Putting a new face on middle age
Midlife reflection led Michael and Pegeen to feel their lives would be fuller if they adopted two children, so they have set the process in motion. Their plan is to adopt siblings between the ages of 5 and 10 years.
The couple can afford the new additions to their family. Over the years, they have built a consultancy that pays them well even though they have plenty of time off to travel. They spend about a quarter of each working year out of the country.
"We hope this won't change once we have kids," Michael writes in an e-mail. When the children join them, they will have to move from their two-bedroom Vancouver condominium to a three-bedroom home. High prices in the city mean they will likely have to rent, Michael writes.
With no company pensions, they have to provide for their own retirement. They are well-fixed to do so now, but they know having children will change things. They have an investment adviser "but don't really have a plan," he adds.
Their major assets are a portfolio of stocks and B.C. real estate - their condo, a vacation property and a half interest in a rental property in a smaller city.
Their goals including scaling back to working half-time so they can spend more time with the children, continuing to travel abroad on business, maintaining their current lifestyle while still providing for the new additions to their family, and "retiring early at 60 with few worries and the kids' education taken care of." Neither one has life or disability insurance and they wonder whether they should buy some.
We asked Eric Davis, a financial planner, investment adviser and vice-president of TD Waterhouse Canada Inc. in Kamloops, B.C., to look at Michael and Pegeen's situation.
What the expert says
"Life is pulling this family in many directions," Mr. Davis says. "As a new Dad myself, I think it may be hard for them to determine all the things they need versus what they want." For example, having young children will make travelling more difficult, he notes. They need to give some serious thought to setting their priorities.
Pegeen and Michael have a cash surplus of about $3,700 a month or $44,400 a year now, so they should be able to continue working less than full time and still absorb the higher costs of raising and educating children. He suggests they set up registered education savings plans once the children arrive to take advantage of the federal government grant.
If they sold their existing real estate, they would have enough money to buy a three-bedroom house in Vancouver if they chose to, Mr. Davis says. Because of the nature of their business, which takes them out of the country part of the time, "they could consider buying a cheaper property outside the expensive Vancouver market but [that is] still accessible to airports."
Mind you, Pegeen and Michael have invested heavily in the B.C. real estate market, which poses some risks if prices fall. They also carry substantial debt in the form of a $390,000 line of credit.
"From an asset allocation standpoint, they have about 64 per cent of their wealth in real estate," Mr. Davis says. "As a benchmark, pension funds tend to target 10 per cent to 15 per cent."
He suggests they continue adding to their savings at their current rate of $1,225 a month (RRSPs and TFSAs). Even if they do not save another dollar, their $500,000 in Canadian assets alone will provide them with retirement cash flow in 15 years of $33,000 a year pretax in today's dollars. That assumes a 6-per-cent return on investment and a 2-per-cent inflation rate.
Michael is right to be concerned about their lack of life and disability insurance, the planner says. He suggests $1-million in life insurance, and enough disability insurance to cover their loss of income if one or the other of them were to become disabled.
In pondering what is most important to them, Pegeen and Michael should remember that their goals might change "once there are four extra footsteps in their home," Mr. Davis says.
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Pegeen, 48, and Michael, 45.
Will having the children cause them to change their easygoing work habits, forcing them to work longer and/or stick closer to home? Can they afford to move to a larger home?
Set priorities. All their other decisions will flow from there.
A fulfilling and comfortable life made richer by the new additions to their family.
Monthly net income
Non-registered portfolio $380,000; RRSPs $80,000; TFSAs $40,000; U.S. IRAs (individual retirement accounts) $160,000; condo $600,000; vacation property $500,000; share of rental property $75,000. Total: $1,835,000
Housing expenses $630; transportation $200; groceries $800; clothing $100; line of credit $1,000; charitable $100; vacation and travel $500; personal discretionary (drinks, dining, entertainment, pet expenses, sports, hobbies, subscriptions) $1,410; dentists, drugstore $150; telecom, TV $185; RRSPs $815; TFSAs $410. Total: $6,300
Investment line of credit $390,000