Will you sacrifice your lifestyle to fund your children's?

Meet Mr & Mrs Investors Chronicle - the average IC subscribing couple:

■ Middle aged with two children

■ Currently working to support an affluent lifestyle and fund private education

■ Aiming to retire aged 60

The financial profile of the average IC reader has been created using detailed reader lifestyle information we collect in surveys and other correspondence with your permission.

Currently both aged 50, Mr & Mrs IC live in a four-bedroom house in the home counties and have two school-aged children. They've paid off their mortgage and they have a joint gross income of £175,000.

Mr IC earns £100,000 a year as a managing director of a company, and Mrs IC is a civil servant on £75,000, giving them £119,000 take-home pay after tax. They spend £86,949, and use the rest to build their investment portfolio, which is currently worth £578,100.

Currently their outgoings are high, but they fall within budget. Their children both attend local private schools and, when they are older, Mr & Mrs IC will give them money towards their university fees and basic maintenance. Then, once they've taken care of those expenses, Mr & Mrs IC would like to retire at 65 - or earlier if they can afford it.

The family's other large outgoings include the upkeep of the family home, running two cars and bigger-than-average food bills. Non-essential spending includes golf club membership, cases of wine, new clothes, a couple of foreign holidays a year and eating out on a regular basis.

At the moment, Mr & Mrs IC can comfortably afford this lifestyle, but our projections show that this is about to change. This is because they are approaching a spending spike as they try to maintain their affluent lifestyle while paying for their kids to go to private school - a cost that is about to rocket when the children start boarding at school as they commence their GCSE courses in a few years.

But even in 10 years when the kids are finally off their hands, their sigh of relief will be cut short. This is because the cost of other aspects of their lifestyle are growing so fast that even then they will be spending 75 per cent of their take-home pay just to maintain their lifestyle - a higher wages/outgoings ratio than they have today.

This is because their wages won't be rising anywhere near as fast. Because Mr IC works in the private sector, his wages will probably rise in line with inflation (2.9 per cent). But due to cuts in the public sector, Mrs IC's wage will very likely fall well behind inflation, and is only expected to climb by 1 per cent a year, as the economic situation stands. In 2021 - their most expensive year when they are supporting two children at university - their outgoings will have reached £180,948. At around £40,000 more than their combined net pay this is a frightening prospect.

So unless one of them gets a promotion or they find income from elsewhere, this creates a big problem. With a growing funding gap gradually separating them and their lifestyle, without forward planning they will be forced to make cutbacks in the future, for example take their kids out of private school or dip into their retirement funds.

Identifying the problem areas:

The main offenders

Food ↑ 4.4%

Energy ↑ 4.4%

Clothes ↑ 4.4%

Private school & university ↑ 8.5%

The first thing to do is to identify problem spending areas in case a stricter budget needs to be drawn up. Living costs rising faster than consumer prices index (CPI) inflation is a phenomenon eroding the value of virtually everyone's wages, with the biggest bite taken from modest salaries, out of which basic expenses make up the biggest chunks. Rapid inflation of some basic every day costs are significantly depleting Mr & Mrs IC's lifestyle, but by far their biggest threat is supporting their children through private school and university, according to inflation estimates calculated by financial planner Close Brothers.

The most startling is private school fees. Today, and in previous years, it has cost them less than 16 per cent of their income to educate two children privately, but this will rise to a shocking 56 per cent by 2021. Richard Watkins, financial planner at Close Brothers, says fees are rising sharply at 8.5 per cent a year - the fastest of any of the expenses Mr & Mrs IC and their kids normally incur. He said: "The late teenage years are normally even more expensive as pupils tend to start boarding then, which ramps up the cost even further. It can look frightening, but as long as you know this cost is only temporary you can manage it by planning ahead."

Their food bill is also a threat. Waitrose chief executive officer Mark Ian Price has warned that food prices are likely to rise by 3.5 to 5 per cent each year for the next decade, meaning the family's weekly food bill will be getting pricier even if nothing extra is going into the shopping trolley. Our estimates suggest Mr & Mrs IC's annual bill will swell from £5,500 to well over £10,000 a year by 2028, despite both the kids leaving home after 10 years. Energy, motoring costs and clothes are also soaring well above inflation - both big spends for the family - and Mr Watkins estimates that the cost of all these items are likely to jump by at least 4.4 per cent each year.

The difficulty caused by rising costs is becoming increasingly common for people in the UK, says Martin Bamford, managing director at chartered financial planner Informed Choice. "And you can't expect things to get easier unless you make them easier by planning," he warns. "People are either spending their savings or cutting back on luxuries such as holidays and satellite TV. And the only way to get around this is to plan ahead."

Replace salary shortfalls with investment returns

When laid bare like this, the escalating cost of maintaining an affluent family life is scary. But if you start planning early, meeting your expectations doesn't have to feel like such an uphill struggle if you've got a decent-sized investment portfolio.

Luckily, Mr & Mrs IC can use their £578,100 of investments to produce a 6.6 per cent average total return every year to supplement their income. According to Mr Watkins, this will allow them to make up the shortfall created by rising school fees and their stagnant wages, without cutting big chunks out of their savings and damaging their nest egg.

But is 6.6 per cent a year, every year, a realistic aim?

Yes, according to Chris Sexton, investment director at Saunderson House. But only if the time horizon is long enough - 10 or 15 years minimum. Pure income of 6.6 per cent would be an unrealistic aim without taking on a serious level of risk, so some of it - at least 3.5 per cent - will have to come from capital gains on the investment, he says.

Mr Sexton also recommends that the portfolio is highly liquid in case circumstances change, so cash can be raised quickly from any asset class. And allocations must be long-term strategic rather then short-term tactical, although they may need to change as markets change. This means Mr & Mrs IC will need to be monitoring their investments regularly if they want to avoid a potential shortfall.

Equities need to be driving most of the portfolio growth - the biggest chunk of the portfolio at around two-thirds. Up to half of this should be in the UK stock market. Why? Because its low volatility, strong exposure to the global market and the FTSE 100's 3.5 per cent yield make it a particularly good fit. Europe, the US and Japan/emerging markets make up the rest in equal proportions.

A big chunk - 36 per cent - could also go to fixed income, but will sit in strategic bond funds rather than gilts. Mr Sexton likes funds such as Newton Global Dynamic Bond fund (GB00B1294F44), which has the flexibility to hedge out gilts' risks as the interest rate environment changes.

To diversify, the portfolio could include a reasonable allocation (7 per cent) to commercial property investment trusts, which are more liquid than open-ended investment companies (Oeics) when it comes to this asset, and a small amount of cash (5 per cent). Around 1 per cent of this should be in an instant-access account for emergencies, and the rest should go in a time deposit account to get a better interest rate.

Of course there are risks involved with a strategy like this, but it looks as though Mr & Mrs IC can probably use their investment portfolio to avoid compromising their family lifestyle, even though in some years the costs will peak so much it exceeds their salary. But, depending on what kind of pensions they've got, their dream of retiring aged 60 looks more like a pipe-dream.

Mr Watkins warns that you need "a lot of money" these days to have a good standard of living, particularly if you want to retire relatively young. Mr & Mrs IC could afford to retire at 60, but they might have to lower their standard of living. However if they continue working until 65, stashing the wages they don't spend into their portfolio while contributing to workplace pensions, they could have a much bigger nest egg to live off for the rest of their lives. That's unless their kids start holding out their hands for a deposit on a London flat.

What to do if you don't have a big portfolio and you're struggling with school fees

Talk to the school about possible bursaries, or contact the Independent Schools Council (ISC). ISC are very sympathetic to the financial challenges facing many parents, and the amount of fee assistance available has grown to reflect this. Some 33.7 per cent of pupils in schools covered by the ISC receive help with their fees, and 7.8 per cent of pupils are on means-tested bursaries, 41.4 per cent of which have more than half their fees remitted.

A cautious portfolio that could be used to supplement income, designed to deliver a 6.6 per cent return