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Saddled with debt, widow struggles with retirement planning Add to ...

After her husband died, Geraldine went back to school and completed an executive MBA. She got a new job last December paying $130,000 a year.

This left her with student debt that she has been struggling mightily to repay. She also has a mortgage on her Toronto house. Now 43, she is feeling the pull of competing claims on her income. What should she pay off first, the loan or the mortgage? Or should she focus on saving for retirement instead?

“I figure I need to save $1-million in the next 25 years in preparation for retirement, but find the thought quite daunting and frankly unachievable,” Geraldine writes in an e-mail.

Her house needs $50,000 worth of repairs, money she will have to borrow. She hasn’t had a break in some time. “I avoid going on vacations, believing that money would be better put to loans,” she says.

Through it all, she has managed to hang on to the home she and her late husband shared, “a promise I made to him on his last day.”

When she quits working, Geraldine would like to travel a bit. “But most importantly, I am concerned with being able to pay for the care I may need as I get older,” she adds.

We asked Kurt Rosentreter, a chartered accountant and senior financial adviser at Manulife Securities Inc. in Toronto, to look at Geraldine’s situation.

What the expert says

Until recently, Geraldine had been contributing more than $7,050 per year to her registered retirement savings plan, but she has shifted her focus to paying off her line of credit at the rate of $3,500 per month. Next, she plans to pay off her mortgage.

Such rapid debt repayment may be hard to keep up for long given that her budget makes no provision for vacations, new cars or house repairs, Mr. Rosentreter says. Still, she could eliminate her debts in seven years or so.

In her new job, Geraldine is eligible for a bonus of up to 20 per cent of her income depending on her performance and the company’s profitability. Any bonus could be used to catch up on her $115,000-plus of unused RRSP room, with the income tax refund used to pay down debts even faster. Once the debt is gone, she can use any future bonuses for occasional expenses such as house or car repairs as well as contributing to a tax-free savings account.

Geraldine doesn’t have a target number for how much she will need to spend when she retires, the planner notes. To illustrate, he assumes she spends $70,000 per year when she retires at age 65 – typical for an executive in pricey Toronto. That implies about $100,000 per year before tax, the planner says. The Canada Pension Plan would make up $12,150 (the maximum 2013 benefit), leaving her to come up with the remaining $87,850 (in 2012 dollars) from her group RRSP and personal savings. That $87,850 will have grown to $135,814 in 22 years with 2 per cent annual inflation. To be conservative, Mr. Rosentreter does not include Old Age Security payments, which “may not be around.”

Geraldine has $138,671 in savings now. If she resumes her RRSP contributions of $7,050 per year plus her employer’s group RRSP contribution of $2,500 per year, she is on track to have $773,636 by the time she is 65. That assumes a 5 per cent average annual rate of return on investments. “To generate $135,814 a year from age 65 to age 100, Geraldine would need a lump sum at age 65 of $2,223,000,” Mr. Rosentreter says. To get there, she would have to save $68,000 a year for the next 22 years, “too high to be achievable.”

Clearly, she will have to live on less. Geraldine may find she can get by comfortably on $50,000 per year rather than $70,000, which would brighten her prospects considerably. As her debt shrinks and she shifts her focus to saving – “ideally this will be coupled with a rising income as her career progresses” – the likelihood of her reaching that $1-million, which seems so daunting now, will increase, Mr. Rosentreter says.

But the key to her financial security in old age is her house. If it grows in value by 2.5 per cent per year, it will be worth $1,253,000 by the time she is 65, Mr. Rosentreter says. The longer she keeps it, the more it is likely to grow in value.

“If she sells her home in retirement and converts part or all of the house proceeds to cash-flow generating assets, she comes closer to her desired cash flow.”

Client Situation

The person

Geraldine, 43

The problem

How to pay off her debts and save enough money to provide for herself when she retires.

The plan

Pay off the debt first then focus on savings, being prepared to pare back her retirement spending plans if necessary.

The payoff

Financial security and the knowledge that she will still have her house to fall back on if she were to need special care in her old age.

Monthly net income



House $728,000; RRSP $138,671. Total: $866,671

Monthly disbursements

Mortgage $900; other housing costs $857; transportation $730; groceries, clothing, dry cleaning $620; line of credit $3,500; gifts $160; personal discretionary $721; health, dental, life insurance $80; telecom, cable $162. Total: $7,730


Mortgage $80,005; line of credit $26,543. Total: $106,548

Special to The Globe and Mail

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