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Photo by Jeff Stokoe (Photo: Jeff Stokoe for The Globe and Mail)
Photo by Jeff Stokoe (Photo: Jeff Stokoe for The Globe and Mail)

Financial Facelift

A single person's road to financial security Add to ...

When her marriage broke down, Joanna did something she had always wanted to do – she went to university and got an undergraduate degree. In 2006, she moved to Britain, where she lived and worked for a couple of years, returning to British Columbia to get her Masters in 2008.

Now 51, she is living and working in Alberta, earning a bit more than $70,000 a year. But her life is not unfolding as she had hoped. Her job isn’t particularly satisfying and her real estate – a fixer upper house and some raw land where she had dreamed of building one day – is weighing her down. She has a mortgage, a line of credit, a student loan and a car loan. To help offset the debt load, she rents out a room in her house for $600 a month.

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“I was desperately trying to secure a future for myself, and worked hard at getting my degrees, but it seems no matter which way I look, it does not seem too rosy,” she writes in an e-mail. Sometimes, she thinks about going back to Britain to work – if she can find a job. She knows this would affect her pension prospects in Canada.

When her children were small, Joanna stayed home to raise them. Now they’re out on their own. She has little in the way of savings, but will be entitled to part of her ex-husband’s work pension. Her expenses are modest and so are her short-term goals: If she stays in Canada, she wants a new motorcycle, a dog, a sofa and eventually, a pickup truck.

“Should I sell the land that I dreamed of living on and then pay off most of my debts?” she asks. “Should I sell my house and move back into an apartment?” And finally, what are the financial ramifications of moving back to Britain?

We asked Ron Graham, a financial planner at Ron Graham & Associates Ltd. in Edmonton, to look at Joanna’s situation.

Based on her current payments, Joanna will be 81 by the time her house is paid for, Mr. Graham says. It will take her 23 years to repay the line of credit, seven years for the student loan and about three years for the car loan. As well, she withdrew $4,442 from her registered retirement savings plan under the government’s Life Long Learning Plan to help pay for her schooling, money that requires annual payments of $444 starting five years after the first withdrawal. Given her cash flow position, the planner suggests she not repay her RRSP and simply pay the tax owing of $142 a year for 10 years.

If she works at her current job until age 65, she will be entitled to a pension of about $1,400 a month. She would get about $551 a month in Canada Pension Plan benefits and another $533 a month in Old Age Security. As well, she is entitled to a portion of her former husband’s pension amounting to $445 a month starting when she is 62. So at age 65, her income would be about $2,929 a month in today’s dollars or $2,500 after tax.

He suggests Joanna strive to repay all of her debts but the mortgage by the time she is 65. If she continues to rent out a room to subsidize her mortgage payments after she retires, she will have about $1,800 a month for living expenses, compared with $1,700 a month today. OAS and CPP are fully indexed to inflation, while her work pension would be indexed to 60 per cent of the rise in the provincial consumer price index.

To keep the dream of living on her land alive, Joanna should hang onto it, then sell her city home when she retires, pay off the mortgage and use the balance to build a home on her acreage. If she changes her mind about building, she could sell the land and apply the proceeds to her debt, which might allow her to pay off her mortgage in full by the time she is 65. As for selling her house and moving into an apartment, Mr. Graham doesn’t recommend it. Joanna’s housing expenses are $1,170 a month after accounting for her rental income. Assuming she could find an apartment for $800 a month, she would only be freeing up $370 a month – not enough to build her dream home. Without a home of her own, she’d be susceptible to rising rental costs in retirement.

If Joanna sells everything and moves to Britain, she will be giving up her work pension and her OAS and CPP would be reduced, Mr. Graham says. If she sold both her properties and paid all her debts, she might leave the country with about $50,000 – not enough for a down payment on a home. But the key question is whether her new employer would offer a pension plan. If not, her income in retirement could be less than half of what it would be if she stayed in her current job in Canada.



________

The person



Joanna, 51.



The problem



Debts that eat up all of her income and a job she doesn't really like.



The plan



Pay down as many debts as possible, keep renting out the room, keep the dream of building on her country acreage alive and weigh carefully the financial pros and cons of moving to the U.K.



The payoff



If she stays at her current job, a reasonable degree of financial security in retirement and more alternatives than she would likely have if she moved to Britain.



Income



Weekly net income $800;



rental income $600/month



Monthly total: $4,066



Assets



RRSP $1,915; residence $270,000; land $120,000. Total: $391,915





Monthly disbursements





Mortgage $1,260; property tax/insurance $160; utilities $350; car loan $260; car insurance, fuel $200; groceries $325; line of credit $400; student loan $200; telecom $110; life insurance $15; other $520. Total: $3,800



Liabilities



Mortgage $233,630; line of credit $56,000; student loan $12,000; car loan $8,320; Life Long Learning Plan $4,440.



Total: $314,390





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