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.