The 55-year-old is a health-care professional and earns about $210,000 annually before tax. 

Since January, in addition to his current employment income, John has been receiving a pension of $65,000 a year indexed to inflation from his former employer. 

If he retires as planned, he will be eligible to access his current employer’s pension plan, also indexed to inflation, which would add another $2,000 to $2,500 per month.

Based in Vancouver, he would love to stay in the city, but is open to downsizing.

In the article you’ll learn:

• Whether he should enjoy a great lifestyle during the last 5 years before he retires.
• How much debt he has from his divorce, and how he plans to pay it off.
• Whether or not he should invest in a registered education savings plan (RESP) for his daughter.
• If he should apply for Canada Pension Plan and Old Age Security benefits at age 65.
• Why he needs to invest $7,000/month to be on track for a retirement where he can travel and help fund his daughter’s education.
• Why he needs to build up $500,000 in investments over the next five years to retire the way he desires.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

A single dad nearing retirement hopes to fund daughter’s education and his golden years

Financial Snapshot:

Assets

Primary residence approximate value: $1.35 million, $700k mortgage

2013 Honda pilot $10k value (paid off)

Investment holdings

Life insurance: 

Me term $120/month 

Lola whole $150/mth

Debts

Credit card o/Loans $22k LOC outstandings balance $20k 

Expenses

Mortgage $1300 biweekly 

Strata fees $610 monthly

Utilities $500 monthly 

Groceries $600 monthly

Transportation costs $350 monthly

Insurance premiums $110

Property tax 1500/yr

Dining out/entertainment $800/mth

Travel $6000/year

Financial Planning Notes & Ed’s Insights

Specifically, his goals are to make sure he can support his daughter through post-secondary education, retire or at least shift to part-time consulting work in five or six years and then start to travel three to four months each year. 

John wants to retire with his current lifestyle plus travel for 3-4 months per year in 5-6 years. If the extra travel is about $20,000/year, then he would need about $120,000/year to retire with his desired lifestyle.

For that lifestyle, on top of his 2 generous pensions and the government pensions, he would need about $500,000 in investments. To achieve this, he would need to invest about $7,000/month. This is a huge amount, but John should be able to afford this.

With his high income and collecting his other pension already and his lifestyle expenses of $6,65/month, John should have just over $7,000/month available cash flow that he could invest.

General advice: “Never get used to a lifestyle you cannot sustain.” It would be a mistake for John to get used to spending this extra $7,000/month, since then he would not be happy having to cut back when he retires.

If he can tolerate the risk of a high equity portfolio, then he would only need to invest about $4,500/month for the next 5 years, which he should be able to do easily.

John is on track to retire on $105,000/year in 5 years, which would allow for an extra $10,000/year for his 3-4 months of travel.

What short-term investments can I make in the next five to six years that will carry me through that low cash flow period between the ages of 60 and 65?

Normally, it is best to think of retirement investments as long-term. You may need more in some years, but you can have a reliable long-term retirement income while withdrawing varying amounts.

If John invests a significant amount like $7,000/month or $4,500/month, then he should have close to $500,000 in 5 years, which would easily allow him to withdraw $15,000-20,000/year extra from age 60-65 to support his desired more comfortable retirement.

John has no RRSP room but $75,000 TFSA room. Maximizing his TFSA is the best place for him to start to avoid tax on these investments. After that, he should just invest non-registered. He is in a high tax bracket, so investing tax-efficiently will be important for non-registered investments.

Right now, he has almost no retirement investments, so his retirement is almost entirely based on his pensions. If he does not invest significantly, he would need to start his CPP at age 60 to retire at age 60, since he would not have money for his lifestyle.

He wonders if he should invest in a Registered Education Savings Plan for his daughter or if the planners have any recommendations. “If my daughter goes to university, I can downsize or tap into the equity in my home to help her and to fund travel and other aspects of my life as they develop,” he said.

An RESP is a good vehicle for him to save for Lola’s education, since he will get a 20% grant. He can invest up to $5,000/year ($2,500/year for the current year plus one catch-up year). The grant is an extra $1,000/year until she is 17.

Saving $5,00/year and investing in an RESP should roughly cover her tuition for 4 years, but not room & board or living expenses. It is a good idea for her to earn enough to pay for these costs, so she can learn some money skills. Money skills are highly valuable in life – far more valuable than cash gifts from parents.

The growth is normally tax-free if withdrawn while she is in university, since she would have her personal tax credits plus university tuition credits, which usually offset the tax on RESP withdrawals.

RESPs accept a wide variety of post-secondary education, including colleges and foreign universities, so there is a good chance she would eventually use her RESP.

If she ends up not going to any post-secondary, he can withdraw the money, which means he loses the grant and 20% of the growth, but he can get his money back plus most of the growth. He can then decide whether to keep it or give it to Lola for another reason.

John is also considering applying for Canada Pension Plan and Old Age Security benefits at 65. “With two indexed pensions, can I delay in order to maximize benefits?

Delaying CPP from age 60 to age 65 provides an implied 10.4%/year return. If you invested the CPP pension amount from age 60-64 and earned 10.4%/year, you would have the same lifetime pension as you would by starting at age 65. Deferring from age 65 to age 70 is an implied return of 6.8%/year.

John is a moderate investor, so he should ideally defer his CPP and OAS to age 70, since it is unlikely his investment returns would provide more.

However, right now he has almost no retirement investments. Unless he invests a significant amount the next 5 years, he would have few options other than taking both as early as he can (CPP at age 60 and OAS at age 65).

John asked about tapping into his home equity for travel or other expenses for the 5 years from age 60-64, which is a decent option for him to allow him to defer CPP. If he wants to do this, he may have to increase his mortgage shortly before retiring, since it may be a challenge to qualify for an even larger mortgage after he retires.

Is there anything else I should consider moving forward?” he asked. “I have a bit of time to be in a very comfortable place in five years.”

The best advice for John is to invest all his extra cash flow of about $7,000/month for the next 5 years, so he can retire with the lifestyle he wants.

To save expenses, he should first pay off his credit card and credit line, since the interest costs are higher than his investments should earn after tax.

He can also cancel his life insurance on himself and his daughter. The only person financially dependent on him is his daughter who would already inherit his net worth of almost $650,000.

The whole life insurance policy is a waste of money and expensive at $150/month. Kids don’t normally need life insurance since losing their income is almost definitely far less than not having all her costs.

The policy is far more expensive than a comparable term policy. The face value is likely tiny compared to any future life insurance she might need when she is married with kids.

We have seen the awkward conversation quite a few times when a parent is sold a whole life policy for their kids and then expects the child to take it over once they are working. By that time, it was a tiny policy with a high premium. Even though the parents took it out more than 20 years earlier, the child almost never wants the policy. They sometimes take it over to avoid embarrassing their parents and not wanting the policy. If the child takes it over, they almost always cash it in immediately to invest it far more effectively!

-Ed

The post National Post Article: A single dad nearing retirement hopes to fund daughter’s education and his golden years appeared first on Ed Rempel.

Divorce is never financially smart!

As a financial planner, I don’t recommend divorce. It’s bad for your finances!

However, you can go through it in the most financially smart way – to leave both of you in the best possible position.

We have seen quite a few people go through divorce.

We’ve seen some total disasters, fighting for years through lawyers with monstrous legal costs.

• A wife hiring one lawyer after another for years to keep going after her ex.
• A dentist declaring bankruptcy to avoid paying alimony.

We have helped clients go through it amicably while talking & agreeing on what to do.

• We can help identify the financially best way to divide assets.
• We can show how to minimize or avoid tax when dividing assets. Paying tax means you both get less.

I am a financial planner – not a lawyer. My insights here are based on experience about how to be as financially smart as possible.

You will learn:

• Why an amicable divorce is better.
• What to be aware of with lawyers.
• Working effectively with your lawyer.
• How to divide your assets the most effective way.
• Should you keep the house?
• What happens to the Smith Manoeuvre in a divorce?
• Should you split a pension?
• What options do you have with spousal & child support?
• What studies say about life after divorce.

Why an amicable divorce is better.

It’s rare that a couple never sees each other again after a divorce. Especially if you have kids, you will still be in each other’s lives. It’s important to be good role models for your kids. You don’t want them stuck in the middle or blaming themselves. Being able to talk amicably and try to get along makes your future life much better.

Being able to start a new life with the right outlook means you need to let go of the old one. An on-going fight keeps emotions high. You are not letting go. Hate is a form of love. Letting go means you don’t have strong emotions – love or hate.

The best divorces I have seen: The couples can talk amicably about anything, share custody, live relatively close in the same school district so kids can go back-and-forth and be in the same school (even by school bus), they cooperate on times to see the kids, they speak highly of each other to the kids, and they may even be friends in the future.

Having your lawyers fight & negotiate for you means you both get less. Maybe a lot less.

You both have rights, but you can agree on anything you think is fair. You do not have to get every last thing you may be entitled to.

Assume you will both have ½ the net worth and less cash flow from paying for 2 homes.

What to be aware of with lawyers.

• Lawyers are motivated to prolong your dispute.
• They may sound like they are on your side fighting for every bit.
• They may spend a lot of time on many details.

Working effectively with your lawyer.

• Both meet with your own lawyers to understand your rights.
• Meet with your financial planner to decide how to divide your assets effectively.
• Discuss who gets what, where you will each live, custody, and support. Decide together.
• Have one lawyer write it up. Each sign with your lawyer.

Result: You both get a decent result and a small legal bill.

How to divide your assets the most effective way.

Having your lawyers fight & negotiate for you means you both get less.

Start with a Net Worth Statement – column for each + joint.

Choose your official separation date. Sometimes it’s obvious. Sometimes not.

Get appraisal of home & pension statement from pension administrator.

Your RESP is usually considered the kids’ money, so it’s not part of the split.

RESP often remains joint or is split. Agree about future contributions.

Keep it joint & both contribute, or split it in half and each contribute to your own. With separate RESPs, you need to coordinate contributions. Whoever contributes first gets the grant.

Allocate on your Net Worth spreadsheet who will take each asset & debt.

You will need to qualify for mortgage & other debts by yourself.

For RRSPs & TFSAs: Usually keep your own. Need a court order to change. There would be legal costs.

Goal: Both be in decent financial position. Nobody should be financially destroyed. You will both need your own new plans for retirement.

Should you keep the house?

Both need to decide where you will live.

Often both want to stay in the home. At some point, you need to start separate lives.

Studies show 5 or 10 years later, usually the husband has done better. This is because the wife has the house and he has the investments, which grew faster.

House is a lower growth asset.

The last 45 years, the Toronto Stock Market TSX has had 5 times the growth of Toronto real estate. This was the best period ever for real estate & slightly below average for stocks.

Can be a good investment if there is a large mortgage.

Buy with 20% down. Leverage 5:1.

Compare:

$1 million in property vs. $1 million in the stock market. Stock market wins.

$200K down on $1 million property vs. $200K in the stock market. Real estate wins.

$200K down & mortgage on $1 million property vs. $200K down & investment loan on $1 million in the stock market. Stock market wins.

What happens to the Smith Manoeuvre in a divorce?

Smith Manoeuvre is a mortgage and usually stays with the home.

Smith Manoeuvre includes investments that are non-registered, which usually are best to go to the person that was claiming it to avoid tax.

If it does not go to the same person that has been claiming it, then there is a deemed disposition. Some tax owing. You both get less.

Effectively, assets are sold to claim capital gain. Then the other spouse can take over Smith Manoeuvre interest deductions & investment growth in the future.

If you have the investments in joint names for estate planning purposes, but one spouse has been claiming the Smith Manoeuvre, you can switch everything to the spouse that has been claiming it without a deemed disposition or tax costs.

If the spouse that has been claiming Smith Manoeuvre is not keeping the house, you can get a new home or credit line to take over Smith Manoeuvre credit line. The credit line should still be tax-deductible if you transfer the tax-deductible credit line to a new credit line on your new home.

Example: Jennifer takes home. Michael has been claiming Smith Manoeuvre. He gets a $100K credit line (on his new home or ULOC) & keeps the Smith Manoeuvre investments & debt.

If you have been claiming Smith Manoeuvre jointly, you can keep half each without triggering capital gains & while maintaining tax-deductibility.

If one person takes it over, there is a deemed disposition on half the investments. Then that person can continue to claim both interest deductions & capital gains.

Think through who wants to have the Smith Manoeuvre. The Smith Manoeuvre is very helpful for saving for retirement without using your cash flow. One spouse can take over the existing Smith Manoeuvre, but the other spouse can start it, as well. Both can do it separately on their separate homes.

Should you split a pension?

Get a pension valuation from the pension administrator.

You can get half the actual pension when paid at retirement or half the value in assets now transferred to your RRSP or locked-in RRSP.

Asset split sometimes adjusts for tax, since the pension is before tax.

If you take ½ the pension payments, you are dependent on your ex and when he/she retires.

Usually better to not maintain financial ties. ½ pension payments in the future maintains ties.

Usually best to take half the value to a locked-in RRSP (LIRA). Not all pensions allow this.

What options do you have with spousal & child support?

Usually, get the support amounts from your lawyer.

Child support & spousal support have a formula lawyers usually use: https://www.divorcepath.com/canada/spousal-support-calculator 

Spousal support:

Guideline: The paying spouse’s support is presumptively 40% of his or her net monthly income, reduced by one-half of the receiving spouse’s net monthly income. If child support is an issue, spousal support is calculated after child support is calculated.

Child support:

Look-up table: https://www.justice.gc.ca/eng/fl-df/child-enfant/fcsg-lfpae/2017/pdf/ona.pdf 

With joint custody, the higher income person may still have to pay child support.

Lump sum instead of support is often better. No longer have financial ties.

Lawyers will sometimes write support at $1. Risky.

Any support can be renegotiated in the future, so there is always risk of more legal battles. I have seen $1/month support be changed years later to $5,000/month.

Lump-sum spousal support: Calculated by multiplying the monthly amount owing by the number of months for which support is payable, & then discounting for tax consequences and other factors.

Lump sum: Agreed as part of the asset split.

Best outcomes: Support payments maintain financial ties. Best outcomes:

Spousal support: Get your lawyer to calculate a buy-out and include it when dividing your assets.

Child support: Sharing custody 50/50 and agreeing to a small amount or no child support.

Note: I am not a lawyer. This is all financial advice only. Plus insights from my experience helping many couples through divorce.

Most amicable: Talk amicably about anything. Joint custody. No support payments or on-going financial ties. Live in the same school district. Kids go back & forth, while still going to the same school & taking the school bus.

Ed

The post Financially Smart Divorce appeared first on Ed Rempel.

She is looking for ways to retire soon, despite her divorce and her age.

In this article you’ll learn:

• Should she declare bankruptcy to help her retire or refinance and pay off her debt?
• How much does she need to invest to retire with the lifestyle she wants?
• Is it more important for her to pay down her mortgage, grow her RRSP or TFSA?
• Should she delay starting her company pension, CPP & OAS benefits, or start them early?
• Should she start a side-business or buy an income property?

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

Costly divorce leaves this 61-year-old woman wondering if she can ever retire

Background:

Anne*, 61, is in the process of finalizing a costly years’ long divorce and preparing for a fresh start. 

She lives with her two young adult children in Edmonton and is thinking of ways she can put her entrepreneurial experience to work to help her eliminate debt and put her on a path that will allow her to pursue a writing career.

Until then, she is working full time in healthcare earning about $110,000 a year, a job she started in 2017 after selling her business in Ontario and moving to Alberta. 

To help pay the bills, she recently started taking extra overtime shifts that pay double time. “I have no idea how retirement is even a possibility for me,” she said. 

She would like to know what the experts think and gain their insights on how she can get onto more solid financial footing.

Her past legal fees cost close to $800,000, which wiped out her savings. She has managed to pay off all but $65,000 and retained her credit rating, opting not to declare bankruptcy. 

“The bank believed in me and showed me they had the utmost confidence in my ability to rise above the situation,” she said. “They put their money on me to win. For that, I am forever grateful.”

However, now as her peers are preparing for a retirement she can’t envision for herself, she wonders if she should reconsider. “Would declaring bankruptcy be the wise thing to do?”

Anne is thinking about selling her current home, which is valued at $425,000 and has a $275,000 mortgage, and purchasing a property with acreage she could potentially rent out to pay the mortgage or turn into a campsite or with some form of income potential. She has $100,000 in unused capital gains tax [ER1] from the sale of her business.

Ultimately, she’d like to work part time in health care and spend more time writing. She has already started picking up freelance writing projects.

Financial snapshot

Annual income: $110,000

Cash (emergency fund): $10,000

LIRA account: $35,000

RRSPs:  $8,000 (Anne contributes $83.30 every two weeks which is matched by her employer)

Defined benefit pension plan which will pay out $1,052 per month at age 65. 

The payment increases with each year the recipient delays drawing it. Anne is considering delaying the pension until she turns 70, when it will pay $1,650 a month.

Family home: valued at $425,000 with a $275,000 mortgage at 2.9% amortized over 25 years. The mortgage comes up for renewal in November 2024. Current monthly mortgage payments are $1,540.

Total monthly expenses are about $5,600 including the mortgage and $1,000 credit card payments for the remainder of her legal fees at an interest rate of about 12%.

Questions for the experts:

What should she concentrate on first? 

Maximizing RRSP contributions to get a maximum income tax return each year, paying down debt or paying down the mortgage?

Quote: “I’d like to get out of debt and pay off my house ASAP.”

Is it advantageous to buy a property that can simultaneously provide her with a home and some type of income (renting out a basement suite, detached garage, campsite, Airbnb, RV storage, etc.)? 

Is it advantageous to start a small business so she can benefit from the unused capital gains tax?

She’d also like enough money to go on vacation annually for a week or two and have some type of inheritance to leave behind for the kids.

Anne would also like to know when she should start drawing Canada Pension Plan and Old Age Security benefits. 

Knowing that she will continue to work, she believes it may make more sense to start CPP sooner rather than later to help pay down debt but would like to know what the experts think. 

She is eligible to start drawing CPP this summer and if she does, the estimated monthly amount will be $765.60. If she waits until age 65, this will increase to $1,015.38 and $1,441.81 at age 70. 

Her OAS benefits will bring in $691 a month at age 65, $848.55 if she delays until age 68, and $939.76 a month at age 70. 

Financial Plan

Ed estimates that she needs $72,000/year before tax in today’s dollars to maintain her existing lifestyle + $2,500/year travel she asked for – savings from refinancing $65,000 credit card.

Mortgage paid off in 25 years at age 86.

At age 65, she needs:

• Balanced funds at 5%/year: $950,000 & is estimated to have $140,000.
• Equities at 8%/year: $700,000 & is estimated to have $150,000.

At age 70, she needs:

• Balanced funds at 5%/year: $725,000 & is estimated to have $290,000.
• Equities at 8%/year: $575,000 & is estimated to have $350,000.

To afford to retire, she would have to work until:

• Balanced funds at 5%/year: Age 78.
• Equities at 8%/year: Age 74.

She will need to keep working until at least age 70.

Pension: $1,052/month at 65 or $1,650/month at 70?

If she is a balanced investor, take the pension at age 70 and use some of her lower return investments first.

If she is an equity investor, take the pension at age 65 and withdraw a bit less from her higher return investments.

Questions for the experts:

What should she concentrate on first?

Maximizing RRSP contributions to get a maximum income tax return each year, paying down debt or paying down the mortgage? 

Quote: “I’d like to get out of debt and pay off my house ASAP.”

Answer from Ed: 

She is not saving anything for retirement, so she needs to start. 

Her credit card is 12%, which is more than she can expect from investments, so she should refinance that to a lower rate & then focus on retirement savings.

Refinance credit card into her mortgage. She has enough equity to get a secured credit line of $65,000, which should cover her credit card. Credit line at 7.45% today is $600/month instead of $1,000/month for a credit card. Save $400/month.

When her mortgage comes due in November 2024, combine it into her mortgage. Her mortgage rate is much lower than today’s rate, so don’t refinance it early.

Then focus on RRSP & save everything she can. RRSP is most effective since she is in a 30% marginal tax bracket now (slightly into 36% bracket) & expects to retire in the lowest 25% tax bracket.

She probably has extra cash flow of $1,000/month after refinancing credit card into a credit line. 

Contributing $1,000/month to RRSP should give her a tax refund of about $3,500, which she can also contribute to RRSP each year.

With contributing $1,000/month + $3,500/year tax refund to RRSP:

At age 65, she needs:

• Balanced funds at 5%/year: $1,050,000 & is estimated to have $70,000.
• Equities at 8%/year: $775,000 & is estimated to have $80,000.

At age 70, she needs:

• Balanced funds at 5%/year: $725,000 & is estimated to have $120,000.
• Equities at 8%/year: $575,000 & is estimated to have $150,000.

To afford to retire and not saving anything, she would have to work until:

• Balanced funds at 5%/year: Age 84.
• Equities at 8%/year: Age 81.

She will need to keep working until at least age 70.

She could retire at age 70 if she reduces her spending or increases her income by $1,000/month now, so she can contribute $2,000/month to RRSP + her tax refund of about $7,000/year.

If she can start a side business and clear $1,000/month (close to $20,000/year before tax) and then invest it all, then she could retire at age 70. This is a reasonable option – a reasonable amount she might be able to save and not work to a ridiculous age.

Either this side business or downsizing her home to a property that can also produce some income are probably her best 2 options.

Questions for the experts:

Is it advantageous to buy a property that can simultaneously provide her with a home and some type of income (renting out a basement suite, detached garage, campsite, Airbnb, RV storage, etc.)? 

Is it advantageous to start a small business so she can benefit from the unused capital gains tax?

Answer from Ed: 

Yes, a property that can produce income is a good idea, depending on the property – how much it costs & how much income it can produce. 

It will cost her $30,000-$50,000 to move, including real estate fees, legal fees, moving costs, & renovating new home to her lifestyle. 

She would have to save more than this from a lower priced property and income from the property.

The advice is, “Don’t let the tax tail wag the investment dog.” Saving tax is a nice idea, but she should not start a business just to save tax.

Questions for the experts:

She’d also like enough money to go on vacation annually for a week or two and have some type of inheritance to leave behind for the kids.

Answer from Ed: 

This is not unreasonable. Say $2,500/year or so is not a big number. Where will the cash come from? I included it in the retirement plan options above.

Questions for the experts:

Anne would also like to know when she should start drawing Canada Pension Plan and Old Age Security benefits. 

Knowing that she will continue to work, she believes it may make more sense to start CPP sooner rather than later to help pay down debt but would like to know what the experts think. 

She is eligible to start drawing CPP this summer and if she does, the estimated monthly amount will be $765.60. 

If she waits until age 65, this will increase to $1,015.38 and $1,441.81 at age 70. 

Her OAS benefits will bring in $691 a month at age 65, $848.55 if she delays until age 68, and $939.76 a month at age 70.

Answer from Ed: 

No, starting CPP early to pay off her debt does not help her. 

She can get rid of the high interest debt by refinancing it into a secured credit line. 

The main factor here is tax. 

If she starts CPP now, it is taxed on top of her income at a high 36% tax rate. There is no offsetting deduction for paying off debt.

Yes, taking CPP now to invest the full amount now makes sense if she is an equity investor, but not if she is a balanced investor. 

The most important priority for her is to start saving for retirement. 

She can start CPP & request no tax withholding and then invest the full $765/month into her RRSP. This will not cost her any tax. It helps her retirement if she is an equity investor, but not if she is a balanced investor.

If she is a balance investor, she should defer CPP until she stops working or take it at age 70. It is better to use some of her lower return investments first.

If she is an equity investor, she should start her CPP now and invest all of it into RRSP. Her higher return investments should give her more retirement income than deferring the CPP.

Ed

The post Financial Post Article: Costly divorce leaves this 61-year-old woman wondering if she can ever retire appeared first on Ed Rempel.