Reduced workweek has consequences

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Cutting back on working hours has a spectrum of consequences -- from standard of life to saving plans. (MIKE DEAL / WINNIPEG FREE PRESS) Photo Store

Rudy's and Mackenzie's finances

INCOME

Rudy: $48,000 ($2,592 monthly net)

Mackenzie: $56,091 ($2,908 monthly net)

 

EXPENSES

Monthly: $5,172 (excludes savings)

 

DEBTS

Line of credit: $158,204 owing at 3.5 per cent variable

 

ASSETS

Home: $250,000

Rudy's RRSP: $37,365 (equity mutual funds)

Mackenzie's RRSP: $35,870 (balanced portfolio)

RESPs: $12,782

Mackenzie's defined benefit pension: $2,793 a month at age 60

Rudy's defined contribution pension: $62,104

 

NET WORTH: $141,943 (excludes work pensions)

A four-day workweek is great when the fifth day is a statutory paid holiday, but for Rudy and Mackenzie, a shortened workweek is a source of stress.

Mackenzie is about to wrap up a stint on maternity leave for their second child. And the civil servant is cutting back to a four-day week on a permanent basis, forgoing pay on the fifth day.

For them, it's a compromise between spending almost $1,000 a month on daycare and spending more time with the children.

"I did a budget when I decided I would work four days a week," says Mackenzie, in her early 30s.

She estimates she'll earn slightly higher than 80 per cent of her past salary of $66,000 a year because she recently got a six per cent hourly wage hike.

Still, she's uncertain whether their expenses and income match.

"Sometimes I feel our expenses are too high and we're living outside of our means," she says. "But I don't know if that's the case."

Expecting a $13,000 pay cut a year, they plan to eliminate big vacations -- about $5,000 annually -- and reduce other discretionary spending. She says they're already used to living on a tight budget because they've had to while she's been on maternity leave.

They have even managed to pay $1,428 a month on their line of credit -- their only source of debt -- on which they owe about $158,000.

"We pay about $428 on interest and $1,000 on principal," she says.

"I was thinking we could reduce the home line if we need to cut our expenses more."

And that's a distinct possibility because they're also restarting savings plans, focusing more on RESPs than RRSPs.

They've recently started contributing $383 biweekly to a family RESP, which they will keep up until the end of the year so they can catch up on contributions to receive the maximum federal grant. Then they'll set aside the maximum monthly amount of about $208 each in the following years to fund their children's education.

But they question how much that leaves for retirement.

"I'd like to retire tomorrow," says Rudy jokingly, a manager in the private sector, in his mid-30s.

Mackenzie says she believes they can meet all of their goals, but if they have to cut back in some places, she wonders if one should be their retirement savings.

"I don't know if it's the best option, but a lot of people in my workplace tell me not to worry about RRSPs so much because the pension will be enough to live on when I'm older."

James Kirk, a financial planner with Sweatman Insurance and Retirement Services, says he has both good news and bad news.

First the good news: At least, Mackenzie and Rudy are aware they may be facing a potential financial problem.

"Clearly if Mackenzie wants to work less, they realize they need to spend less," says the Winnipeg-based certified financial planner.

Now for the bad news: Kirk says it's likely their calculations underestimate their expenses while overestimating income.

Their total monthly income will be about $5,500 and expenses are about $5,172, excluding RESP and RRSP contributions.

"That leaves them with about $328 to spare," he says. "That's cutting it very close."

And they still have to set aside money for their savings goals.

On the upside, they do have plenty of places to cut back.

For instance, they have room to trim the fat on debt payments and savings.

Kirk says it's likely they don't need to save as much as they intend to on RESPs.

"With a current balance of about $13,000, plus maximum future contributions of $30,000 for one child over the next 10 years and $39,000 for another over 13 years, they'll have likely at least $82,000, not including growth," he says.

"How expensive do they think university will be in 15 years?"

Much has been made about the future costs of education. Some estimates state the total cost of a student living at home for a four-year degree will be more than $100,000 in 18 years, but Kirk questions these numbers.

"The banks have badly infected our thinking on RESPs to the future detriment of retirement savings," he says.

That doesn't mean Mackenzie and Rudy should cut out RESP contributions altogether. But they should find a way to save for retirement too, even though they both have work pensions.

"It's a huge mistake to put education above retirement," he says. Rudy may only joke about wanting to retire today. But the comment also suggests early retirement may be in the back of their minds.

Giving up RSP contributions today amounts to a lot of opportunity lost that could make early retirement a reality.

Right now they have $62,655 in their RRSPs. If they stop contributing $300 a month over 10 years, earning about five per cent annually, that's $46,585 they won't have by the time they restart saving for retirement. After another 10 years, by the time they retire, the missing $46,000 is more like $76,000.

Kirk says investing in their children's education is a worthy cause. Many parents feel obligated to help their kids with university, and fully funding an RESP is indeed a better option than paying out of pocket on the cusp of retirement to help cover post-secondary education.

Mackenzie and Rudy do have other options, including reducing their debt-repayment schedule.

"They are on pace to pay off their home line of credit in just over 11 years, but my guess is they won't."

It's likely they will renovate their kitchen, take a big vacation, buy a new car or purchase a cottage.

Credit lines are insidiously tempting to use when available, he says.

"Lines of credit are like drugs: Once you get a little taste, it's hard not to come back for more."

Kirk says an alternative is cutting line-of-credit principal payments by about $500 a month.

"This would stretch their repayment time frame to 19 years as opposed to 11," he says.

They'd still have the debt paid by the time they retire, but they would also be able to save for both retirement and university.

"It's better to find a balance than going 100 per cent in one direction."

By cutting back on debt payments, they could save for retirement and their children's education. They could, for example, contribute $50 per child monthly to the RESP. Based on a five per cent annual return, they will have about $42,000 saved for their children's education in 15 years. And if they can contribute $200 a month to their RRSPs, based on the same return, they'd save $75,000 more for retirement in 19 years.

As their incomes increase, they can augment savings, even contributing to a TFSA, which would give them flexibility to save for both goals.

"Mackenzie decided to first work less, so they need to figure out how to make that work -- I get it," he says, adding he has young children, too.

Making them a priority is never a mistake, he says.

"They sound somewhat realistic about the choices facing them, but there are some more tough decisions to be made."

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Republished from the Winnipeg Free Press print edition July 21, 2012 B10