Financial Post Article: Costly divorce leaves this 61-year-old woman wondering if she can ever retire

The Financial Post asked me to review the finances of an Edmonton woman who is in the process of finalizing a costly divorce and preparing for a fresh start. 

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