Fertility treatments mean couple must cut expenses

The challenges of parenthood have been acute for an Ontario couple we’ll call Philippa, a corporate manager in marketing, and Marvin, a civil servant, both in their early forties. Several series of in vitro fertility procedures, the last of which was successful, have cost them $45,000. Their debt, including almost $34,000 remaining on their line of credit, totals $364,365, more than twice their $148,908 combined gross annual income. Now, they wonder, what will the financial consequence be if Philippa chooses to take a prolonged parental leave?

“We considered it an important decision to go into debt now to achieve our dream of having a family rather than having money later in life and the regret of not having a family,” Philippa says.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Marvin and Philippa. “The costs of in vitro fertilization have set this couple back financially, but given their earning power and years to retirement, the problem is fixable,” he says.

Cash management

In preparation for loss of income during maternity and parental leave, Marvin and Philippa should reduce costs where possible. First, they should close their tax-free savings accounts and use the $2,315 they will liberate for contributions to RRSPs, Mr. Moran suggests.

Adding $300 a month from the TFSA to their existing $4,200-ayear RRSP contribution will generate a total refund of $2,774, excluding the maternity and parental benefits period, when income and tax rates will be lower.

Benefits for a combination of 15 weeks of maternity leave and 35 weeks of parental leave would be $24,250, far below Philippa’s takehome salary in the 50-week period, $57,500. Some of the difference can be made up by cutting such discretionary expenses as $300 a month on sports, $350 on restaurants, and $435 they spend on household goods and furnishings, for a total of $1,085 a month, or $13,020 a year.

Philippa has a whole-life insurance policy with a cash surrender value of $16,500. It is a good policy, but it is costly. They could replace the $250,000 death benefit with $500,000 of 10-year level term coverage. Term coverage for Philippa will reduce her monthly costs from $160 to as little as $31. That will liberate $16,500, plus $1,548 a year in premium savings. That money can be used for debt reduction. They will have twice the coverage on Philippa’s life at a fraction of the original cost.

We considered it an important decision to go into debt now to achieve our dream

of having a family

They can then use the $16,500 to pay off their $10,000 boat loan, which costs $215 a month. With the boat loan paid off, the monthly payments can be added to the current credit-line payments of $1,600. This will shorten the payback period from 17 months to 15.

Assuming that Philippa takes 50 weeks off work and then returns to her job, their line of credit would be paid off by early 2015. Then monthly expenses will have declined by $1,600 from paying off the line of credit, $215 from terminated boat-loan payments, and $134 from the switch to term life insurance. This strategy will result in total cash flow gains of $1,949 a month, or $23,388 a year, and $1,049 of tax savings via RRSP contributions for a grand total of $24,437 a year.

Add in savings from reducing restaurant, appliances and sports spending, $13,030 a year, and government benefits of $24,250, and Philippa will have $61,717 of cash flow a year. The additional disposable income as well as money not spent on restaurants, etc. can be directed to the needs of their baby.

The couple’s home mortgage, about $312,000, has a 2.25% floating interest rate. It costs them $1,854 a month. It should be paid off after 17 years if the rate remains constant, though that is unlikely. If, after the boat and credit line are paid off, Marvin and Philippa add $1,949 a month to the mortgage payments beginning in a year after Philippa has returned to work, they could reduce the amortization of the mortgage to seven years and 11 months and save $20,138 of interest, Mr. Moran estimates. If they do nothing, the mortgage will be paid off when Philippa and Marvin are in their mid-50s. Then their enhanced cash flow will last until retirement.

RetiRement planning

In retirement, the couple will have Marvin’s government pension based on 2% per year of service for the best five years of salary. If his pay rises to match inflation, the pension in 2012 dollars would be $39,134 a year. Each will get Canada Pension Plan at what should be the full rate of $11,840 at current rates, assuming payments begin at 65. Each will receive Old Age Security at age 67 at $6,540 at current rates in 2012 dollars.

The sum of these pensions, $75,894, could be supplemented by registered savings. With continuing contributions at $650 a month and 3% growth over inflation, the fund, now $35,495, would be approximately $340,000 when retirement begins. If this fund were spent to the time that Philippa is 87, it would add $24,770 a year, for a total of $100,664 a year. If pensions are split and then taxed at an average rate of 15%, the couple would have after-tax income of $7,130 a month, less than their present after-tax income of $8,724 a month but free of debt-service charges.

“With a few sacrifices in current spending and some juggling of life insurance and RRSP savings, the couple can have substantially increased financial security within a few years, not long after their child is born,” Mr. Moran says.