By DIANNE MALEY
Special to The Globe and Mail
Saturday, April 21, 2018
At 51, Meredith is single again with two young children, ages 6 and 9, money in her various accounts that has not yet been invested, a new home in Eastern Ontario and a rental condo in suburban Toronto - her former home - with a big mortgage.
"I plan to return to the city at some point," Meredith writes in an e-mail, explaining why she wants to keep the Toronto condo. "Maybe when the kids go to university. I would never be able to afford a condo there in the future," she adds. "And it seemed like a worthwhile investment. I love the location and amenities."
She works for the government, earning $66,000 a year. If she stays put to the age of 65, she'll be entitled to a pension of $2,038 a month, plus Canada Pension Plan and Old Age Security benefits.
Short term, Meredith's goals are to furnish her new home, pay for her children's various lessons, sports and other activities, and save up enough for a nice vacation with them. Longer term, she wants to pay for the children's postsecondary education and save for her eventual retirement.
In the meantime, she wonders how to invest the money she received as part of her settlement with her former partner - she gets no child support - and whether she will ever be able to retire.
"At this point, I can't see retiring since my children are so young," Meredith writes. "I am worried that I won't be able to fund their postsecondary education and will continue working well beyond age 70 to help pay for it." Her goal is to maintain her lifestyle after she quits working.
We asked Heather Franklin, an independent, fee-for-service financial planner based in Toronto, to look at Meredith's situation.
WHAT THE EXPERT SAYS
Meredith is starting out this new phase of her life in a precarious financial position mainly because the income from her rental condo of $1,800 a month is not covering the expenses, Ms. Franklin says. Meredith's principal residence is mortgage-free. The mortgage alone on the rental unit is $1,855 a month; then there are the property taxes, condo fees and maintenance. Interest rates could rise or the tenant could move out, leaving Meredith in a crunch.
As well, her budget for monthly outlays is understated, with no allowance for replacing her car or major appliances, nothing for vacation or travel, and an unrealistically Spartan allowance for dining out, sports and hobbies.
"The biggest issue is the rental property mortgage and associated expenses of this property," Ms.
Franklin says. As well, managing a rental unit in another city can be difficult when maintenance problems arise or tenants move out.
"The ongoing cash-flow shortfall is detrimental to Meredith's financial health now and in the future." She recommends Meredith sell the property and pay off the mortgage. The money she nets could be set aside for other needs as they arise. That way, she will be able to focus on furnishing and maintaining her current residence.
As well, Ms. Franklin suggests Meredith track her spending over time to see what her actual needs are and where she is falling short.
This will help her to better allocate her savings in future.
Next, the planner looks at Meredith's savings. Properly investing the money she has sitting in cash - in her bank account, her tax-free savings account (TFSA), her registered retirement savings plan (RRSP) and the children's registered education savings plan (RESP) - will be critical to Meredith's achieving her goals, the planner says.
If she wishes to manage her own money, Meredith could build a diversified, balanced portfolio of low-cost mutual funds or exchange-traded funds in line with her risk tolerance, Ms. Franklin says. Such a portfolio would include stocks and bonds or other fixed-income securities diversified internationally.
Alternatively, she might want to explore using an online portfolio manager or robo-adviser to draw up an investment policy statement and recommend a suitable portfolio. That way, she would benefit from professional money management, including rebalancing.
Meredith should set aside some readily available money for an emergency fund, the planner says. This could be the proceeds from the rental unit sale or part of the money in her TFSA. The remainder of her TFSA contributions should be invested in longterm growth securities such as dividend-paying blue-chip stocks or exchange-traded funds and low-cost mutual funds, the planner says Because money invested in a TFSA can grow and compound free of tax, "investments that earn income and have growth potential should be held in these plans," Ms. Franklin says.
For the children's RESP, Meredith could look at investments that will grow in value to keep ahead of inflation. Because the savings in this account will not be required for some time, Meredith can include longer-term investments similar to the ones in her TFSA.
As the children get closer to university age, though, Meredith should shift the RESP investments to term deposits or guaranteed investment certificates.
If she continues with her current RESP savings program, and invests with growth in mind, the RESP will grow to about $160,000 or so in eight years, Ms. Franklin says - enough to cover four-year degrees ($20,000 a year) for the two children. That assumes an average annual return of 4 per cent after fees.
In addition to the registered accounts, Meredith might want to set up savings accounts to cover children's activities, the occasional big vacation and the cost of new appliances or a new car.
Because her circumstances have changed, Meredith should update her will and ensure the beneficiary designations on her pension and registered plans are up to date, Ms. Franklin says.
Looking further ahead, Meredith is concerned she might have to work well beyond normal retirement age. While retirement is a long way off, Meredith should have enough income to retire comfortably at the age of 65, Ms.
Franklin says. Meredith is entitled to a pension of $2,038 a month at 65. Her Canada Pension Plan benefit would be $778.23 in today's dollars and her Old Age Security benefit of nearly $600 in today's dollars. Any shortfall could come from her savings and she'd still have her residence to fall back on.
Want a free financial facelift?
Some details may be changed to protect the privacy of the persons profiled.
The people: Meredith, 51, and her two children.
The problem: Can she afford to help her children with their postsecondary education and still retire at the age of 65?
The plan: Sell the rental condo and pay off the mortgage.
Invest the savings in a balanced and diversified portfolio of stocks and bonds through low-cost funds.
The payoff: A road map to a worry-free future.
Monthly net employment income: $4,380 Assets: Bank deposits $30,000; TFSA $74,215; RRSP $140,608; RESP $74,730; residence $506,400; rental $515,000; estimated present value of defined-benefit pension plan $200,000. Total: $1.5-million Monthly outlays: Condo fees, taxes $400; utilities $190; home insurance $100; transportation $390; grocery store $1,000; child care $350; clothing $100; gifts $30; other discretionary $40; grooming $50; dining out $50; sports, hobbies $100; health care $30; life insurance $250; phones, internet $150; RESP $415; pension plan contributions $400.Total: $4,045 Liabilities: Rental mortgage $412,000 at 3.5 per cent
CHAD HIPOLITO/THE GLOBE AND MAIL