Question e-mailed in by a Globe and Mail reader: I’m in my early 40s and divorced with two kids. I kept the house as part of the divorce settlement. I won’t move the kids so I’m going to live in the house at least another 10 years. It’s so expensive on one income. I earn $80,000 a year and I get child support. My ex and I split all the kids’ activities and extracurricular. Even with a great income and support, I feel like I can never get ahead. As soon as I get my financial footing, something happens – mostly home repairs – and I eat into my meagre savings. I only have $30,000 in my RRSP. How little can I save for retirement and still be okay?
Answer from Shannon Lee Simmons, a financial planner and founder of The New School of Finance in Toronto: Divorce is tough. You may feel like you’re starting your financial life over again. It can be very scary. Here are some ways to rebuild and stay positive about your finances after divorce. Please note that the tips below are financial tips only. Run any of these solutions by your family lawyer before implementing.
Keep overhead as low as you emotionally can
Being financially responsible for an entire home is really hard, even with a great income. It’s a tall order to be able to pay for the home, your transportation, daily life and still save for retirement. With only one income stream, you need to ensure that you are getting the biggest bang for your buck with all of your expenses, since every single dollar counts. If the house is a non-negotiable, look to other fixed expenses in your life to see where you can reduce.
Are you getting the best deal for your telecommunications? No? Get another (and cheaper) provider. Are you using all your subscriptions? No? Cut them. Start with expenses that don’t have a huge impact on your lifestyle first. Adjusting your lifestyle from a two income household to a one income house is not easy. Keep in mind, these reductions don’t have to be major. $20 here, $30 there. The goal is to reduce your fixed expenses by as much as you possibly can do realistically. That way, you free up cash flow in a consistent amount each month. For example, let’s say that you were able to reduce monthly fixed expenses by $100 a month. You could then automate this $100 to a no-fee high interest savings account earmarked for home repairs. Since you replaced a reoccurring bill with new automated savings, you won’t feel this new savings at all since you are already used to spending that money. One hundred dollars a month may not be enough to cover all your home repair emergencies, but it’s a start. It will help you feel more in control and less terrified next time a home repair needs to happen because at least you’ll have some, if not all of the cost covered.
Find places to make money
Are you able to bring in more money to help offset the cost of living? Could you rent out your basement? Or your home on a short-term rental basis? You’ve got this huge asset that is costing you money. I wonder if there’s an opportunity for it to earn you some money as well. I had a client who would stay at her parents’ house one or two weekends each month and rent the house out. This earned her around $500 a month after tax and cleaning fees. That’s not chump change! She was able to use this to offset the cost of living. Often, we only think about cutting expenses as the way to save money, but if you can diversify your income stream and find ways to earn more money on the side, you can save without slashing all your lifestyle expenses.
Start small and build for retirement
There is no way for me to tell you how little you can save for retirement. That’s like asking how long a piece of string is. However, my go-to advice for anyone is the same for you. Save as much as you can when you can, even if it’s $25 a month. Do this for three months. Then, each month after, add $10, and another $10 after that until it gets to the point where you feel like you are so tapped you will start to take on credit card debt. That means you’re maxing out how much you can save.
Automate the money to a tax-free savings account (TFSA). Unlike the registered retirement savings plan (RRSP), you are able to take money out of your TFSA without paying income tax if you need it. The goal is to build up some savings in the TFSA and then put a lump-sum into your RRSP over time. Why? Because you’re living pretty close to the financial edge. If an emergency happens, I don’t want you going into high interest rate debt, like a credit card, because you don’t have ready access to the money saved in your RRSP – money you’ll pay tax on when you withdraw it. By building your savings in a TFSA first, your money is invested in a tax shelter but you can still take it out for an emergency. Once you’ve built your savings up, you can leave it in the TFSA or transfer to your RRSPs once you know you are safe to do so.
Be sure to check the contribution room for your TFSA so that you don’t overcontribute by accident.
Don’t forget that paying down the mortgage is also retirement savings
In my opinion, paying down your mortgage is also a form of long-term retirement savings. Once you are mortgage free, you have an asset that you could sell tax free and use to downsize and top up retirement savings down the road. The less debt you owe, the more money you will make from the sale of the home in the future. You should get some customized financial advice from an unbiased advice-only financial planner on whether prioritizing the small amount of savings to your mortgage versus your RRSP makes most sense for you for your retirement.
Check in with a financial planner often
It will be important for you to ensure you really have a grasp on your finances and what retirement looks like for you as you continue saving. You always want to ensure you’re getting the highest potential return on investment for your savings.
Find all this a bit overwhelming? Here’s the gist: When rebuilding your retirement savings after divorce, live as cheaply as you can, try to earn a small amount of money on the side, save a small amount of money where you can, use it strategically and see your financial planner often.
You can also join the Young Money Facebook group.