7-day makeover: Where does the money go?

Â

Martin and Jennifer Murphy don’t know why they feel so poor. Between the two of them, they make a healthy income of more than $100,000 a year. But, after paying the mortgage on their nine-acre farm and feeding three kids, they never have a dollar left over. “It would be nice to have some money in my wallet just so I could go to Tim Hortons for a coffee,” Martin told us in his initial letter. “I often ask my wife how everyone else does it, and we assume for the most part that everyone puts it on credit. Am I wrong?”

Martin isn’t the type to complain. At 43, he’s a powerfully built, soft-spoken man who has worked for nearly 20 years in an auto plant in Oshawa, Ont. When he’s not on the assembly line, he’s working on his farm, raising Christmas trees. “Well, trees and kids,” he chuckles. Martin doesn’t smile often, but when he does, his grin lights up the room.

Nothing puts a grin on his face faster than his wife, Jennifer, 42. (We’ve changed their names and some details to protect their privacy.) She’s a striking, athletic woman who is in many ways his opposite. While Martin is laid back and quiet, she talks in bursts and vibrates with energy. In addition to looking after their kids, aged 10, 8 and 5, she works part-time as a social worker in a local hospital and competes in triathlons. “I do a lot of my training in the early morning, at 5 or 6, before everyone is up,” she says. “And sometimes Martin will take the kids for the afternoon so I can work out. We’ll pack some food and then he’ll work out back on the Christmas trees while the kids have a picnic beside him.”

It sounds like heaven — except for their financial worries, that is. Given the grim outlook for the auto industry, Martin isn’t sure how much longer he can count on having a job. And since he and Jennifer are barely making ends meet on his current salary, a layoff could be devastating. “We have so much and I am thankful for everything we have, but it’s difficult not to worry,” Martin wrote. “Do I have enough to retire? What happens if I lose my job?”

Background

Martin and Jennifer grew up just outside of Kingston, Ont., in the same small town, but in very different families. Jennifer was local gentry — her father was a lawyer, her mother, an elementary school principal. Jennifer was one of five kids. She and her siblings competed in local swim meets and were encouraged to excel in school. “There was a big focus on education in my family,” Jennifer says. “We weren’t spoiled, but we always had enough — there were three cars, we all took piano lessons, that sort of thing.”

There wasn’t a lot of piano playing in Martin’s home. His parents were Irish immigrants who worked hard, but didn’t have a lot. His father, a factory laborer, considered sports and education to be garbage. “I was the oldest of four kids and Dad always made it clear that he expected us to go out there and get a job the second we finished high school,” says Martin.

Martin did just that and after a series of jobs as a farm laborer and warehouse worker, was hired as a forklift driver in an auto plant in 1989. A year later he bumped into Jennifer at a dance. They had met in high school, but had never been friends. Something clicked that night, however. Two years later they were married.

Jennifer had by that time completed a degree in social work and was working as an addiction counselor. She and Martin pooled their resources and bought their first home. Four years later, they paid $143,000 for the farm they now live on. It was in sad shape. “The house was so bad even the real estate agent wouldn’t go in,” says Jennifer with a laugh. The previous owner had been an old woman who kept 30 dogs indoors and used one of the bedrooms to whelp the pups. But Martin and Jennifer saw the farmhouse’s potential. They gutted the place, installed a new well and soon had a handsome residence.

Their first child, Robert, was born in 1997. He was a fine baby, but as he grew older was always thirsty. He would cry because he wasn’t allowed to drink the toothpaste water. When he was three, Martin and Jennifer took him to the doctor and soon received the diagnosis: their firstborn had Type 1 diabetes. “He’s now on an insulin pump, but, sure, we worry,” says Martin. “He plays soccer, he runs, he’s an active little guy, but if he goes on a school trip, one of us always goes with him just in case there’s a problem with his insulin.”

Martin and Jennifer went on to have two other kids — Erin, 8, and Seamus, 5 — and while neither has displayed any sign of diabetes, the Murphys worry that they too may develop the illness. They would like to have a financial cushion so they can help out their kids if that should happen.

To help build that financial cushion, Martin has devoted his spare time to planting thousands of Christmas trees. He originally thought that having a sideline business might help him escape the drudgery of the auto plant a few years early. “It hasn’t worked out quite as quickly as I hoped,” he says. “Christmas trees take 10 to 12 years to come to maturity. I started planting in 1997. I figure that in a couple of years the trees might produce, say, $20,000 a year in income, but right now I’m content if they just don’t cost me a lot of money.”

That comment brings a hoot from Jennifer. “He dreams, I worry,” she says. Since their second child was born, she has worked half time at various social work jobs and is currently employed two-and-a-half days a week in the palliative care ward of a local hospital, where she earns $30,000 a year. Even on a part-time basis, it’s a demanding, stressful job.

What adds to her stress are the bills. She looks after the family accounting and there’s never quite enough money to go round. “I’m always juggling, always putting off one thing to pay another,” she says. “The reality is that we’re always in overdraft and I can’t sleep some nights worrying about what we’re going to do.”

The challenge

The Murphys feel under pressure. Their income just barely covers their bills and that’s without any luxuries — they rarely buy clothes, have only basic satellite television, and don’t eat in restaurants. They struggle to contribute to their RRSPs each year.

Martin can look forward to retiring in 12 years, at age 55, from the auto plant with a full pension, but he doesn’t know if the factory is going to stay open that long. His employer is a money-losing automaker and Martin fears that his $70,000-a-year job could disappear any day. “There aren’t a lot of well-paid jobs in this area,” he says. “And I don’t know what would happen to my pension if my employer went under. Will it all go up in smoke?”

Jennifer’s goal is to finance university for their three kids and to stop running overdrafts at the bank every month. She knows the easiest way to put more money on the table would be for her to go back to work full-time, but she doesn’t want to do that. “Raising three young kids is demanding,” she says. “I want to be a good mother and I know that if I were to work full-time, I wouldn’t have a lot of emotional energy left for my own family.”

Meanwhile, there’s Robert, who is just about to turn 11. His diabetes seems to be under control, but the Murphys worry that his condition may worsen in the years to come. “If he doesn’t get a good job when he grows up, with good benefits, I worry about how he’s going to cover his health costs,” says Martin. Their life insurance agent told them that Robert is uninsurable because of his condition. However, the agent did sell them $50,000 policies on each of their younger kids, in case the children develop diabetes later in life and can’t get insurance.

The Murphys figure their home and farm (now with 5,000 Christmas trees on it!) are probably worth about $480,000. But they are carrying a $200,000 mortgage on the property, as well as $30,000 in loans that they took out to buy a car and a tractor.

They have scrimped to make RRSP contributions each year and have managed to build their savings to $170,000, but they’re the first to acknowledge that they have no clue as to how well the money is being invested. “We’ve trusted our financial adviser to tell us what to do and he’s put us in what he calls a wrap program,” says Martin. “We really don’t know how to judge it.”

The makeover

The Murphys came in with doubts about the financial products they had been sold, and those doubts were quickly confirmed by our panel of advisers.

Norbert Schlenker, our lead financial planner, was quick to pounce on the insurance policies they had been sold for their younger children. “They make no sense,” he told the Murphys. The point of insurance is to replace lost income. Insuring a child’s life is a waste of money because children don’t produce income. Yes, the policies guarantee their two younger kids will have a bit of insurance as adults, even if they do develop diabetes, but will $50,000 in coverage really make much of a difference to them? “You are being taken advantage of,” Schlenker told the Murphys. “The insurance agent who sold you this is making an emotional argument, not a rational one. The amount of money that’s involved is not huge, but it’s just one demonstration that the financial industry is very good at selling you products you may not need.”

Warren MacKenzie and JoAnne Anderson, the two other members of our advisory team, helped the Murphys understand exactly how much they were paying for investment advice. “The wrap program you’re in is probably charging you 3% a year in fees,” Anderson told them. “So you’re paying several thousand dollars a year in fees. That’s far more than you should be paying.”

Schlenker pointed out how they could put together a simple portfolio composed of index funds for under 0.5% a year in fees. “The difference over the course of a couple of decades is huge,” he told the Murphys. “You’re talking tens of thousands of dollars.”

The advice

“I know you feel stretched to the limit,” Schlenker told them. “I wish I could tell you that things will get better on a day-to-day basis, but I can’t. There isn’t any way to turn your empty wallets at month end into a happy cash surplus as long as Jennifer remains part-time.” The good news? A return to full-time work for Jennifer is an option, not a necessity. Either way, the Murphys will be fine in the long run.

For now, the couple should realize they are not spending money foolishly. Schlenker pointed out that they pay $20,000 a year in taxes and nearly another $20,000 on their mortgage. Factor in the costs of raising three kids, investing in the farm and contributing to RRSPs, and “you’re managing your budget very well. You’re going to be absolutely fine — more than fine — in the long run.”

Especially if the Murphys remember that much of the money they’re putting out is building wealth for the future. “I think a lot of your stress would be alleviated if you realized how much equity you’re building up every month,” MacKenzie told them. Between paying down their mortgage, contributing to their RRSP, tending to their Christmas tree farm, and accumulating pension benefits, they are adding tens of thousands of dollars to their net worth every year.

Our experts assured Martin he could stop worrying about losing his company pension. Even if his employer were to go bust, Martin’s pension is protected by a government backstop and he will collect most, if not all, of what he has accumulated. If Martin makes it to 55 at the auto plant, then his pension benefits and Jennifer’s half-pension, combined with the farm income and the impressive amount they’ve accumulated in their RRSPs, will provide the couple with a comfortable retirement. At that point, if they want to help out with their kids’ university expenses, they could continue to work or even sell part of the farm.

Our experts did have tips for the Murphys. First, they should get out of their expensive wrap portfolio and construct a diversified portfolio using low-cost index funds. (For more on the mechanics of doing this, see “Be a Couch Potato”) This could easily double the effective return from their portfolio. A conservative assumption is that their low-cost portfolio will produce 6% annual returns, meaning their $170,000 in savings will double over the next 12 years. If the Murphys continue to contribute to their RRSPs at their current clip, they will have $450,000 or so in savings by the time they hit their mid-50s.

Second, the Murphys should keep their chins up. The biggest threat they face is that Martin may lose his job, but even then they have options. They could replace most of the $70,000-a-year shortfall if Jennifer went to work full-time (for an additional $30,000 a year), the farm started to produce $20,000 a year in profit and Martin found additional work that would pay $20,000 a year.

For now, the Murphys should focus on paying down their mortgage and contributing to registered education savings plans for their kids. If possible, they should continue building up their RRSPs. The most tax-efficient way to do that is for the high-income spouse (Martin) to contribute to spousal RRSPs for the lower-income spouse (Jennifer).

They should drop the life insurance on their kids. And — most important — they should stop beating themselves up. “You’re not doing anything wrong,” Schlenker told them. “In fact, you’ve accumulated far more wealth than most people your age. So don’t feel you have to put every extra $35 that comes your way into your RRSP. Use it to improve life now, not when you’re 95.”

Six weeks later

The Murphys have cancelled their kids’ life insurance policies. They’re getting out of their wrap account and becoming self-directed investors in index funds. “I think we took our adviser by surprise,” says Martin. “He didn’t really say anything. But what we’ve found is that it takes forever to change things. It’s a mountain of paperwork and we’re still in the middle of it.”

Will Jennifer go back to work full-time? Can Martin make the farm pay? Read their blog at www.moneysense.ca/martinandjennifer.