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Focusing on the doable, not the dreamable

Before the baby arrived last fall, Ming and Sue enjoyed the lifestyle of other young, urban professionals, driving nice cars and dining out whenever they pleased.

He is 38, she is 32. They've been married three years and own a home in suburban Vancouver with a mortgage. Ming earns $94,000 a year, Sue $110,000.

Now, with an eight-month-old child and another planned, they wonder whether they are able financially to support a growing family and still maintain their standard of living.

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"This new chapter of our life is both exciting and a bit intimidating on the personal and financial front as it opens doors to many questions," Ming writes in an e-mail.

Should they pay down the mortgage, save for their children's education or save for retirement? Do they have enough insurance? Can they buy a bigger home and an income property some day? Can they save enough money to retire at age 55?

We asked Eric Davis, an investment adviser with TD Waterhouse Private Investment Advice in Kamloops, B.C., to look at Ming and Sue's situation.

What the expert says

"Unfortunately, there is no magic bullet" when it comes to apportioning savings, Mr. Davis says. Because of their high tax bracket, he suggests Ming and Sue take full advantage of their registered retirement savings plan room. They may also want to renegotiate their 5.3-per-cent mortgage loan.

"As a rule, once there is more than a one-percentage-point difference between your rate and current rates, it might make sense to pay the penalty," he notes. The current five-year mortgage rate is 3.84 per cent.

At the time they wrote in, Ming and Sue had not yet drawn up wills and powers of attorney. "Run as safely as possible to a lawyer," Mr. Davis says. While they have group insurance at work, he recommends they take out their own policies as well. "Most young families need about $1-million." They could each take out $500,000 of term insurance, half of it "Term 10" and the other half "Term 20."

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"This is the cheapest form of insurance and premiums are guaranteed not to change for 10 and 20 years, respectively," the adviser says. He estimates the cost at $124 a month for both of them.

Will it be possible for them to retire at 55 and maintain their current lifestyle?

"In short, no," Mr. Davis says. Ming is 17 years away from age 55, Sue 23. They have about $225,000 in investable assets. They figure they'll need $50,000 a year after tax when they retire, but the adviser questions that number given that they are earning more than $200,000 now.

"It is my experience that retirees are not able to adjust to such a big drop in income."

Even so, using their target of $50,000 a year and adding inflation of 2 per cent a year over an average of 20 years results in an income target of $75,000 a year in future dollars, Mr. Davis points out. Using an average tax rate of 25 per cent would require a gross income of $100,000 a year.

How much money will they need to generate that $100,000?

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"A quick rule of thumb is to use a multiple of 20 or 25 times your future income target to determine your portfolio goal," the adviser says. Ming and Sue would need anywhere from $2-million to $2.5-million - say $2.3-million (RRSPs and registered pension plans). To build a $2.3-million portfolio, the couple would have to save about $43,000 a year, earning an average annual rate of return of 6 per cent for the next 20 years until they retired.

Can they upgrade to a larger home?

"While they have a fantastic household income, they cannot do everything on their wish list," Mr. Davis says. "Upgrading to a $1.5-million home would dramatically affect their retirement goal as well as require additional costs in the way of maintenance, property taxes and life insurance."

As for where they could cut back, Mr. Davis points to their car expenses and the $400 a month in their budget for dining out. "That is $5,000 a year or the equivalent of a small holiday," Mr. Davis says. "Food for thought."

He also suggests they move the money they have in tax-free savings accounts into their RRSPs to catch up on their combined $56,000 of unused contribution room, using the tax refund to put more into their RRSPs, start an RESP for their children or pay down the mortgage.


The people

Ming, 38, and Sue, 32, and their eight-month-old child.

The problem

How to change focus from being footloose and fancy free to knuckling down and saving for their family's future.

The plan

Take advantage of RRSPs, open registered savings accounts for the kids' education and rein in expectations for buying a more expensive home and retiring early.

The payoff

A comfortable lifestyle, plenty of money for their children's post-secondary education and a secure financial future.

Monthly net income



Bank accounts $24,700; TFSAs $22,400; RRSPs $168,800; employer pension plan, his $15,500, hers $19,800; house $690,000. Total: $941,200

Monthly disbursements

Mortgage $2,990; property tax $220; utilities $185; property insurance, security $80; maintenance $500; car payment $920; car insurance $290; fuel, and maintenance $490; parking $95; groceries $400; child care $1,600; clothing, cleaning $155; family loan repayment $200; gifts $100; charitable $35; travel $400; personal $270; dining out $400; entertainment $150; telecom $200; RRSPs $2,500; group benefits $210. Total: $12,390


Mortgage $279,000; car loans $37,000; family loan $9,600. Total: $325,600

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