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Tom Woods for The Globe and Mail

Changing circumstances often lead to a shift in one's financial plans, prompting a person to seek advice. So it is with Delia.

"My life circumstances have unexpectedly changed," she writes in an e-mail. She and her husband divorced recently.

So despite a good salary and a stable administrative job, Delia wonders if she should cut expenses by selling her house in Saskatchewan and buying a condo or even renting, and whether it is realistic to contemplate retiring from her job in five years. She is 55 with a defined contribution pension plan, similar to an RRSP.

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Two of her three children, ages 16 and 23, live at home. She hopes to help the youngest with her university costs in a couple of years.

To supplement her income of about $87,000 a year before tax, Delia has a student boarder, which brings in another $6,000 a year. For a family of three, her budget is fairly tight with little room for long-term goals such as retirement savings. Her only debt is a mortgage of about $77,000 for which she pays about $1,000 a month. Utilities, insurance and maintenance add another $770 to the monthly housing bill.

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

What the expert says

If she sells her house, Delia can pay off her mortgage and still have enough money left over to buy a smaller house or a condo for $250,000 to $275,000, Ms. Franklin says. The $1,000 a month she is paying on her mortgage could go to retirement savings and for her daughter's tuition.

If she keeps the house, Delia would be hard-pressed to pay off her mortgage loan before she retires – she'd have to pay another $1,500 or so a month, money she just doesn't have.

"Downsizing at this juncture to a smaller home or condo would be a prudent decision," the planner says.

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Even so, retiring in five years with a budget of $50,000 after tax looks to be out of Delia's reach. Ms. Franklin's calculations assume a 2 per cent annual inflation rate, a 4 per cent average return on investments and a life expectancy of 90 years. Delia's savings total about $555,000, including her pension plan. She would need about $1,100,000 in today's dollars, the planner says. She needs to work longer and save more.

How much her pension plan pays depends on how the investments in it perform, Ms. Franklin notes. Most of Delia's savings are in mutual funds that have not done well and have "fairly high management fees." To the extent she can, Delia should switch to lower-cost exchange-traded funds and dividend-paying blue-chip stocks over time.

Some employer pension plans limit available investments, but Delia could diversify into ETFs and stocks in her other savings vehicles.

Holding some stocks makes sense because retirement savings are long term and must fulfill a twofold role: Providing an income stream in retirement and generating some growth as well, the planner says.

"Solid blue-chip companies that pay dividends would be the recommended investment." As well, dividend income is taxed at a lower rate than interest income.

Delia's daughter will require help with her tuition beginning in about two years, so that portion of the education savings should be invested conservatively; for example, in guaranteed investment certificates, Ms. Franklin says. The remainder, which will be needed over three to six years, "can be invested a little more aggressively."

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To take full advantage of her tax-free savings account, Delia may consider transferring funds from her non-registered holdings to make the maximum annual contribution. This money could be invested in a corporate bond ETF.

For an emergency fund, Delia could draw on her TFSA, but Ms. Franklin says a separate fund would be better.

Finally, while Delia does appear to be fairly careful with her money, she would benefit from reviewing her monthly expenditures, the planner says. Even if she can't cut a particular expense now, she can target it for reduction in future, helping her to plan.

"An examination of cash management provides insight and allows one to take corrective action," she says. "It gives you a road map."

If, as the years go by, Delia finds herself pinched – at 75 or 80 – she could draw on the equity in her home through a reverse mortgage.

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The person

Delia, 55

The problem

How to scale back her expenses to match her income now that she is on her own, and figuring out when she can retire from her job.

The plan

Sell the house, buy a smaller house or a condominium, and plan to work a few years longer, saving as much as possible along the way.

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The payoff

Enough money to help with her daughter's education, less constraints on the monthly budget, a fully paid-for home and, eventually, a secure retirement.

Client situation

Monthly net income: $4,820

Assets: Cash in bank $15,000; stocks $9,405; non-registered portfolio $214,000; tax-free savings account $18,500 ; RRSP $192,585; employer pension plan $106,000; residence $350,000. Total: $905,490

Monthly disbursements: Housing $1,770; transportation $175; groceries $800; clothing $300; gifts $85; charitable $85; vacation, travel $200; personal discretionary $510 (grooming, clubs, entertainment, dining out, pets, subscriptions); children's activities $325; health and dental $185; life insurance $55; telecommunications, cable $130; savings $195.Total: $4,815

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Liabilities: Mortgage $77,575

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