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PAUL DARROW/The Globe and Mail

Heather's situation is one many Canadians can identify with – competing demands on her income and not enough money to go around because of her big debt load.

Forty-three and single again with two children, 9 and 12, Heather recognizes her situation is precarious.

While she earns a good income, Heather's employer has had its own difficulties so has not been paying the annual bonus – as much as $25,000 in a good year – she enjoyed in the past. Heather had hoped to hang up her hat at age 60, but that is looking increasingly like a distant dream.

If she can manage to stay at the same job until she is 65, Heather will retire with a company pension, but that, too, could be changed.

As it stands, Heather's liabilities add up to about $455,000. Her income is $88,000 a year before taxes.

Her rental property in another province produces no net income and she has a $270,000 mortgage on her New Brunswick home.

She receives about $775 monthly in child support from her ex-husband. She has little in the way of emergency funds and will need to buy a new car soon.

"What should my priorities be?" she writes in an e-mail, "debt reduction, retirement savings, education savings, emergency fund – I don't know what to attack first."

She considered selling her rental property but the market is soft now and whatever equity she might have is shrinking. She worries about how she would pay for any major repairs.

"As a single mom, I worry about what will happen if I get sick or become unemployed," Heather adds. Though she is living "quite frugally," she misses the little luxuries she enjoyed in better times, things like travelling and "buying new clothes once in a while."

We asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto, to look at Heather's situation.

What the expert says

Heather's debt is large and her monthly cash flow is pinched to the point where she can hardly afford to save anything, Mr. Baldwin notes.

"She simply covers her day-to-day expenses for herself and her family and can ill afford any potential unexpected expenses on either of her houses or her car," he adds.

With some careful budgeting, Heather may be able to free up a little more money. If so, Mr. Baldwin suggests she make contributing to a registered education savings plan for her children a priority in order to take advantage of the government grant. She could use any extra to build up an emergency fund.

If over time she doesn't need the emergency money, she could use some of it to repay her credit card and line of credit debt, the planner suggests. If her company resumes paying a yearly bonus, Heather could use the money for further RESP contributions, building an emergency fund, contributing to her registered retirement savings plan and paying down her debts.

Heather has set a target of $50,000 after tax for retirement spending. By the time she is 65, that $50,000 in lifestyle spending will have grown to $78,845 with inflation, the planner calculates. He assumes an average annual inflation rate of 2 per cent.

In 2033, when Heather turns 65, (assuming she stays in her job and her company pension is not altered) her pension income will be $50,318 a year before tax, partly indexed to inflation. She will also be entitled to Canada Pension Plan benefits and at age 67, Old Age Security.

This, plus her savings, will not be enough to meet her spending target of $50,000 after tax. To achieve her target, she would have to save an additional $13,100 a year for the next 23 years, Mr. Baldwin estimates.

Given her limited savings, Heather should plan to cut her lifestyle spending when she finishes work from $85,944 today to about $38,500 in 2012 dollars, Mr. Baldwin says.

That way, her pension income, government benefits and modest existing savings would be enough to carry her through to age 90. That assumes an average annual return on her investments of 5 per cent.

Heather's rental property investment is both good and bad, Mr. Baldwin says. She doesn't make any money after expenses now but she is building equity that could be important in the future depending on how her work situation unfolds.

If she manages to repay the mortgage in full by the time she is 65, the rental income would provide what could be much-needed funds for retirement. In the meantime, though, she is vulnerable to expenses for maintenance and repairs as well as rising interest rates.



The person

Heather, 43, and her two children, 9 and 12.

The problem

How to scrape up enough money to save for her children's education, pay off debts and to the extent possible, and put a little away for retirement, all on a budget that already is stretched to the limit.

The plan

Examine expenses to see if she can trim anywhere in order to free up enough mon ey to take advantage of the federal government grant through the registered education savings plan. Try also to build an emergency fund.

The payoff

After a lifetime of scrimping and saving, her children will have enough money to help pay for post-secondary education. If her job and company pension continue unchanged, she can look forward to a comfortable retirement.

Monthly net income

$7,305 (includes $1,830 rental income).


House $335,000; rental property $200,000; RRSP $70,000; TFSA $1,060; value of life insurance $9,450. Total: $615,510

Monthly disbursements

Mortgage $1,250; other housing costs (property tax, water, insurance, hydro, heating) $808; transportation $270; groceries $600; child care $295; clothing $50; loan payments $1,200; gifts $100; vacation, travel $165; eating out $200; children's sports, hobbies $165; personal $80; entertainment $50; life insurance $175; telephone $90; carrying costs for income property $1,662. Total: $7,160


Mortgage on home $270,000; rental property mortgage $156,000; line of credit $24,000; credit cards $5,000. Total: $455,000

Special to The Globe and Mail

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