Two years ago, Henry and Carlena Sullivan were on top of the world. Henry worked at his father’s manufacturing firm in Orillia, Ont., and earned $142,400 annually. Carlena made $45,000 as an accountant, working part-time so she could spend more time with the couple’s two young sons, Peter, 8, and Lawrence, 7. “It looked like the sky was the limit in terms of what the future would hold for us financially,” says Carlena, now 39. “Then the bottom fell out of the economy and Henry’s father filed for bankruptcy. We’ve been struggling ever since.”
A U.S. firm took over, and while Henry, also 39, initially got to keep his job, it was at a much-reduced salary. Then, this past April, he was laid off. It took Henry 10 weeks to find another job, but the pay was even lower: $60,000 a year, plus a $10,000 bonus. “Our household income is now $115,000 total—a 40% cut from two years ago,” says Carlena (we’ve changed both their names to protect their privacy). “We have to either earn more or live on less, but where do we start?”
The Sullivans know they have options. For instance, Carlena has considered working full-time—a step that could bring her income up to $75,000—but she hesitates to do that, mainly because both her sons have learning disabilities. “They attend activities several nights a week to help their progress. I think it’s critical that my sons get extra help to make their futures brighter.”
The Sullivans’ expenses are all up for review—even their $390,000 four-bedroom home in Orillia, which carries a $201,844 mortgage. Also under the microscope is Henry’s annual $6,272 car lease, no longer covered by his employer. And what will they do a year from now when Carlena’s seven-year-old Nissan Altima needs to be replaced? “We need two vehicles,” Henry stresses.
The good news is the couple’s only other debt is $31,824 on their line of credit—a debt incurred by Henry to build a home office in their basement. But they’ve only been paying the $915 in annual interest. “I know that our living expenses now exceed our take-home pay by several thousand dollars,” says Carlena. “We need to make changes fast.”
The Sullivans’ biggest concern is their savings plan. Until now, they have automated their savings: Carlena, for instance, contributes to the defined contribution pension plan at work, and her employer matches her contributions. The couple has also been saving $5,000 a year in RESPs, making $2,600 in extra mortgage payments, and tucking $3,900 into an emergency fund.
“It scares us to think we may not be able to save enough for a comfortable retirement,” says Henry, who has not contributed to an RRSP in two years. “We need to get back on the right financial track. Can you help us?”
Carlena grew up on a chicken farm near Leamington, Ont., with traditional parents who had no tolerance for debt. They didn’t buy anything unless they could pay for it in cash. “They lived a simple life and taught me to have a strong work ethic.”
Not surprisingly, Carlena was always good with money. As a teenager, she worked part-time at a local Tim Hortons. After graduating from high school in 1991, she enrolled in a three-year accounting program at a college in Hamilton, Ont. She got a full-time accounting job soon after graduation, and in 1998, she met Henry through mutual friends. “We liked each other right away. We have a lot of fun together.”
Henry grew up in Orillia, the youngest of four kids. “I had a charmed childhood,” says Henry. His father and stepmother ran several successful businesses and had plenty of money—enough, in fact, to send Henry away to boarding school when he was 14. “The way I saw it, my stepmother was the numbers gal and dad was the salesman. I’m more like my dad.”
At 18, Henry attended Humber College in Toronto and completed a diploma in marketing. He got his first job with a U.S. company, but in 1997 he moved to Hamilton to accept a better job offer at a local technology company. The following year, he met Carlena. “It was the best day of my life,” says Henry. “Our personalities complement each other even though we look like opposites. We have similar tastes in music, movies and books. It’s a good match.” In 2000, the couple married, and that’s when Carlena first looked at Henry’s finances. “They were a complete shambles,” she says. “He was taking cash advances to pay his Visa. He’s learned a lot since then.”
In 2001, Henry and Carlena moved to Orillia so Henry could work at his father’s new manufacturing company. Carlena got a job in the accounting department of a local insurance company and life was good. Carlena also took over all the budgeting. “Henry had never saved money. But I had a strict budget for years. If it wasn’t in the budget, I didn’t buy it.”
In 2002, the couple had their first child, Peter, and a year later Lawrence was born. Carlena switched from full-time work to part-time, figuring that if she was home more, they could trim their hefty daycare bills and commuting costs. “But I won’t lie,” says Carlena. “The maternity leaves were tough on our finances. I have a serious debt aversion and even withdrew $7,000 in RRSP savings to prevent us from going further into debt.”
In January 2008 they bought the house they are living in now. By that time, Henry’s salary at his father’s company had increased to $142,400 annually, plus a $7,200 car allowance. Then, in 2009, the company failed.
This past July, after months of searching Henry landed a new job, but it pays a lot less: $60,000 a year plus a $10,000 bonus. The company says there is the potential to earn up to $20,000 more in commissions, but the couple can’t count on it. To make matters worse, Henry no longer gets a car allowance. “It’s frustrating,” says Carlena. “We have 19 years left on the mortgage and paying it off sooner—a goal of ours—seems impossible now.”
The couple’s other large expenses include their $15,250 grocery bill, the $5,000 they spend on clothing and haircuts, as well as $5,300 in childcare costs. They are also paying more than $2,300 in term life insurance premiums—a $1.6 million policy on Henry’s life and $1 million on Carlena’s. When they drew up their budget, they were surprised to see that they also spend about $4,500 a year on vacations. “We don’t do much—just visit friends and family. But I guess it still costs money to get there.”
It’s their diminished capacity to save that worries the couple most. When Henry was making $142,400, they saved 100% of Carlena’s after-tax salary. “That won’t work anymore,” says Carlena. The couple had been maximizing the government grant on their kids’ Registered Education Savings Plans (RESPs), but they doubt they’ll be able to continue that either. “We wanted to pay for all of their post-secondary education,” says Henry. “Maybe half is more realistic.”
The couple also stopped contributing to Henry’s RRSP two years ago when his employer stopped matching his contributions. He now has $90,000 in accumulated contribution room, while Carlena has about $40,000. “Maybe one day we’ll make use of it,” says Henry. The $136,305 they have in RRSPs already is invested in mutual funds and the couple is happy with their returns.
The couple also has $17,889 from a U.S. retirement account that Henry collapsed in January. Once taxes are paid, they’ll get about $14,000. “It’s hard to say what’s the right strategy for that money—paying down debt or putting it towards other savings goals,” says Henry. “We can’t decide.”
They desperately need a plan to get through the next eight years—that’s when Carlena plans to go back to work full-time. “We’re just hoping that won’t be too late to save our finances—and our retirement.”
What the experts say
Henry and Carlena Sullivan have always bought whatever they wanted. Now, with less income, they will have to learn to live on less. “It might not be as bad as they think,” says Barb Garbens, a fee-only financial planner in Toronto. “We often waste a lot of money, and the truth is that living on more doesn’t necessarily mean living better.”
Rona Birenbaum, a fee-only financial planner at Caring for Clients in Toronto, agrees. “The key is to be committed to your values and priorities. Having a plan will lower Carlena’s anxiety because she will be able to see clearly that, even with less money, they can achieve their goals over time. Patience is the key.” Here’s what the Sullivans need to do.
Slash their spending. The Sullivans’ annual household expenses currently exceed their net income by $8,711. When you factor in their savings goals, the shortfall is closer to $20,000 a year. Both experts say they should start by cutting $3,250 from the grocery bill. “A family of four should be able to eat at home for $1,000 per month with careful shopping,” says Birenbaum. They should also cut $700 from the clothing budget, $500 from the vacation budget, $1,740 from landscaping, $500 from furniture and electronics, $500 from life insurance (see below), and possibly drop their disability insurance if it can be replaced by group coverage from Henry’s employer.
Pay down their debt. The $14,000 they’ll net from the U.S. savings account and the $12,000 in emergency savings should be used to pay down the line of credit, leaving only $6,000 outstanding. “There is no point in paying over 3% interest on the line of credit and earning 1% after tax on savings,” says Birenbaum. “The Sullivans are paying 2% per year to see money in a bank account. That’s false security. In an emergency, they can access the line of credit.” By cutting the interest cost, they will save about $700 a year.
Restructure their car costs. When Henry’s car lease comes due later this year, he should use a service such as LeaseBusters to pick another short-term lease. He should be able to get something decent for $400 a month—resulting in $1,472 in annual savings.
Then, when Carlena’s old car dies in a year or so, they can lease one for her as well. “It doesn’t make sense to pay $3,750 a year in repair costs,” says Garbens. “Take that money and lease a car for $250 a month. That’s cheap.” Garbens says that the cost of leasing Carlena’s car can be covered by the money they’re now spending on car maintenance, plus the $1,472 in savings from Henry’s lease.
Be choosy about savings. Carlena should keep contributing to her defined contribution pension plan (the employer matches her contributions), but stop all payments to the emergency fund and extra mortgage payments for now. “They’re creating stress for themselves,” says Garbens. “They’ll be able to catch up with their savings when Carlena returns to work full-time.”
Review their insurance needs. Henry has $1.6 million in term life insurance and Carlena has $1 million. “Henry is over-insured by $400,000 and Carlena is over-insured by $300,000,” says Birenbaum, who reviewed the couple’s situation. “Cutting their coverage will save them $500 annually. Life insurance after 2025, when these policies come due would be nice,” but because the kids will be grown up by then, “it isn’t essential.”
Use Henry’s commissions for savings and debt payments. Henry doesn’t know how much he will earn in commissions from his new sales job, but he should put the first $5,000 into RESPs and whatever remains should go toward the line of credit and the mortgage.
Catch up on their RRSPs later. In five years, maybe earlier, the $5,300 annual child care expense will end, and that money can be redirected to their RRSPs. When Carlena returns to work full-time, an additional $20,000 from her increased salary can be allocated to RRSPs. “It’s not a big deal to stop contributing to RRSPs for the next five years,” says Garbens. “They can make larger contributions from 44 to 60. Any tax refund should go towards paying down the mortgage.”
If they do all of this, the Sullivans can retire comfortably at age 60. They’ll have Carlena’s modest company pension in hand, a paid-off house, and RRSP savings of more than $900,000. “It’s all fixable,” says Garbens. “The next five years will be tight, but if they stop and smell the roses along the way, they’ll have a very satisfying life.”