Monday, 27 May 2019

Can this couple avoid debt while managing lost income on parental leave? – The Globe and Mail

Stan, 49, wants to arrange for Sandra, 41, to take a year off with the children without having to go into debt.

Justin Tang/Globe and Mail

With a toddler at home and a second child arriving soon, Sandra and Stan are wondering how to manage lost income during parental leave without going into debt. He is 49, she is 41.

Although their combined income is “healthy,” they struggle to have much left over each month, Sandra writes in an e-mail. “I squeaked through mat leave without incurring debt, but my expenses haven’t yet adjusted to the addition of daycare costs,” she adds. Sandra plans to take parental leave this year, after which daycare costs for the two children will total $21,600 a year until 2022.

Luckily, their parents are stepping in with a $200,000 gift – an advance, perhaps, on their inheritance. They wonder how to “best use the money to balance short-term needs and long-term future planning.”

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He works for the government, earning about $107,000 a year. She works for an industry association, earning about $91,000. He has a defined benefit pension plan, while she has a defined contribution pension plan.

Their short-term goals include replacing their car. They also want to visit Sandra’s parents overseas for a couple of months and eventually take the kids to Disney World.

Although retirement is not on their radar yet, Stan hopes to hang up his hat at the age of 64. Sandra, who is eight years younger, would retire at 60. Their goal is maintain their standard of living.

We asked Jason Pereira, senior financial planner with Woodgate & IPC Securities Corp. in Toronto, to look at Sandra and Stan’s situation.

What the expert says

Thanks in part to Stan’s pension, which will pay him $72,624 a year at the age of 64, the couple will be able to meet their goals, Mr. Pereira says. That includes retiring as planned with $78,000 a year after-tax, a travel budget of $3,360 a year, car replacement every five years starting this year ($30,000), putting their children through university at a cost of $30,000 a year for four years for each child ($240,000 in total) and a Disney vacation in 2024 for $12,000.

Mr. Pereira starts by preparing a cash-flow forecast starting with the current year. This year they will have a combined after-tax cash flow of $317,365, including the $200,000 gift. That also includes Sandra’s salary for one month, mat leave benefits and the Canada Child Benefit. Their taxes factor in the tax savings from pension and registered retirement savings plan contributions. From that, the planner subtracts lifestyle expenses, leaving $213,039. He subtracts $30,000 for a second-hand car, a mortgage prepayment of $35,143 and life insurance of $3,090.

The remaining cash ($144,806) goes to savings: Stan’s pension plan, Sandra’s pension plan, in which her employer matches her contributions, Stan’s co