Alberta woman has seen her income dry up and her home value plunge

HER INCOME HAS PRACTICALLY DRIED UP DUE TO COVID-19.

In Alberta, a woman we'll call Katie, 64, is caught in a dilemma. A food marketing consultant, she has seen her former six-figure income diminish drastically during the COVID-19 pandemic. The value of her home has taken a significant hit, too. Nevertheless, she has monthly mortgage payments of $1,842 to make and a car to feed, repair and insure. She dreams of being financially independent just a year from now. There are solutions, explains Montreal-based financial planner Caroline Nalbantoglu, to whom Family Finance assigned this file.

“Her income has practically dried up due to COVID-19,” the planner explains. “She collected the Canada Emergency Response Benefit of $2,000 per month. That program ended and replacements provide little assistance. She needs a plan to survive without her former business income.”

Katie, whose three children are financially independent, has the potential of inheriting a $400,000 cottage, but it could be years away and, for now, the asset does not help. She must rely on savings and government assistance.

INADEQUATE

SAVINGS

Katie's problem is that her savings, $377,000 plus a small pension she will get from a former employer, will not pay ongoing allocations of $4,475 per month. One alternative is to sell her house and move closer to her children, who live in Nova Scotia. She could also rent out her Alberta home for perhaps four months of the year, when she would like to be in Mexico. Beyond a winter plan, she also wants to create a wedding fund of $10,000 for each of her children. “I am living hand to mouth and I feel I am near bankruptcy,” she explains.

Although Katie has substantial assets, her savings cannot support her very long. Were she to invest all of her financial assets in stocks with a fairly dependable three per cent dividend flow, she would not be able to attain the $40,000 she needs to maintain her way of life.

Her $750,000 house had been worth $900,000 in more prosperous times. It has a mortgage with a $438,000 balance, so if she decides to sell, the proceeds will be limited. The pension and her CERB payments were just about covering her living costs of $4,475 per month, but without CERB payments, she will have a decision to make.

COST MANAGEMENT

Before she makes a commitment to move, Katie can cut costs. She could put $10,000 into an RRSP, which would just be transferring cash from a $62,000 bank account. But it would generate a $4,600 tax savings. Otherwise, the planner says, she would have to reserve $7,800 for taxes due on income she generated before COVID-19.

Once Katie sells her house and pays a former husband his share, she should have $150,000 cash. Next year, at 65, her monthly income without her professional income would be $749 from the Canada Pension Plan and $613 from Old Age Security plus perhaps $800 from investments. That's before tax. Her after-tax income would be $2,162 and her expenses $2,400 per month. At best, she would break even.

Katie could cash in her investments and use the proceeds to buy a $300,000 house in Nova Scotia, she would have no mortgage. After sales and moving costs, she might have $163,000 left in non-registered investments, $53,500 in her TFSA and $21,330 in her RRSP, assuming she makes a $10,000 contribution from non-registered savings this year to reduce her taxes.

INCOME SUPPLEMENTS

If Katie receives only $613 OAS and $749 CPP, her pretax income would be $1,362 per month. She would qualify for a Guaranteed Income Supplement payment of $400 per month, lifting her total monthly pre-tax income to $1,762. She would pay no income tax. In order to avoid reducing the GIS, she would not draw from her RRSP.

With the GIS benefit, her income would be $1,762 per month or $21,144 per year. She would be able to support a budget of $2,333 per month assuming no RRSP or TFSA savings and no mortgage payments, reduced house taxes and reduced car and home insurance. There might be months of cost overruns, but they would be transitory and coverable with a few economies. Were she to sell her car, she could save a few hundred dollars per month, but the cost of public transit would reduce those savings.

Katie is a victim of the COVID-19 crisis. If and when financial recovery programs end, Katie will have to live on her OAS, CPP and the GIS benefit unless she can replace them with professional income from her food marketing consulting business. We have no insight into when or if that business will recover, so Katie's survival plan is based on income flows she can count on.

“This plan is a survival strategy,” Nalbantoglu explains. “It assumes sale of her Alberta house, the move to Nova Scotia, retention of financial assets and declining payments from federal support programs. On its face, the plan works, but it has the anomaly that if Katie returns to full-time work, funds she receives from various government programs and the Guaranteed Income Supplement will decline.”

Nevertheless, this plan can work and allow Katie to survive even with no business income. It is, unfortunately, a plan for the times. “This plan is a solution if she follows it,” Nalbantoglu concludes. For now, Katie is caught in a web of business collapse and ever-changing relief programs. She will need imagination to make ends meet.