At the age of 50 and recently divorced, Abby is making independent financial decisions for the first time in her life. She knows what she has to do.
“I’m trying to learn about finances and investing, and I need to come up with a stepped plan that will help me live a balanced life now while saving and investing for retirement,” Abby writes in an e-mail. She has no work pension. Her spousal support payments will end when she is 65.
She has two children in their 20s, the younger of whom is living at home and going to university. When her son graduates in a couple of years, the family house will be sold and the proceeds divided between Abby and her former husband.
In addition to the family home, Abby and her ex-husband jointly own a company. Under the settlement, he will buy out her share over 15 years. Abby herself has a small business teaching pottery classes, which brings in about $10,000 a year.
“I would like to retire with modest income and be able to travel and enjoy the simple life and live within my means,” Abby writes. Soon, though, she will need to find a place to live.
We asked Ian Black, a fee-only financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Abby’s situation.
What the expert says
For the next couple of years, Abby will get spousal support of $8,800 a month, falling to $7,100 a month (or $85,200 a year before tax) thereafter to age 65, Mr. Black says.
When the family home is sold and the mortgage and line of credit are repaid, Abby will be entitled to half the net proceeds, or roughly $250,000 after accounting for accrued rental costs she will eventually pay to her former spouse, Mr. Black says. “At this point, her other major asset, a $1-million promissory note, comes into play.” The note, from her former spouse, will cover her share of the family business. She will get a lump sum of $370,000 with the remainder being paid out over 15 years.
The planner recommends Abby take $550,000 to buy a new home free and clear. Given how expensive the Toronto-area market is, “this may not be enough capital to provide the kind of home she feels she can live with,” Mr. Black says. As well as living space, she needs space for her pottery studio. Yet renting would be expensive and precarious. “Abby should be ready to look beyond the city in her search for a suitable home.”
Assuming she purchases the $550,000 home with no debt, she will be able to spend up to $57,000 a year, Mr. Black says. She will be entitled to 65 per cent of Canada Pension Plan benefits at the age of 65 and full Old Age Security. The balance of her retirement income will come from her savings and investments.
“This level of spending is sustainable and inflation-adjusted through to the age of 96,” the planner says. At that point, she’d still own her home.
If she took on a mortgage, she could buy a more expensive place – say $750,000 – but this would cut her sustainable spending to about $50,800 a year, the planner says.
Abby should contribute other cash on hand to a tax-free savings account, where it can be held first as an emergency fund and then invested to help build her financial knowledge. Abby has yet to open a TFSA, so she has the full $63,500 of unused contribution room. She could invest in low-cost exchange-traded funds through a discount broker or a robo-adviser.
When her car lease comes up for renewal, Abby should either buy it out if it makes sense financially or lease or buy a less expensive car.
Once her son is out on his own and the house is sold, Abby’s costs will fall. She will need to draw up a budget and live within it, the planner says. “As expenses drop, the extra should go to savings,” he adds. “If this proves difficult, the time to learn that is now rather than 15 years down the road.”
With no retirement income other than CPP and OAS, Abby will need to become a disciplined saver in order to build an investment portfolio, the planner says. Over the next three years, when her income (from spousal support and the promissory note) is highest, she should save as much as possible in a registered retirement savings plan, which she still needs to open. After she maximizes her RRSP and TFSA contributions, she can focus on building a non-registered portfolio.
“Between the ages of 55 and 65, we suggest that she save roughly $53,000 a year on top of the RRSP and TFSA contributions,” Mr. Black says. That would amount to total savings in the range of $75,000 to $80,000 a year.
With aggressive saving and a low-cost portfolio of 60-per-cent fixed income and 40-per-cent stocks, the planner projects Abby can retire at age 65 with $480,000 in her RRSP, $250,000 in her TFSA and non-registered assets of $720,000. His forecast assumes a rate of return on investments of 4 per cent and an inflation rate of 2 per cent.
“Abby has plenty of other options to help her take control of her finances,” Mr. Black says, such as being even more aggressive in her budgeting or generating more employment income. As well, “she might want to examine the option of moving to a less-expensive location, where her assets would stretch a lot further.”
The person: Abby, 50
The problem: How to draw up a budget to live comfortably now while saving and investing for retirement.
The plan: Open a TFSA and RRSP, draw up a budget and plan to buy the lowest-priced house she can find that will meet her lifestyle needs. Consider earning more income or moving to a less-expensive location.
The payoff: Goals achieved.
Monthly net income: $7,900
Assets: Cash $57,000; half share in residence $600,000; promissory note $1-million. Total: $1.66-million
Monthly outlays: Utilities $280; house maintenance $200; other housing $360; vehicle lease $900; other transportation $650; groceries $1,000; university costs $300; clothing $150; gifts, charity $120; vacation, travel $200; dining, drinks, entertainment $230; club membership $120; golf $200; pets $200; health care $350; health, dental insurance $250; phones, internet, TV $360. Total: $5,870
Liabilities: Mortgage and line of credit (half share) $340,000; accrued rent owed on residence $43,200; vehicle lease $8,100. Total: $391,300
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