From rich to ruin

Then Sebastian lost his job. In January of 2008, he was “reorganized” from his company, given a small severance package and sent home. Sebastian (both names were changed to protect their privacy) quickly found another job but after a few months was laid off again. He is now collecting unemployment insurance and considering his options. “Jobs in technical sales have just dried up,” says Sebastian, 45. “Many sales jobs now don’t even offer a base salary—just commission. And forget about a pension or benefits. I’ve been unemployed for six months now and it’s just so discouraging.”

Alana, too, is stressed. Right now, her small gas company is in the process of being bought by a U.S. firm. Soon, she too may not have a job. “I have a 50-50 chance that they’ll keep me on,” says Alana, 44. “That’s creating a lot of stress in our life right now. I have been with the same company for 12 years and while I might be able to find another job if I’m let go, I worry that we won’t be financially prepared to have two of us out of work.”

Both Sebastian and Alana consider themselves hardworking, but they are in two sectors of the economy that have recently been decimated. To make matters worse, they have two large expenses: a huge luxury home worth $500,000 that they bought three years ago and currently has a $121,000 mortgage on it, and elite soccer and hockey activities for their 16-year-old son Max that cost $8,000 annually.

The Rossis love their showpiece home with two offices and a pool, but realize they only really need to stay in Kitchener, a mid-sized city 100 km west of Toronto, until Max goes away to school in 2011. After that, they say they may move to a smaller home—perhaps a condo in another part of Canada. “We bought this house three years ago because it was a great deal and suited our needs,” says Sebastian. “But we’re chameleons and things change. If Alana loses her job, the house will be put up for sale the next day.”

Sebastian and Alana are hard-working people. Both grew up on tobacco farms in southwestern Ontario and the pair spent most of their summers throughout high school and university working on the farm. “I met Alana in public school,” says Sebastian. “We grew up in a small community and everyone knew each other. She didn’t think I was cool then but as we got older, there was a chase component there on her part.”

The differences in the way the two families dealt with money was obvious to anyone who was familiar with how each family ran their tobacco farm. “Alana’s parents had all the new technology on the farm and carried a lot of debt,” says Sebastian. “My parents always had the older stuff but they were great savers and knew how to stretch a dollar.”

Right after high school, Alana went to McMaster University in Hamilton, Ont., and completed an undergraduate degree in business administration and economics. Sebastian followed a different path. He left home the year after high school graduation and immediately got a job as a general laborer and welder. The couple dated while Alana was in university and married in 1985, soon after Alana graduated with her business degree. “We geared our wedding date to October, the end of the harvest,” says Alana. “We had 300 people at the wedding. If we weren’t related to them, then we knew them in the community.”

Life was good and Alana got a job right away as a junior accountant with a tobacco export company. The following year, the couple bought a small home in Woodstock, Ont., for $65,000 and sold it three year later for $123,000—almost double what they had paid for it. “Sebastian wanted to go to college and be a mechanical technician,” says Alana. “I was making only $27,000 a year at the time but the gain from the sale of our home helped pay our living expenses for three years while Sebastian attended college. We rented an apartment and lived very comfortably.”

Once Sebastian graduated in 1992, he got a full time job as an applications engineer with a manufacturing company and the following year their son Max was born. Within a couple of months, the Rossis settled in Kitchener, where they put a small down payment on a $158,000 house and they lived there for 13 years until 2005. “We sold it for $228,000 and bought our dream home,” says Alana. “It has the ‘wow’ factor—a pool, beautiful stone fireplace, two offices and a lovely deck and backyard. We got it for $429,000—a steal—and put about $60,000 in renovations into it. It’s a real showpiece.”

Over the years Sebastian held several jobs with different manufacturing companies. But in 2001, he wanted a new challenge and took a job as technician at a software company. “I did teaching, mentoring, training and trouble-shooting,” says Sebastian. “It lead to a great sales job within the company and I loved it. The people were great and the money was better. I went from earning $70,000 a year in 2003 to $130,000 with bonus in 2005.”

Two years ago, their good luck ended. In 2007, Sebastian was downsized from his company. He landed another job in four months but was downsized again in January 2009. His salary at his last job was $65,000—half what he was making two years earlier. “Both Alana and I have had great-paying jobs for over a decade now and we’ve never had to go through an economic downturn of this magnitude,” says Sebastian. “We never dreamed that we would ever be downsized or have trouble getting good-paying jobs.”

Sebastian tries to stay upbeat, but he feels that many good-paying manufacturing jobs may never come back. “I had no pension in my last two jobs and no benefits,” he says. Now in addition to collecting unemployment insurance benefits, he’s teaching a part-time course at a local college. “I have thought about going back to school but that’s expensive and we can’t afford to have me out of the workforce for a year or two. The positions I apply for now are all lower level sales jobs. Some pay nothing except a 100% commission with no benefits. You end up losing money because you have to pay out of pocket for transportation, cell phones, and other expenses. Who can live on that?”

What keeps the Rossis up at night is the probability that Alana will lose her job when her company downsizes later this year. That would mean disaster for the couple’s finances. In this tough economic climate, both will consider themselves lucky if they get jobs making even $50,000 a year. In the meantime, they worry about how they’ll continue paying their expenses. Their 3,200-sq-ft house still has a $121,000 mortgage on it, so they have to pay $20,000 a year in mortgage and utility payments. In addition they pay $10,600 a year for transportation and maintenance on their three vehicles, and $47,320 a year for groceries, vacations, gifts and other expenses.

To get their costs under control, the Rossis recently began fast-tracking their mortgage payments by paying their mortgage every two weeks instead of once a month, and they are also making an extra 10% payment this year on the outstanding principal to pay it off even faster. Still, they’d feel as if they were overextending themselves by holding onto their home if both of them lost their jobs. Alana says she would put the house up for sale quickly if necessary. “We’d then consider buying a condo for $300,000 cash so we would be mortgage free. And we’d sell our $27,000 convertible—our dream car—to raise extra money for living expenses. But would that be enough to continue living comfortably on less than half our usual household income? We just don’t know.”

Even if the Rossis manage to chop their expenses, one huge cost looms that they don’t want to cut back on—Max’s post-secondary education. Max is interested in completing the undergraduate business degree at Dalhousie University in Nova Scotia. The bill? About $100,000. “Max has already told us that he really wants to go on the March break school trip to Europe next year,” says Alana. “That’s $4,000 but we’d really like him to go. We’ve saved for his education but not nearly enough to cover all his post-secondary expenses. In fact, we’ve lost about 30% of our RESP money and 40% of our RRSP money during this financial collapse.”

Those financial losses were a huge shock, and because of them, the Rossis feel they should scrap their entire investment portfolio strategy and start over. They have an impressive amount of money in their RRSP and RESP—about $329,000—but they aren’t comfortable with the way it’s invested. Right now, they hold more than a dozen high-fee mutual funds that are invested almost entirely in equities. “I would have been happier had we buried our money in a mason jar in the backyard,” says Alana. “We need to preserve capital and cut our losses. We don’t have big company pensions and probably never will have in future, so it’s important to us to make the most of our $314,000 in retirement savings. Should we sell our mutual funds now that the market is down? Or should we wait and restructure our portfolio once the market has gone back up? It’s difficult to know.”

One thing is certain—the Rossis are up to the challenge. They’ve already cut back on eating out and have begun to do a lot of the lawn and garden maintenance themselves instead of hiring a landscaping service. Sebastian is handy around the house and has installed automatic thermostats in the house and near the pool to keep utility bills down. The couple has even encouraged Max to find a part-time job this summer as a counselor at a summer camp so his earnings can help pay for part of his European trip next year. They feel that’s a good start. “You can’t control a lot of things but you can control how you react to certain situations,” says Sebastian. “I have to believe that sometimes things happen for the better and you don’t see it right away. I’d like to believe that that’s the case this time around for us.”

But Alana isn’t so sure. She wants a financial plan for the future that will prepare them for living on less than half their usual $270,000 income. “Our worst nightmare is that neither of us gets a good-paying job ever again. How will we live? Sebastian’s best friend got laid off a couple of months before him and is now making $12 an hour at Home Depot. That’s the reality of the job market right now. We need advice on how to scale back to ensure the family’s needs are taken care of. Can you show us how?”

What The Experts Say

Like so many other middle-class couples, Alana and Sebastian indulged themselves during the high-rolling economic boom of the 2000s. They bought a fancy house that was far bigger than they needed and a luxury convertible to boot. At the time, they could afford all these purchases. Alana and Sebastian were both earning six-figure paycheques. Now, with Sebastian unemployed and Alana in danger of losing her job, they can no longer afford this lifestyle.

But the Rossis are actually in better shape than most couples in the same boat, says Alfred Feth, a fee-for-service financial planner in Waterloo, Ont. Except for a small mortgage, they have almost no debt. And they’ve stashed away a tremendous amount of money in savings and for retirement. “Honestly, they’ve done well for themselves,” Feth says. “It’s just a matter of getting them through this transition.”

Margaret Cameron, a certified financial planner with Cameron Leadership Development in Ottawa, thinks one of the Rossis biggest problems is their panicky outlook. “Alana seems so stressed out. She hasn’t lost her job yet and she may never lose it. She needs to be more positive.” Even if Alana does become unemployed, she should get up to 24 weeks of severance pay (based on 12 years service with her employer). And the couple has $33,000 in savings to act as an emergency fund.

Sebastian also needs to calm down. He’s had a varied career in welding, manufacturing, sales and teaching. “He’s really selling himself short,” says Feth. Sebastian bemoans the fact that most sales positions that come up are commission-only. But as Feth points out, a good salesperson can make a decent income from commission sales.

Sebastian is doing one thing right: He’s not sitting at home blindly firing out résumés. He’s teaching and doing some consulting work. Both of these allow him to make contacts that could result in full-time employment. If he decides to do something entirely different and retrain for another career, he should consider dipping into his RRSP. He can withdraw $10,000 annually to a maximum of $20,000 for school.

Despite their overall optimism, our experts say there are some definite changes the Rossis should make. Here’s what they suggest:

Find a new planner: Alana and Sebastian are understandably upset that their RRSPs have been cut by 40% over the last year. Alana blames their adviser. She wants to fire him and handle the investments herself.

Barb Garbens, president of Toronto planning firm BL Garbens Associates, says they have a right be angry. Their adviser put them in aggressive mutual funds that are invested almost entirely in equities. “No one at their age should be all in equities,” she says. But Alana didn’t pay much attention to their investments before the stock market meltdown, so Garbens doesn’t think she’s up the challenge of handling their large portfolio herself.

Step one, then, is to find a new adviser who understand that the Rossis aren’t risk-takers. Feth suggests the Rossis change their asset mix so that no more than 50% to 60% is in equities. The rest should go in bonds and fixed-income investments like GICs. As they reach 50 and 60, they should change their asset allocation again, putting even more money into bonds and fixed income.

The Rossis have already built up a substantial nest egg of $314,000 in RRSPs. With up to 20 years to go before retirement, they can afford to be conservative and let their investments grow slowly. “They need to preserve capital, not take risks,” says Garbens.

Put Max’s university fund into a GIC: Right now Max’s education money is mainly in equity mutual funds. With their son just two years away from university, the Rossis should put the money into GICs, says Garbens. It might not grow as fast as they’d hoped, but it won’t shrink either.

The Rossis should congratulate themselves for saving as much as they have already for Max’s education—$61,000 in all. But they estimate it will cost $100,000 to pay for the schooling Max wants—an undergraduate degree from Dalhousie University in Nova Scotia—so they don’t have enough. The solution is to tell Max that if he wants to go to an out-of-town university, he’s going to have to help pay for it. They’re already encouraging Max to get a summer job to pay for a highschool trip. He should be working to put money aside for his university education as well.

Once again, though, the Rossis are stressing out way too much, says Cameron. Max is still two years away from university and the Rossis have enough money to pay for two years of education. That takes them to 2013. By then Sebastian will likely be employed. “I think by then they’ll have put aside more money to help him out,” Cameron says.

Start living cheap: Before Sebastian lost his job the Rossis were taking home $270,000 a year between them. Now they need to cut back. They’ve made a good start by doing their own lawn and garden maintenance, rather than hiring a landscaping service. Our experts think they Rossis can do even better. They’re spending a lot more than they need on clothing, furniture and gifts. And for three people, the $1,200-a-month grocery bill seems high. With no job, Sebastian should be put in charge of finding better deals at the supermarket, says Cameron.

The Rossis should also think about selling their convertible. They don’t need three cars, and the convertible is worth $27,000. Selling it will put more money into their bank account and save them $600 a year on insurance. Some of the proceeds from the sale of their car should be used to pay down the $2,250 remaining on their car loan.

Sell their house: Sebastian says that if Alana loses her job, the for-sale sign will go up on their home immediately. Why wait? asks Feth. With Max off to university in two years, they don’t need such a big house. If they sell it now for $500,000 and buy another home in the $300,000 range, they’d be able to live mortgage free and pocket around $50,000. They should put that money into a non-registered, high-interest savings account. It’s less tax-efficient than RRSPs, says Feth, but if Alana loses her job they’ll need the money.

Our experts weren’t unanimous on putting their house up for sale, however. Garbens thinks it’s only necessary if Alana loses her job. The Rossis only have $121,000 left on their mortgage and they are good savers. If Alana remains employed, she and Sebastian will probably be able to pay off their mortgage in a couple of years.