Life in the FUTURE LANE

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�Do I really need to cut everything now, or can we keep living the way we�re living�

If money were muscles, Louise and Warren would be bulging, beefy specimens of strength.

The couple work in the private sector earning a combined $170,000 annual income before taxes.

In their mid-30s, they recently had a child, and Louise has only been back at work for a few weeks.

"I was on mat leave for the last year, so that ate up any surplus we had," Louise says. "Our slush fund was our TFSA, which used to be around $40,000."

Today, it sits at about $18,000.

Both belong to group RRSPs and pension plans at work -- their only source of retirement savings. Combined, they have $64,000 in work RRSPs. As well, Warren has about $16,500 in a profit-sharing plan through his work.

While the couple take home more than $9,200 a month, they have no set savings plan. Basically, any additional money they have goes into their TFSA.

They also have no debt, except for a mortgage of $321,000 owing on a $450,000 home. And they're also contributing the maximum amount to their young child's RESP.

"We're in our early 30s; we're already both close to six figures, and our salaries are going to go up in the next six years to about $150,000, so do I really need to cut everything now, or can we keep living the way we're living?" Louise says.

The couple want to retire at age 60 and maintain the same lifestyle they have today. Essentially, that's all of their current expenses -- about $7,800 a month -- minus $590 for daycare, about $230 for RESPs and $1,600 on the mortgage.

"We're wondering whether what we're saving now with RRSPs -- which is contributing alongside our employer -- is enough, or should we be contributing more?" she says.

They're willing to cut back, if need be, especially given Louise spends about $2,000 a month on discretionary expenses.

"That's manicures, pedicures, hair and clothing for the kid from Baby Gap every two weeks," she says. "It's stupid things that can be changed if I need to."

Certified financial planner MaryAnn Kokan-Nyhof says it's highly unlikely Warren and Louise would be able to maintain the same lifestyle in retirement.

They simply spend too much to save the mountain of money required to fund their current spending habits.

"We're dealing with a young couple living high on the hog because they have lots of income, and they don't have to worry about where their money is coming from," says the adviser with MGI Financial in Winnipeg.

"But good for them for asking for advice now, while they are young and earning a good income."

The couple net more than $9,200 a month -- about $110,000 a year -- but roughly $1,350 is unaccounted for in their spending. Furthermore, Louise spends another $2,000 a month on leisure.

All told, they're letting about $40,000 slip through the cracks every year.

That's money they'll need to save to maintain their current lifestyle when they retire. Kokan-Nyhof says they'll be challenged to save enough money to match their retirement income to the spending habits they enjoy today -- even without the mortgage payments, daycare and RESP savings.

And if they continue with the status quo, saving only through their work plans, they'll certainly fall short.

"If they want to replace only 50 per cent of their gross income of $177,000 a year in retirement, and they each live to age 90, they will run out of money when Louise reaches age 78," she says.

Part of the problem is inflation. They live off $110,000 today. But 30 years from now, with three per cent inflation, they'll need substantially more.

"Only replacing 50 per cent of their spending today, the inflated net retirement income they'll need at 60 is $146,626 per year."

Assuming a five per cent return on their investments before retirement and a four per cent return once they retire, they'll need roughly $4.7 million to see them through until age 90.

And they can't save that much money through their group RRSPs. Heck, they can't save that much money maxing out their RRSPs and TFSAs.

Warren has already maxed out his contributions through his work plan. If Louise maxes out her RRSPs, too -- 18 per cent of her gross income of $95,000 -- that's $17,100 in savings a year. Through her group plan, she's already contributing $9,500, so she'd need to save an additional $7,600 a year.

Throw in $10,000 in savings to their TFSAs and an additional $2,000 each a year to non-registered savings, and they'd still fall short of maintaining their current spending habits in retirement. Still, they will have accumulated a sizable nest egg, about $3.1 million.

"If they reduce their expectation of income to $30,000 net -- in today's dollars -- each in retirement, then they can retire and not run out of money," she says, adding those figures include CPP and OAS.

The only way for them to realistically scale back their retirement-income needs without feeling a big shock at 60 is to reduce their spending habits today.

"My concern with these folks is that they seem to be living the high life right now, and once you get used to that, it's hard to scale down in retirement," she says.

"Keeping track of expenses for a few months or a year would be a good way to start to get a handle on their spending habits."

But they also need to find money for insurance to help mitigate risks to their retirement plans.

At their current income levels, if one of them was unable to work due to illness or injury, they would lose at least $3.75 million in income between now and retirement. So it's best they find money -- which they certainly have if they reduce spending -- to buy critical life insurance that pays a lump sum upon diagnosis of a major illness. And they should also beef up disability and life insurance. At the moment, they do have disability plans through work, but Kokan-Nyhof says the coverage likely will fall far short of covering off the risks. They also have life insurance plans totalling $560,000.

That's not enough, Kokan-Nyhof says, adding they should consider at least doubling coverage for each of them.

And the premiums shouldn't be too costly considering their age.

"Cost for a critical-illness policy for a 10-year with a benefit of $325,000 for him is $110 a month," she says. "And for her, it's $93 a month."

Although the assessment of their finances may seem a little dire, Kokan-Nyhof says Louise and Warren do have a lot going for them.

But earning big money without keeping tabs on spending can set them up for problems decades from now.

"It's easy to mess it up if you keep spending everything you bring home," she says.

"But at least, they're realizing they need to do something today."

And having an aggressive savings plan is a win-win for them, Kokan-Nyhof says.

"The nice thing is that starting good savings habits now will inevitably make them live on less today, setting them up nicely for living within their means in retirement."

giganticsmile@gmail.com

Warren's and Louise's finances

ñü INCOME

Warren: $82,000 ($4,330 net a month)

Louise: $95,000 ($4,875 net a month)

ñü EXPENSES

Monthly: $7,858

ñü DEBTS

Mortgage: $321,000 owing at 3.5 per cent; 21 years remaining

ñü ASSETS

Home: $450,000

Warren TFSA: $9,000

Louise TFSA: $9,000

Warren group RRSP: $28,000

Louise group RRSP: $36,000

Warren deferred profit sharing plan: $16,500

ñü NET WORTH: $227,500

Republished from the Winnipeg Free Press print edition October 6, 2012 B11