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(Tim Fraser for The Globe and Mail)
(Tim Fraser for The Globe and Mail)

FINANCIAL FACELIFT

Single mother with fluctuating income keeps retirement goals in sight Add to ...

Lydia is 52 and single with two children, age 16 and 21.

They live in suburban Toronto, where the older child is in fourth-year university.

Two and a half years ago, Lydia was laid off from the job she worked at for 20 years. After her severance pay ran out, she worked off and on in a number of temporary assignments as an executive assistant.

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“My life over the last few years has seen challenges, with family health issues and periods of unemployment,” Lydia writes in an e-mail. For the past year, she has been dipping into her savings to make ends meet.

“Looking down the road, I have considered selling my condo when my son finishes high school and moving back to the East Coast,” where costs are lower, she says. She is thinking of training for work as a doula, a person who lends physical and emotional support to new mothers.

Her concerns at the moment are how to cut spending and “move forward in the most positive way given where I would like to go in future,” she writes. Despite her uncertain future, she wonders whether she will be able to retire by age 65.

We asked Heather Franklin, an independent Toronto financial planner, to look at Lydia’s situation.

What the expert says

A good strategy to manage fluctuating income is for Lydia to keep the money in her tax-free savings account liquid so she can draw on it as needed, Ms. Franklin says. Lydia can use this income “to smooth out the rough edges when required” – which is what she has been doing.

Her monthly budget is already tight, so there is not all that much room to cut, Ms. Franklin says. “However, there is always some wiggle room.” A thorough review of the family’s spending might turn up some modest savings.

Lydia’s housing costs are about $1,500 a month including an impending special assessment of $125 a month. While Lydia wants to stay put until her son finishes high school, it may make sense to sell now and rent an apartment that is less expensive, the planner says.

“If rents are reasonable, renting may offer a very real alternative and also provide maximum flexibility.”

Lydia wonders whether she should renegotiate her mortgage with a view to lowering her costs.

“Tread carefully,” the planner says. “I would not recommend it at this point.” When her bank finds out she no longer has a permanent job, it could turn down her application. “Maintain the status quo.”

Before Lydia embarks on a new career, she should weigh the costs and potential benefits, inquiring about demand for such services and salary expectations, the planner says.

If all goes well – and that’s a big assumption – Lydia should be able to retire at 65 as long as she can find ways to pare her costs a bit. She is spending a little more than $3,100 a month now but her costs will likely be lower in retirement.

For example, if she sells her condo for a net after mortgage and expenses of $140,000 and invests the proceeds, she will be able to draw on this money to supplement her Canada Pension Plan and Old Age Security benefits when she retires at age 65.

If Lydia can hang on to the funds in her registered retirement savings plan – most of which came from her work pension – her RRSP will have grown to about $260,000 by the time she starts making mandatory withdrawals at age 72, Ms. Franklin says. That assumes an average annual return of 3 per cent a year after subtracting inflation.

In the year she turns 72, Lydia will be required to draw down about $19,000 a year from her RRIF, Ms. Franklin calculates; the percentage will climb gradually over time.

To achieve these goals, Lydia needs to earn as much as possible on her savings, so she should consider switching her investments from mutual funds with high management expense ratios to low-cost exchange traded funds, Ms. Franklin says.

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Client situation

The people

Lydia, 52, and her two children.

The problem

How to get by in high-cost suburban Toronto with contract work until her youngest is finished high school. Will she be able to retire at 65?

The plan

Considering selling the condo now rather than later to lower expenses – if she can find a less costly rental. Before spending money retraining for a new career, check out the job prospects. If she can pay her way and keep her costs down, she can get by comfortably when she retires.

The payoff

Confidence that her plans for the future are sound.

Monthly net income

$3,700 (variable)

Assets

TFSA $20,818; RRSP $124,678; RESP $19,043; condo $234,000 (2013 assessment). Total: $398,539

Monthly disbursements

Mortgage $544; property tax $148; condo fees $676; property insurance $16; transportation $490; groceries $300; clothing $30; gifts $50; charitable $90; vacation, travel $40; other $160; personal discretionary (grooming, dining, entertainment, pets, subscriptions) $253; dentists, drugstore $120; life insurance $35; telecom, cable, Internet $110; RRSP $50; other savings $25. Total: $3,137

Liabilities

Mortgage $78,322

Special to The Globe and Mail

Read more from Financial Facelift.

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Some details may be changed to protect the privacy of the persons profiled.

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