Patsy knows she's in over her head.
When she and her partner Greg moved in together, they each brought two children from previous marriages.
Although their families have blended, Patsy and Greg keep their finances mostly separate. She owns the house, he contributes $1,200 a month to the household expenses (about $2,550 for mortgage, taxes, insurance and utilities) plus half the $1,200-a-month grocery bill.
"I'm recently divorced and trying to re-establish myself financially," Patsy writes in an e-mail. Her Vancouver house is valued at $879,000 with a $320,000, 35-year mortgage at 3.79 per cent. Patsy is 53, has no company pension and earns $65,000 a year working in the health care field.
As the months pass, Patsy is feeling the financial pressure. She has no emergency fund, no maintenance fund for the house and no budget for vacations or travel. She wants to help her two boys with university costs. Unused contribution room is piling up in her registered retirement savings plan.
"I feel very stretched carrying the responsibility of the house," she writes. "Can I afford to live in this house?" and then, as if to answer: "The expenses are too close to my income." She is looking for ways to make more money, either by changing jobs or picking up some private work in the evening.
A nagging concern adds to her feeling of insecurity: "Can I afford to stay in the house if my partner leaves?"
We asked Heather Franklin, an independent Toronto financial planner, to look at Patsy's situation.
What the expert says
Patsy's short-term goals are to help her two children through university, keep up with the household expenses and put away more money for retirement. Longer-term, she wants to pay off the mortgage and take a much needed vacation.
She could do all this if she sold the house and used her considerable equity to buy a more modest one, perhaps in the suburbs, with cash, Ms. Franklin says. As it stands, Patsy's budget is extremely tight and there are expenses she has not accounted for, such as ever-rising utility bills, house maintenance and ongoing children's needs. Nothing is left to pay off the mortgage before Patsy retires, raising the prospect that she will be saddled with it well into her 80s.
"When mortgage rates increase, this will put additional financial pressure on an already impossibly tight cash management scenario," the planner says. Instead, Patsy should downscale to a less expensive neighbourhood where her $500,000 to $525,000 of equity "will buy a considerable house."
Without the mortgage burden, Patsy will have at least $1,600 more a month for financial goals that have been neglected or abandoned, Ms. Franklin says – "namely, her savings and retirement." She will be in a better position to help her children with their schooling costs, although they may still need to take out student loans, the planner says. Alternatively, Greg, who makes about $100,000 a year, could contribute substantially more to the common expenses.
As for whether she could stay in her current house if her partner moved, "unfortunately, no, she will definitely not be able to support this lifestyle," Ms. Franklin says. "However, if she is mortgage-free, regardless of whether or not her relationship with her significant other continues, she will have achieved a much better, financially balanced position."
Patsy's combined savings total about $194,000. This will have grown to about $275,000 by the time she is 65, assuming a 5-per-cent rate of return and a 2-per-cent inflation rate. Although Patsy did not offer a specific income target for retirement, if she were to spend $50,000 a year, for example, she would use up all her savings by the time she was in her early 70s, Ms. Franklin calculates. If Patsy wanted $40,000 a year after tax, she would need to accumulate about $750,000 in savings by the time she retires, the planner says.
"This amount necessitates adding significant contributions to her retirement saving." Otherwise, Patsy could scale down her income expectations or consider downsizing her home again in her 70s or 80s to free up more money.
Once Patsy has resolved her housing situation, Ms. Franklin suggests she build an emergency fund and take full advantage of her tax-free savings account, perhaps shifting money from her non-registered portfolio into her TFSA each year. Then she can begin catching up on her unused RRSP room. To enhance her returns, she may want to shift from mutual funds to a diversified portfolio of lower-cost exchange traded funds, including equity ETFs.
Patsy, 53, and her blended family.
How to cut expenses to make sure Patsy and the children are on a solid financial footing now and in the future.
Sell the house, pay off the mortgage and buy a less expensive house for cash.
Peace of mind, financial independence, positive cash flow, and enough money to help the children with schooling and save for retirement.
Monthly net income
$4,200 plus $1,200 from Greg for household expenses. Total: $5,400
Mutual funds $88,000; stocks $42,000; TFSA $15,000; RRSP $49,000; house $879,000. Total: $1.07-million
Mortgage $1,600; taxes $400; utilities, home insurance, maintenance $550; car expenses $585; grocery store $600; clothing $100; personal care, club membership $385; dining out $150; subscriptions $35; dentists, vitamins $125; telecommunication $150; loan payment $150; charitable $50; educational needs $300. Total: $5,180
Mortgage $320,000; line of credit $7,000. Total: $327,000
Special to The Globe and Mail
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