Matthew Sherwood/The Globe and Mail
Lucinda and Vince earn $133,000 between them, yet like most young people, they're struggling to pay down the mortgage on their Toronto home and set some money aside for when they have their first child.
He is 31, she is 30. Longer term, they want a "new, larger, better house for a growing family," Lucinda writes in an e-mail.
Vince inherited $60,000 recently and they wonder how best to use it. They also wonder how to invest their registered savings.
"Are we under- or overexposed to stocks and ETFs in our TFSAs and RRSPs?" Lucinda asks.
When their first child arrives, they want to take time off work – a year for her and perhaps the following six months for him – without having to cut their spending or interrupt their savings. All the while, they'd be stashing money away in anticipation of a second child as well as making lump-sum payments on their mortgage principal "to prepare for the next house."
We asked Barbara Garbens, a financial planner and founder of B L Garbens Associates Inc. in Toronto, to look at Vince and Lucinda's situation.
What the expert says
Vince and Lucinda are taking a long-term approach to their financial picture, something many young couples don't even think about until much later in life, Ms. Garbens says.
In her calculations, the planner assumed that Lucinda will take a full year of leave with each child and that Vince will take six months of leave after Lucinda goes back to work.
"This is doable," Ms. Garbens says. During Lucinda's leave, she will collect $501 a week of benefits.
Once Lucinda returns to work and after Vince's parental leave finishes, the planner assumes they will pay child care of $15,000 a year until the children are age 6 1/2. When the children start school full time, the child care expense will fall to $7,500 a year until they reach age 13, the planner estimates.
"Although this may seem high, it's likely that there will be after school programs, lessons, camps, etc., to pay for, so I think this amount is reasonable."
She recommends they start contributing $2,500 to a registered education savings plan (RESP) in the year each child is born and continue until the year they turn 17.
"Since there is about 18 years before each child starts university, I would suggest that the RESPs be invested for long-term growth in an equity/dividend paying exchange-traded fund," Ms. Garbens says.
Vince and Lucinda's savings program during their "before kids" years is off to a good start, the planner says. She recommends they take full advantage of their tax-free savings accounts because they may have to dip into these savings while they are off work with the children.
She also recommends they continue with their RRSP contributions, but does not suggest increasing the contributions much until their mortgage is completely repaid (about 16.5 years with the current mortgage). They can always top up the RRSPs when cash flow permits.
Vince and Lucinda have a fair amount of cash and short-term investments. Rather than using some of this – their $60,000 inheritance, for example – to pay down the mortgage, she suggests they hang onto it all to cover costs during their parental leave.
"Although paying down the mortgage is generally a good thing to do, they are facing a cash-flow shortfall during the years when the children arrive," the planner notes. Because the cash will serve as an emergency fund, it should be invested in safe instruments such as guaranteed investment certificates or bonds that can be redeemed readily to cover operating costs in the years when their income will be lower.
As for their longer-term investments, Ms. Garbens recommends a balanced approach, perhaps a 50-50 split between equities and fixed-income investments. She suggests the fixed-income portion (relatively short term) go into their TFSA because they may have to draw down on these funds during the maternity/parental leave years.
For the time being, the RRSPs can hold the equity portion of the total portfolios. She suggests they choose exchange-traded funds to minimize costs.
The planner assumes the couple buys a new house in 2022 for an additional $150,000 and takes on a new mortgage. She assumes a 5 per cent average annual return on investments and a life span of 90 years.
While retirement is far in their future, Ms. Garbens figures Vince and Lucinda will have no trouble meeting their expenses for the duration of their lives. "A key assumption is that they continue to save and lead a relatively modest lifestyle," the planner says.
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Client situation
The people
Vince, 31, and Lucinda, 30.
The problem
Starting a family and taking parental leave while paying down mortgage and saving.
The plan
Hang on to the cash and short-term investments as an emergency fund. Build TFSAs to help them when one or the other is off work.
The payoff
Relief from the stress that a financial squeeze can cause, and a solid future footing.
Monthly net income
$8,530
Assets
His RRSP $38,240; his TFSA $25,115; present value of his defined benefit pension plan $24,760; his GICs/CSBs/cash $41,350; her RRSP $37,215; her TFSA $25,230; her non-registered (company stock) $10,990; cash $23,805; house $549,000; inheritance (cash) $60,000. Total: $835,705
Monthly disbursements
Mortgage $2,050; other housing $1,535; transportation $505; food, clothing $755; vacation, gifts $450; discretionary $610; phone, Internet $220; life, disability insurance $265; drugs, dentists $100; charitable $90; union dues $35; his RRSP contributions $435; her RRSP $400; his pension plan $240; his TFSA $460; her TFSA $460. Total: $8,610
Liabilities
Mortgage $322,779 at 2.99%
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