Worry .. free once the children leave
When Tess decided to leave her husband of 25 years, she knew she would have to take on a big mortgage if she wanted to buy out his share of their Vancouver home. She would also need to hand over a considerable amount of money.
At age 56, and with three children, 17, 21 and 22, she is starting over financially. Tess worries about the future and whether she will be able to support the ehildren through university. Her ex is helping with their education expenses.
"This is going to be tough and my budget is going to be very tight," she writes in an email. She plans to fix up the house a bit, hold on to it until the children are out on their own in a couple of years and then sell it. As a health-care professional, she has a good salary and pension. She plans to work until she is 65. Still, she can't help but worry: Will it all work out or will she end up living on the street?
We asked Warren MacKenzie, president and chief executive officer of Weigh House Investor Services in Toronto, to look at Tess's situation. Weigh House is a fee-only financial planning firm that does not sell securities.
WHAT THE EXPERT SAYS
After an in-depth analysis, Mr. MacKenzie was able to put her mind at ease. "Tess will be able to achieve all of her financial objectives, including leaving a small inheritance to her children," he said.
The person: Tess, 56.
The problem: How to deal with the financial shock of separating from her husband and dividing assets without disrupting her children's university education.
The payoff: Getting through a difficult spell and coming out the other end solvent, secure and able to leave a small inheritance to each of her children.
Monthly net income: $6,030.
Assets: Half share of family home $275,000; RRSP $80,000 (which goes to her husband); RESP $40,000; non-registered investments $15,000. Total: $410,000.
Monthly disbursements: Mortgage $2,770; property taxes $400; utilities $435; phone, TV $125; home insurance $140; repairs/maintenance $200; groceries $900; eating out $130; household supplies $100; clothing $225; transit $70; car insurance $160; car maintenance, gas, parking $275; orthodontics $550; life insurance $120; school activities, summer camp $200; music
lessons, sports, allowances $265; vacations $170; other: $895. Tatal: $8,130.
Liabilities: New mortgage: $325,000; new line of credit $20,000.
At the moment, Tess is spending more than she is taking in, but her expenses will drop once. the children finish university and move out on their own - and some will drop even sooner.
The expensive orthodontic treatments will soon be finished. When the children graduate and move out, the cost of their clothing, school activities and other expenses will be gone and the household food bill will drop.
Tess will no longer need term life insurance when the children are established, shaving another $120 a month from her expenses. The new mortgage will be discharged when the house is sold, so the $2,770 in monthly payments will come to an end.
By the time she retires from her job at age 65, she should be able to get by on about $4,000 a month rather than the $8,000 she is spending now, Mr. MacKenzie said. By then, her pension income will be $44,800 a year, her Canada Pension Plan $14,028 and her Old Age Security $7,740 (all indexed for inflation), bringing
her total pension income to $66,568.
Tess needs $275,000 to buy out her ex's share of the house. She would also like some money to renovate. Mr. MacKenzie suggests she borrow another $7,000 to pay off her current line of credit, and $2,000 to contribute to her RRSP. With this $2,000, she will educate herself about investing. The planner also suggests she get another $20,000 line of credit for emergencies.
Tess's current investments are mainly in underperforming mutual funds with high management expense ratios. "She feels her [investment] adviser is either incompetent or does not have her best interests at heart."
As an educational exercise, Mr.· MacKenzie suggests she open an online brokerage account and invest the $2,000 in a self·directed portfolio of exchange-traded funds.
"We recommend she go to the MoneySense magazine website, pick a couch potato portfolio and buy three ETFs," he says. She can then monitor their performance and adjust or "rebalance" her holdings once a year, or whenever one of the holdings exceeds her desired allocation by 10 per cent or more.
Mr. MacKenzie's calculations assume that Tess will sell her house in a couple of years and invest the proceeds for an average annual return of 6 per cent (and an inflation rate of 2.5 per cent), and that she will draw on this when she retires.
By Dianne Maley
Special to The Globe and Mail
July 24, 2010