WID OW FORCED INTO FI NAN CIAL WORLD
In a pretty lit tle town in the back coun try of Brit ish Col um bia, a woman we’ll call Cel este, 55, is rais ing her three chil dren — two teens and one bare ly post- teen, on take home in come of $ 3,400 a month. Her ca reer is a checkered path from a de gree in edu ca tion to an or gan ic fruit farm, then to a non- prof it or gan i za tion. Now she re al iz es that, in spite of avow als that it does not, money ac tual ly does mat ter.
Re cent ly wid owed, she has been forced into the real world where money is neces sary to raise a fam ily and keep a home to geth er.
“I like hav ing money, but I’m not very in ter est ed in chas ing it and I’m not very greedy about it,” Cel este ex plains. “I have had a ser ies of jobs in town and on a farm. Now I have a job fund ed by gov ern ment. Bottom line — I need fi nan cial secur ity.”
The good news is that she has no debts and a fair amount of financial assets, almost $642,000, largely from the sale of a family busi ness after her hus band’s death, ex plains Der ek Moran, head of Smarter Fi nan cial Planning Ltd. in Ke low na, B. C. “The bad news is that she does not know what to do with the money.”
With restructuring of her portfolio, Celeste can have a re tire ment in which she can main tain her way of life. It will take both a com mit ment to do it and a good deal of skill to move from her present hoard of low- yield cash to a portfolio of con trolled risk with ac cept able re turns.
STEP PING UP TO IN VESTING
Cel este’s fi nan cial prob lems are numer ic al — how much to save and how much to spend, what and where to invest. Be neath those ques tions is the person al prob lem of a woman sud den ly on her own with chil dren, a fi nan cial fu ture based on un cer tain gov ern ment fund ing of her job, and, of course, the un known course of her in vest ments.
For now, Cel este is in a de fen sive fi nancial mode. She has $ 316,400 in cash earning at best 1.5% a year. An other $ 216,288 is in guaranteed in vest ment cer tifi cates earning lit tle more. Capital plan ning is the first pri or ity. Cel este, who has thought of mov ing from her small town in a fair ly re mote part of B. C. to Van cou ver, should forget about it for now, Mr. Mo ran says. With Van cou ver real es tate prices in the strato sphere, a move from her large house in the coun try to a small con do in that city would be a poor idea. When inter est rates rise, con do prices are like ly to fall. Cel este could re visit the sub ject if prices de cline, per haps shop ping for some thing in a rela tive ly in expen sive bed room town near Van cou ver. Moreover, a move to the Low er Main land would have to be matched by a job to sup port the move.
In sum, it’s a con cept more than a plan, Mr. Mo ran cau tions.
Cel este has $ 641,792 of fi nan cial assets, not counting her chil dren’s RESPs. The RESPs will cov er tu ition at local uni ver si ties, though re quire the kids to have sum mer jobs. If the non- RESP money were in vested in di versi fied dividendpay ing stocks and in vest ment grade cor por ate bonds with terms averaging no more than sev en years, perhaps in low- fee, ex change- traded funds, she could at tain a 3% re turn after in flation. That would pro duce $ 19,250 a year be fore tax, which would add 53% to her pre sent $ 36,000 an nual pre- tax in come, or pro vide sub stan tial re place ment cash flow if she is laid off.
IN COME AND RISK
To get that 3% re turn after in flation, Cel este will have to move money out of cash. The pro cess takes time and study. She can study mar kets or use finan cial ad vi sors to help. She has suffi cient funds to hire an in depend ent asset man ager for 1.0% to 1.5% of assets under man age ment. She or the manager can use ex change- traded funds with fees typ ical ly not more than one half of 1% of net asset value, mu tual funds with fees typ ical ly sev er al times high er or se lect in di vid ual stocks and bonds.
If Cel este grows her fi nan cial assets at 3% a year after in fla tion for 10 years, then at age 65 she would have $ 862,500. At the same 3% rate of re turn, that cap ital would gen er ate $ 25,900 a year. If she choos es to use an an nu ity pay out model which be gins to pay her at 65 and that would leave her assets at zero at her age 95, she could take $ 42,720 a year. At 95, she would still have a house to sell and her govern ment pen sions.
She will have es ti mat ed Can ada Pension Plan bene fits of $ 5,057 a year at age 65 and Old Age Se cu ri ty bene fits of $ 6,619 late in her 65th year. The total on the con stant pay out model would be $ 37,600 be fore tax, suf fi cient to maintain her pre sent way of life, or $ 54,400 be fore tax with the an nu ity pay out model, which would al low her more pleas ures in re tire ment.
After tax at an aver age rate of 13% for con stant pay out or 17% with the an nuity model and no tax on TFSA pay outs, she would have month ly in come of about $ 2,700 with con stant pay out or $ 3,800 with the an nu ity model. Given that only about 10% of her fi nan cial assets are regis tered and thus sub ject to com pul sory min imum pay out rates from Regis tered Retirement In come Funds, the choice of model is large ly hers.
Fru gal liv ing would al low her to get by with the con stant pay out model. She could have a more ex pan sive life with trav el and some pleas ures she has denied her self with the an nu ity pay outs. In the lat ter case, she could choose to save some of her in come in her TFSA or to gift it an nu al ly to her chil dren for their own TFSAs or other uses.
“Cel este is a wise lady of mod est income, sub stan tial cap ital, much good sense and a will ing ness to learn how in vest ments work,” Mr. Mo ran says. “I have lit tle doubt that she can thrive, even if her job evap or ates and she has to look for an other. This is the sto ry of a so- called aver age Can ad ian who can have a good fu ture and a pleas ant retire ment.”