Retiree will need to reduce her rent
Messy divorce, adult daughter and credit card debt force woman to make some changes to stay afloat
The person Winifred is an unemployed, divorced mother of an adult daughter, Helena. She is turning 65 in a few months.
She receives disability insurance payments provided by her former employer, as well as Canada Pension Plan Disability. She rents a two-bedroom apartment with Helena, who receives an Ontario Disability Support Program supplement. The problem After surviving a bone-marrow transplant and a messy divorce, Winifred worries that she doesn’t have enough of a nest egg for her golden years. She lost half her assets after paying off debts when her marriage broke down.
She receives $28,000 a year in income but her expenses are $34,800. Helena does contribute toward household expenses, but Winifred manages the rest of the shortfall by tapping into her investments. The particulars Assets Cash: $5,317 Locked-In Retirement Account (from ex-spouse): $98,900 Tax-Free Savings Account: $34,000 Registered Retirement Savings Plan: $80,600 Non-registered account: $10,200 Liabilities Credit card balance: $8,000 The plan When Winifred retires, she will need to make some changes to stay afloat, says Robyn Thompson, a feebased financial planner at Castlemark Wealth Management in Toronto. Her income will shrink, since disability insurance stops at age 65. Do you need a Money Makeover? Need a hand to get on top of your budget? Smart Money is looking for a few subjects who are looking for a financial touch-up. Contact deannegage@gmail.com.
Instead, she’ll receive regular Canada Pension Plan payments and her company’s defined benefit pension plan.
Winifred’s current annual lifestyle expenses are $34,800, but her income after she retires will be only $23,500.
Her $222,000 in investments can provide a buffer to start. She should be able to generate about a 5-percent annual yield from her portfolio, or about $11,000 a year, to add to her income.
But Winifred should also be looking at ways to decrease expenditures in her budget.
For instance, one priority could be finding a cheaper apartment, ideally by downsizing to a one-bedroom unit. Winifred pays $1,565 a month to rent her two-bedroom apartment. Thompson says her target housing expense should be $1,025 per month for a one-bedroom, unless Helena can commit to contributing $540 per month to maintain a two-bedroom unit so they can continue to live together. If not, Helena should find her own accommodation.
This change in rent would reduce Winifred’s annual expenses to $30,130 a year.
She must also contend with the hefty $8,000 credit-card balance. A friend compromised her card, running up half of the charges. The dispute has been settled out of court, with the friend agreeing to pay his portion of the bill. Thompson recommends that Winifred contribute $450 a month toward her credit card, taking $150 from her own funds and $300 from the friend who is paying off his portion. Once her credit card is paid off in 21 months, Winifred will have an additional $1,800 per year. This mon- ey should be placed in the Tax Free Savings Account.
Eighty-one per cent of Winifred’s assets are registered while19 per cent are in a TFSA. Her overall portfolio reflects a balanced approach, with 58 per cent in fixed income investments and 42 per cent in equities. Thompson recommends Winifred withdraw from her registered accounts first and keep her TFSA funded for as long as possible, since it compounds tax-free.
Going forward, Winifred will need to stick to her budget and be mindful of her spending habits. She should also be clear about the fees she is paying for investment management, and the return she is actually achieving on her investments.
When Winifred retires, she will begin collecting about $7,717 a year from the Canada Pension Plan. Thompson advises that Winifred ensure that the CPP credit split was done correctly after her divorce.
“Her ex-husband earned substantially more than she did during their marriage,” she notes. “A division of pension credits may help her qualify for a CPP benefit increase.”
Winifred may also be eligible for the Child Rearing provision from CPP if she stopped working or reduced her hours to care for her children while they were under age 7.