Rewriting the plan after a divorce
Recovering from lawyer’s fees and accumulated debt, while building retirement savings
The person
Joanne, 53, is divorced and has four children. Two children are in post-secondary institutions, one son is in high school and one daughter, Lisa, age 21, has an intellectual disability and lives with Joanne. Lisa receives $9,720 from the Ontario Disability Support Program (ODSP) annually, which she uses for her room and board. Lisa plans to move out in three years, and this money will go with her.
Joanne works as an independent contractor, providing career counselling for a global consulting company. As a self-employed professional, her income fluctuates greatly, especially during the summer months, but generally she can earn around $70,000 a year. With the three kids launched and Lisa becoming more independent, Joanne anticipates she can ramp up her business and earn more income.
The problem
Joanne’s divorce proceedings sent much of her personal funds to lawyers and accumulated debt, leaving her with limited savings. For instance, the divorcing couple sold the family’s sprawling home in affluent Oakville, but after paying off home-equity lines of credit and lawyer’s fees, not much was left over. Now Joanne rents a two-bedroom duplex and has more than $200,000 in investments. Her ex-husband previously managed the investments, and she’s not sure what portfolio strategy makes sense for her now. For Lisa, she has set up a Henson trust — which are designed to benefit people with disabilities — but wonders if that’s enough planning for her. Finally, Joanne still has $8,000 to pay off on her line of credit.
The particulars
Assets: Registered retirement savings plan: $92,770 Spousal registered retirement savings plan: $46,175 Tax-free savings account: $20,000 Locked-in retirement account: $20,679 Non-registered account: $20,000 Guaranteed investment certificate: $20,000 Liabilities: Line of credit: $8,000
The plan
Joanne showed great foresight in not just setting up a standard will but by also creating a Henson trust for Lisa, notes Robyn Thompson, a fee-based planner at Castlemark Wealth Management in Toronto. A Henson trust, set up by a lawyer, provides discretionary control over how and when assets are given to a disabled person such as Lisa. Lisa, as the beneficiary of a Henson trust, never gains full control of her inheritance as she will remain under the protection of the trust until she dies.
Turning to Joanne’s debt, so far she is only able to pay interest on her $8,000 line of credit, Thompson says. “There is not enough money after lifestyle expenses to pay down the principal on the debt,” she says. She recommends that Joanne tighten the belt and scrutinize her monthly budget.
One line item that stood out for Thompson is car expenses. She calculates that Joanne spends $13,000 a year on a lease, gas and insurance for a vehicle she never uses. She recommends getting rid of the car and moving to a car-sharing service instead. Fifty dollars a month would give her six hours of driving time, for instance, and would include gas and insurance. “This will free up $12,400 a year,” Thompson says. Making this change would mean Joanne would be able to pay off the line of credit in just over eight months. “Once that’s done, the funds can be deposited regularly into her RRSP and TFSA as retirement savings,” Thompson says.
Joanne has little idea what she is invested in apart from cash and her GIC, which are earning little to no interest. She considers herself a conservative investor and is risk-averse. She doesn’t know if her investments have made or lost money, and does not know what fee she pays to each adviser. She has not seen or spoken to an adviser in a few years. Thompson recommends that Joanne look for one accredited investment adviser, preferably one with a discretionary portfolio manager who is qualified to make investment decisions on her behalf.
She has a lot of accounts and needs one person to create a seamless strategy for her. “She also requires a financial plan to ensure she is on the right track for retirement,” Thompson says.
Given Joanne’s low tolerance for risk, Thompson recommends a conservative, low-volatility portfolio, with 40 per cent in equities and 60 per cent in high-yield income. Based on a 20-year historical return of 5.46 per, the portfolio can grow to $444,000 in 15 years, which is when Joanne hopes to retire.
Layering in her $12,400 in free cash flow annually for 14 years will amount to an additional $261,000, assuming a 5.46-per-cent rate of return after investment fees.
Her combined retirement savings in 15 years’ time will be about $705,000. Assuming a 5-per-cent annual rate of return, this will provide Joanne with about $35,250 in investment income, while keeping her principal intact.
Joanne will collect about $14,550 from the Canada Pension Plan and Old Age Security. Combined with her investment income of $35,250, this puts her annual income in retirement is just over $49,800.
“She will need to keep a close eye on her annual investment returns to ensure her plans stay on track and review her risk tolerance regularly,” Thompson says.
Down the road, Joanne may consider buying a home or condo instead of renting, and allocate funds for a down-payment. “This strategy would allow her to build equity in real estate that could be sold in the future, with proceeds used for retirement income,” Thompson says.