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Couple’s many goals stretch paycheques too thin

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RODNEY and Sidney consider themselves to be fairly adept at managing money. They have set aside $16,000 for their child’s education. They’ve saved about $25,000 for retirement and only owe $75,000 on a home worth $350,000.

Not bad for a couple in their early 40s. In the next 15 years, they have a host of other goals they’d like to cross off the list.

They want to send their child to private school in two years. That’s four years of school, costing $3,300 a year. They want to redecorate the main floor of their home, renovate the kitchen, finish the basement and pay off the mortgage faster than the current amortization of 18 years.

They also want to take a vacation to a premium holiday destination every couple of years.

"We recently went to Disneyland and we’d like to be able to do that again," says Sydney, a nurse earning about $87,000 a year.

And, they want to retire early.

Sydney has a defined-benefit pension that will pay $1,500 a month at age 55, and that’s bound to increase as she works longer and earns more.

Rodney works in the private sector, earning $50,000 a year before taxes.

He belongs to a defined-contribution plan at work, which has accumulated about $46,000.

While their combined net income is more than $76,000 a year, money is tight.

Rodney and Sydney have been tracking expenses and cash flow for the last two years. And their budget shows a $3,400 annual surplus — just enough for private school. But they have little left for other goals.

"I wish we had an unlimited pot of money, but we don’t," Sydney says.

"Part of what we’re looking for is whether we have realistic goals. Do we need to change how we look at things?"

Certified financial planner James Kirk says they have a lot going for them: They have good incomes; they save and pay down debt. And they budget — perhaps the best omen of achieving future financial success.

"If you don’t know where you are, you certainly can’t figure out where you want to go," says the adviser with Sweatman Insurance and Retirement Services in Winnipeg.

But if there’s one thing they should have realized after two years of budgeting, it’s that they don’t have enough money to achieve all of their goals in 15 years.

"They have seven goals that require more money than they have, and it appears they don’t have the capacity to increase their income all that much."

To be blunt, something’s got to give.

On the surface, it appears they can at least afford tuition for private school. But Kirk questions whether they actually have an annual surplus.

"If their net income is $76,560 a year, and they have a surplus of $3,480 a year, the chances are they’re spending that cash regardless of what their expense and income tracking indicates," he says.

One way to lock in the surplus so it doesn’t get spent is to increase contributions to their TFSA to $450 a month, up from about $150.

At the moment, the TFSA is at zero because it’s their holiday fund, recently depleted to pay for the Disneyland trip. The $300 in additional monthly contributions would be earmarked for private school in two years.

Invested in a high-interest savings account, they would have $7,300 by then. That’s enough to cover two years of school — a good head start.

If they continue saving over the next four years, school will be paid in full two years early. Then, they can designate the $3,300 to other goals, such as redecorating the living room.

On top of that, they also will save about $3,650 every two years for vacations and emergencies, based on their current contribution rate — $150 a month — to their TFSA. In addition, in three years’ time, their car loans will be paid, freeing up about $540 a month.

Even with the additional cash, Kirk says they likely will still fall short on other goals. Kitchen and basement renovations can easily cost tens of thousands of dollars. It might take years to save enough money to pay for renovations out of pocket.

Of course, they have plenty of equity in their home — $275,000 — to renovate now and pay later. If they borrowed $75,000 at 4.5 per cent, their monthly payment would be $570 with a 15-year amortization.

The problem is, they don’t have the cash flow in their budget to make the payment while paying car loans and private-school tuition. An alternative is to make interest-only payments until they have paid for school.

Still, that’s a $281 monthly punch to the budget, which might be tough to absorb over the next four years. They also would be carrying debt into their late 50s, making early retirement less of a possibility.

Another option is borrowing less.

With $37,500 owing on a line of credit, their monthly payment on a 15-year amortization would be about $280 a month.

Even if they borrow less and save more, early retirement is still likely out of the question.

Yet Kirk says it’s likely as they get closer to retirement, they may actually want to work a little longer.

"In my experience, people who are five years or less from retirement will find it acceptable to work another year or two in order to achieve a short- to medium-term goal," he says, referring to renovations and redecorating.

It’s also likely their current retirement savings strategy won’t provide them with enough income to retire early anyways.

Their RRSPs and Rodney’s work pension combined will only be about $220,000 by their late 50s, based on a four per cent annual return. That’s about $13,500 a year income until age 85. Even with Sydney’s work pension, at the very least, they would have to cut spending early in retirement until they are eligible for CPP or OAS.

They could double their RRSP contributions to improve the picture, increasing savings — by about $85,000.

This would boost their retirement income to $18,000 a year.

If that still isn’t enough, they could work until Rodney is 65, increasing savings to about $409,000. That would provide them with about $30,000 a year until age 85, or about $20,000 after the effects of inflation.

Shoring up retirement savings involves scaling back other goals — even eliminating some altogether.

That’s harsh, but they can take comfort in the fact they’re not alone.

"There are very few people who renovate their house, go on trips, retire early and put their kids through private school — all the while becoming debt-free," Kirk says. "It’s even a challenge for people with more wealth than Rodney and Sydney."

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