So many goals, so little time

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This article was published 18/06/2016 (3427 days ago), so information in it may no longer be current.

Wilson and Cheryl still have a long way until retirement. And that’s a good thing because they have plenty they would like to accomplish in the meantime. In fact, they have so many goals they’re worried whether they can achieve them all.

Contributing to their anxiety is a lack of free cash flow.

“I think it would be fair to say we’re almost spending what we’re bringing in at this time,” says Wilson, a government worker in his early 40s, earning $84,000 a year.

After expenses of about $5,700 a month, they estimate they have about $300 left, which is often used for the family holiday (sometimes spent at a timeshare).

Some of their income goes toward savings, too.

The couple puts aside $50 a month for their child’s university education, and they’re investing $100 a month in RRSPs, including Cheryl’s work plan, mostly in money market funds. (They are also funding two universal life insurance policies worth $90,000 each.)

But the major piece of their retirement plan will be Wilson’s workplace pension, $30,000 annually at age 55 (their ideal date to retire).

“I think we could live on the frugal side if I could stop working at 55, but I could see myself working in something else,” says Wilson, who could probably work as a consultant.

Cheryl, in her late 30s, earning about $25,000 a year in the private sector part time, will go back to work full time — almost doubling her current income — in the next year when their little one enters grade school.

The couple hopes this income boost will be enough for them to afford purchasing a cabin.

They also wonder if there would be enough left for another real estate investment: “I think it might be a good idea to take on rental property,” Wilson says. Although uncertain they can afford all these goals, they would like to try, just as long as their efforts don’t come at the expense of retiring early.

“We don’t really know what the future holds, but is it at least feasible to retire at age 55?” asks Wilson.

Certified financial planner Ian Wood with Nelson Financial Consultants in Winnipeg says while it is commendable Wilson and Cheryl have ambitious financial goals, they don’t want to bite off more than they can chew — financially speaking — and put their most important needs at risk.

“They have many questions about retirement, vacation properties and rental properties,” Wood says.

The problem is “they are very different financial and lifestyle objectives.”

Long story short: many of these priorities are at odds with each other financially, so something’s got to give.

To sort through the muck, Wood has identified a few key areas, including risk management.

The couple each have life insurance, and that’s good, but they need to consider whether the universal life policies worth $90,000 apiece are adequate. Generally, life insurance helps protect against lost income while raising children if one parent (or both) becomes critically ill or dies. In this respect, Wilson and Cheryl could likely use more coverage, including critical-illness insurance.

Term coverage, which lasts for 10 or 20 years, bears consideration because it provides more benefit for less cost than universal coverage, which is in place until they die. Universal — or whole life — insurance is generally employed to address tax liabilities for an estate. While it can address risks associated with loss of income while working, in their case, the $90,000 death benefits would only cover one or two years of lost income. So the question they need to answer is whether that’s enough.

Yet, insurance is a back-burner issue, Wood says, because the couple needs to focus on saving more for retirement and other needs first.

“It is my view that allocating your hard-earned income and savings first into RRSPs, TFSAs, the mortgage, and RESPs provides better potential long-term value.”

And Wilson and Cheryl have plenty of contribution room left in their TFSAs and RRSPs to justify a greater focus on saving. That doesn’t mean they should cancel their insurance, but they should consider different coverage that will make their premium dollars stretch further.

Moreover, the biggest risk the couple face to their finances is a lack of an adequate emergency fund. Based on their expenses, they require at least $15,000 in accessible savings — enough to keep them afloat for three months.

They have $6,400, so they’re about halfway. But Wood says he is uncertain if Wilson and Cheryl have the ability to save more. While they stated they have $300 monthly surplus, Wood questions whether that’s accurate.

The only way to know is by creating a good budget. “A budget is a proactive document prepared before the month begins where you decide where your money is going to go.”

Then it’s a matter of tracking spending and adjusting accordingly. They also need to keep at it.

Budgeting is an ongoing process that must go on for years to pay off in a big way.

Unfortunately, even with one in place, retiring at 55 is likely not possible. Based on their current course, they would face a $3,000 monthly deficit and run out of savings by age 60.

To even come close to having enough, they’d need to save about 20 per cent of income. They’re nowhere close to that now, though that may change with a budget.

Once they pay off their mortgage of about $134,000 in nine years, they can also save $1,500 a month more, which would go a long way to improving the picture.

Furthermore, Wilson and Cheryl could work part time to cover some of the shortfall.

But Wood says retiring at 55 would still be a stretch. Even 60 would be challenging. They would still have a deficit of $2,200 a month. And they’d still risk running out of money in the middle of retirement.

Their best bet — given their current course — is retiring at 65. Wilson and Cheryl would still need to draw on savings to balance their budget a little more than Wood would like to see, but the drawdown would be sustainable late into retirement.

Given this challenging outlook, the financial math doesn’t bode well for their other goals: buying a cabin and rental property.

While they could pursue both goals, Wilson and Cheryl would put more important goals (like retirement) at risk. Moreover, given their low appetite for risk (their money is mostly invested in money market funds), investing deeply in real estate doesn’t make sense.

Undoubtedly buying a cabin and/or rental property would involve borrowing money — and that’s risky. And with a rental they face other risks such as prolonged vacancy, bad renters and big-ticket maintenance costs.

As for the cabin, Wood says it’s a bit redundant because they have a timeshare.

Perhaps, at some point, these goals may be within reach. But establishing good budgeting habits must come first.

This will help them plan “three to five years at a time and see how things look at 45 and 50” and then re-evaluate, Wood says.

A good budget will be their trusty road map, he adds.

Without one, they’re bound to get lost.

joelschles@gmail.com

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