning and a retirement date pushed back until age 60 that Rick and Teresa only need to marginally scale back their current lifestyle in order to enjoy the retirement they currently envision."

Numbers wise, by the time they would retire at age 55, their savings, including group RRSPs, would be worth about $1.6 million based on a 6.5 per cent average annual return on investment.

"A sustainable withdrawal rate of four per cent a year is $64,000, coming mostly from an RRSP, which will be 100 per cent taxable," he says.

"If they want to make that work for them, then they can retire."

By comparison, retiring at 60 will allow their money to grow to about $2.4 million.

"Assuming the money is coming out of RRSPs, the after-tax, net family income will be $71, 646, which by the way is about 70 per cent of their current net, after-tax income."

In the meantime, they have a few additional considerations to help get them to their goal.

One recommendation is maximizing their TFSAs. At the moment, they have about $40,000 in contribution room, even though they have plenty of money in investments that could be used for this purpose.

If maximized annually, their TFSAs could be an important piece of their retirement income plan, because most of their retirement income will be fully taxable RRSP money. Their TFSAs will provide tax-free money when retired for big-ticket expenses such as globe-trotting. "Both of them need to max out their TFSAs before they contribute to non-registered accounts."

That's a big reason why Challis says they should rethink their flow-through shares-purchasing strategy. While this type of investment helps reduce taxes, it likely isn't the most effective use of their money.

Furthermore, these tax-friendly investments are not eligible for TFSAs in most cases, and when they are, the associated tax deductions aren't.

"I get the appeal, but these types of investments are definitely not considered core components of a balanced and diversified portfolio that most people need to grow, protect and preserve their wealth for an eventual source of retirement income," he says.

The reason being is flow-through shares are generally high-risk investments.

"They're often small startups without proven free cash flow, usually concentrated in the Canadian mining, oil and gas sectors, and they are not as liquid as other investments," he says.

"They also often have a high premium or are priced much more expensively compared with the company's common stock."

Instead, Rick and Teresa should focus on maximizing their RRSPs and TFSAs and, with a mix of cash, corporate bonds, preferred shares, REITs (real estate investment trusts) and common stock comprising of large, mid- and small-cap companies in Canadian, U.S. and global markets.

Last, they need to review insurance coverage. Teresa likely needs more than 'two-times salary' coverage offered by her work plan. A term life policy for about $250,000 would probably do the trick, Challis says. And while Rick has adequate coverage at $1 million, it's a whole life policy that costs him $4,000 a year in premiums. Challis says he can't see any need for Rick to have this kind of expensive coverage when term coverage would serve the same purpose.

"A term 10- or 20-year policy for $1 million will cost about between $550 and $820 year," Challis says. "Over the next 20 years, that is about $60,000 in savings compared to his current plan."

Finding those kinds of savings will make a big difference going forward, he adds.

Indeed, the next few years will be "a grind," but on the upside, Rick and Teresa are more financially able than most to handle the potential curve balls that may come with twins, he says.

"With an annual family income of more than 21/2 times the average family income of $76,000, Rick and Teresa definitely have choices about what type of lifestyle they would like and how to go about reaching those goals."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition November 30, 2013 B13

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