BUDGETING TO CUT DEBT

The first step is to deal with the cost of loans. Charlotte is paying $1,902 per month on her $425,000 mortgage at 2.49 per cent with 25 years to go. There are higher rates on smaller loans: eight per cent on her $22,000 car loan, eight per cent on her $11,000 line of credit and 19.8 per cent on her $12,000 credit card bill. She should try to negotiate lower rates. Even a one or two per cent saving on her $470,000 of debt would allow her pay off her debts sooner, Moran notes. Debt management is Charlotte’s priority. Her credit card bill has the highest interest rate. It is top of the list for paydown. At present, she pays $350 a month on the bill, $4,200 per year. At this rate, the credit card bill will be history in three years, freeing up $350 to pay other debts. Charlotte pays $582 per month, $6,984 per year, on the $22,000 car loan. With no change in interest rate, the loan will be paid in full in three years, about the same time as the credit card bill. Charlotte will have liberated $932 per month or $11,184 per year. If she applies that to her line of credit, which should be down to $5,400 after payments of $1,800 per year for three years, it will be paid in full in about six months. Another $150 will be freed up to allow a total of $1,082 to be added to mortgage reduction.

She can add that sum to her present $1,902 mortgage payments for total payments of $2,884 per month. Her daughter will have finished her first degree. She can add the $500 monthly payment to her daughter to mortgage payments, raising them to $3,484

At the present rate of $1,902 monthly paydown, Charlotte’s $425,000 mortgage will be paid in full when she is 77. If she raises monthly payments to $3,484, the mortgage balance, assuming no change in the present interest rate, reduced by three years of payments to this point to about $356,000, will be paid in full in nine more years at her age 61. If she gives herself some breathing room and pays just $2,500 per month or $30,000 per year, the mortgage would be discharged in about 14 years when she is 66. In reality, higher interest rates on the home mortgage could lengthen the payoff period by several years. Even so, Charlotte should be mortgage free a few years after retirement beginning at age 65, Moran says.

SAVINGS AND INSURANCE

Charlotte has a lot of life insurance. She has a policy for twice her annual salary at work. She also has term policies for $50,000, $500,000 and $350,000. If she keeps the $500,000 policy and her job policy, she will have coverage sufficient to pay off her house and provide benefits for her children. If she saves, say, $500 per year, about $40 per month, on premiums on the terminated policies, she can direct that to a Tax-Free Savings Account, Moran suggests. A TFSA balance growing with contributions of just $500 per year for 13 years at three per cent after inflation would have a value of $8,000 in 2018 dollars at Charlotte’s age 65. Chances are that Charlotte can build her TFSA balances more aggressively, but, to be conservative, we’ll leave any additional gains out of further calculations.

RETIREMENT PLANS

When she retires at 65, Charlotte will have an unindexed $36,000 per year from her defined benefit pension plan. She will also have $162,000 from a defined contribution plan. If that plan grows at three per cent a year after inflation, it will become $238,000 at her age 65 and produce $13,665 annual taxable income in 2018 dollars to her age 90.

We can assume that Charlotte will have the full present $13,610 Canada Pension Plan benefit at age 65 and full Old Age Security, currently $7,075 per year, at age 65.

Adding up her various income sources at retirement at 65, Charlotte will have $70,350 per year in pre-tax retirement income at age 65. She will have $4,750 to spend each month after 19 per cent average income tax. Elimination of all debt payments and the mortgage and ending of tuition assistance will remove $3,484 from present $7,000 monthly spending, leaving $3,516 to cover. She will have $1,234 surplus for travel, for TFSA contributions, perhaps a fund to eventually replace her car or other things. There will be no need for her to sell her house, Moran concludes.

“This analysis shows that despite losses from her divorce, she can build a secure retirement,” Moran says. “Charlotte will have moved from survival to choice. Debts gone, she will have a lot of options in retirement. Pleasures she has denied herself will be affordable. That in itself is a success.”