Posted by Canadian Dream on March 11, 2009
Well I’m typically not in the business of offering specific advise to a person’s situation, but when someone recently asked me to have a crack at their numbers I decided I would have a look and try for a change of pace. I made it known I’m not an expert on this, but will rather be just giving them my thoughts of the situation. Then much to my amusement I was told they both worked in the financial planning industry. So they already are experts compared to most people.
The couple has several questions including if they have a baby will they be alright during her maternity leave and afterwords would she have to go back to work (full time, part time or not at all). The second set of questions was could they retire early at 55? She is currently 35 and he is 37.
Ok before I even look at dollar number I’m already struck by something. They are waiting too long to have kids. After age 35 your odds of medical problems with your kids start increasing dramatically for woman. So to avoid things from getting worse for odds in a health sense you need to start having a baby RIGHT NOW. Do not pass go, do not collect $200 go straight to the bedroom and have sex. We will sort out the money after the fact. Also people generally assume you can get pregnant at the drop of the hat, which some people can. While other can not. You don’t want to find out the hard way it takes you over a year to conceive. Therefore get busy having lots of sex.
Now with that out of the way, let’s get onto sorting out the money issues. She makes $70,000/year while his is a bit more variable so I’m suppose to use the lower number of $50,000 to be conservative.
Expenses are currently as follows:
Expenses – Basic (monthly)
Car payment = $500 /month (will be done in April 2010)
Transit pass = $96
Groceries = $300
Toiletries = $100 (includes cleaning products)
Property tax = $280/month
Heat, hydro, water = $200/month
Cell phones, cable, internet = $200/month
Insurance policies (critical illness, health, life) = $200
House and car insurance = $200/month
Parking pass for husband = $100/month
General maintenance for car = $42/month
Gas for car = $100 month
Total = $2318/month or $27,816/yr
Discretionary Expenses (monthly)
Clothing = $150
Travel = $1200
Restaurants = $300
Entertainment = $100
Cleaning lady = $160
Total = $1910/month or $22,920/year
Grand Total = $4428/month or $50,736
Ok obviously they have a serious love of travel (they take a lot of cruises) and for those reading the above carefully would note they also own their own home free and clear. Instead of the traditional mortgage they pulled off a Smith Maneuver so they just have very large taxable investment accounts and very large investment loans to match. Yet for today I’m generally ignoring their assets to focus on their first baby related question.
Because of their Smith Maneuver I can’t predict their after tax income. It’s just too complex for me to even guess at. So after being assured that they get enough income from their investments to cover the loan interest and pay it down in 20 or so years I’m going to ignore it. Instead I just plugged in their regular income into a tax calculator and assumed no deductions and got rough estimates of after tax income of $52,800 for her and $39,150 for him.
So during baby’s first year when mom is off, life is fairly good. Mom would get about $400/week from EI and that with Dad’s income could cover their normal expenses and leave some extra to cover baby related costs.
Yet after that if she wants to stay home full time they are going to have to cut back a bit. Currently the difference between his income and their expenses is about $11, 500/year or $965/month. So the obvious solution would be drop the cleaning lady to cover off the baby expenses and then drop the travel budget to zero until the car payment is done. Then make some or all of the car payment money your basic travel fund. So then net their spending would be down $1200/month. That would leave a bit extra wiggle room since I don’t see any retirement savings in the above. The couple can use their Child Tax Benefit money to fund the kid’s RESP. Then if the husband has a good year they can bank it up in a travel fund for an extra trip or throw money at their retirement plan.
Now the above doesn’t consider yet the whole early retirement plan or the fact mom might decide she doesn’t want to stay home with the kid all the time. I know many mothers who like to work part time just to have a bit of their own life that doesn’t involve the kids. So just because you don’t have to work doesn’t mean you don’t want to work a bit. Consider part time work or even trying a home based business. I’ll touch these options a bit more next week when I look at the early retirement question.
So to summarize: yes have kids now, you can afford to stay home if you give up some travel and are willing to make it a bit more of variable expense to match the fluctuations in the husbands income. Any one else have some ideas for this couple so far? If so please share in the comments.
Posted by Canadian Dream on November 4, 2008
I do like my inbox some days. Jordan sent me a note with the following interesting question:
Hey Tim, I was chatting with friends last weekend about money and told them of my plan to retire early. They thought I was crazy and basically take a much different tact of using their money now and so aren’t able to put much away for the future.
One thing that came up was the subject of inheritance, they have 2 sets of parents who have been successful professionally and probably each have a net worth of a few million per family. They figure that eventually they will inherit a portion of that and count it in their financial plan for retirement. My own parents are near the same financial level, and again they think I’m crazy because I’ve never planned on getting anything.
I’m curious where you fall on this topic, I doubt you would count on it either, but is it worth avoiding completely or is there some way or even reason to plan for it?
Maybe since most people plan to retire at 65 they are at the age when inheritance might be coming and needed the most without savings of their own. Where as early retirees need a to have a more solid financial base decades before inheritance would even be likely?
Ah, inheritance. It’s one of those sliding scale kind of issues when talking about retirement planning. To those that expect to get nothing or near nothing they don’t worry about it. To those that may get $500,000 plus it could be rather significant.
I personally like to rephrase the question to people. Hi we’ve got this great new investment product that could give you up to a million dollars during your retirement. The drawback is it’s based on a complex life insurance scheme that means we have no idea when you will see the money or the exact amount you will receive. Do you want to invest?
Of course a rational person would go: NO! I tend to agree and don’t plan on getting a dime from my parents after they die. After all we are talking about people that will likely live till 90+ so they could eat up a fair amount of their wealth just on long term care or other medical costs as they age. Also they might decide to skip their kids and give some of the money directly to their grandchildren when they are alive. Not to mention if they even get close to the same age of their parents before they die I won’t see any money until I’m in my 60′s. Hardly useful to me when I would have already been retired for over 15 years at that time.
Overall I suggest to people that you don’t plan on inheritance for any of your basic retirement expenses. If you want to treat it as a vacation slush fund or buying a second home someplace warm, so be it. It can make a good retirement just a bit nicer. Just make sure you are not planning on that money to eat or pay rent in retirement. Your parents already looked after you as a kid, don’t expect them to do it when they are dead. Be a big person now and plan for your own retirement regardless if you plan to do it early or at 65.
Well that’s my two cents on that topic. What are your plans for any inheritance you might receive? Would you use it in your retirement planning? If so, how would you use it?
Posted by Canadian Dream on August 12, 2008
Jordan sent me an interesting link yesterday on the predicted collapse of the Western Canada real estate market. Where the report states BC is overvalued by 35% and SK is over valued by 50%. Then he asked a few questions:
Not being an owner yet myself, that made me wonder what a financially savvy person would
do if they found this out and deemed it to be true?
I recall your net worth gained a lot from the value of your house going up, if
you now stand at the top of possibly large declines would you consider selling
your family home to avoid the downtown? Pocket the appreciation and wait to
re-buy when prices were a deal or is the value of home ownership / stability
too great?
First off I do think the report is somewhat true, but a little late. We are already experiencing a downturn in Western real estate markets and there will likely be some more dropping of prices for at least a year or two until supply and demand get balanced out again. I think the 50% over valued number is just plain bullshit in SK personally. Why? Well first off that would wipe out all the gains in the province since the boom started, which seems to me like a little over simplified math. Basically SK cities has historically been grossly undervalued compared to just about every other major city in Canada. I bought a house here which would have easily cost me $300,000+ anywhere else for $190,000. Hell even the provincial government knew that and used to sell the idea of SK’s low cost of living to attract people. Part of the boom up in prices is just bringing us up to par (I would guess about 25%), then other 25% is unstable due to speculation. So we are going to continue to fall, but I don’t think we will drop by 50%.
I won’t sell my home to try and cash in and try to avoid the downturn. My home to me is more than just an investment, it is also my shelter and my wife’s place of business. We choose this home over all the others due to price, location and most importantly the floor plan. It is ideally suited to a our lifestyle (no dining room) and running a daycare (large family room and a main floor bedroom and under 1km to three schools). So finding a replacement as a rental where my wife could continue to run the daycare would be difficult.
Additionally my wife is sick of moving (I believe our total now is 6 moves in the last 8 years). So I’m doing my best to stay put here for at least 10 years total. So with that in mind I don’t dare place a for sale sign on my front lawn until 2016 unless I can come up with a REALLY damn good argument to move us. So in the mean time my net worth will continue to look like a yo-yo until my investments out pace my equity in my house.
