In Ottawa, a woman we’ll call Helen, 60, is struggling to meet expenses. Her former job running a small hospitality business collapsed, a casualty of the COVID 19 pandemic. Now, she has a part-time retail job that pays her $700 monthly and she adds $800 in rental income from a property she owns. She has also been taking $2,500 per month out of her non-registered investments. That adds up to a pre-tax monthly income of $4,000, or $3,600 after tax. She would like to maintain it when she has no further employment income.
Helen’s situation is fragile, for her part-time income depends on how quickly the community rebounds from the virus lockdown. It is a shaky foundation for retirement. Helen must cut her costs and raise investment income.
Helen gets minimum wage with some benefits that add up to about $16 per hour. Her dividends come from a handful of well-established mutual funds, which, though their value may wobble, are fundamentally well managed. She has an outstanding mortgage of $21,000 at 3.14 per cent with a dozen years left until it is paid off and a $6,000 line of credit at five per cent interest. These are not large sums, but with no financial backup, no one with whom to share costs, and a relatively expensive dwelling, Helen has some tough choices to make.
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Family Finance asked Eliott Einarson, a partner in the Winnipeg office of Ottawa-based fee-only financial manager Exponent Investment Management, to work with Helen.
Rent or buy?
Helen is currently renting a condo for her own use, but is wondering if she should remain a renter or buy a condo in the city, which would require her to take on a bigger mortgage.
A $250,000 loan for 25 years at three per cent would cost her $1,185 per month. That is less than the present rent she pays, but she would need a down payment and that would use up much of her capital, which she is using to cover living costs.
Her own rent, at $1,800, eats up 45 per cent of her pre-tax income. The property she rents out is in a small town and generates less than half of what she herself pays in rent. Her prospects for a large rent increase for her tenants are dismal given rent controls and the poor economy. For more income, she can start taking her Canada Pension Plan benefit now at age 60 at an estimated $419 per month rather than waiting to 65 to receive CPP benefits of $655 per month. But over a period of a couple of decades, the cost of those early benefits would be too high.
Just to survive, Helen needs a bigger pool of savings on which to draw. She figures that she could sell the rental for $65,000 and walk away with $30,000 after settling the mortgage, HELOC and selling costs. She could add that to the $90,000 in non-registered investments; selling the rental property would also eliminate debt service costs, insurance costs, maintenance and property taxes. That could be a $500 monthly saving.
Doing the numbers
As it stands, the $90,000 can only furnish three years of drawdowns. If she adds $30,000 from the sale of her rental for a total $120,000, and invests it at three per cent after inflation, it could sustain drawdowns of $2,120 per month for the five years to her age 65. Without the rental income to draw on, her pre-tax income would be down to $2,820.
Spending reductions are in order. Travel at $200 per month would not be possible. Added to $500 terminated ownership costs for her former rental, she could save $700 per month. Her reduced cost of living would be $2,900 per month. If she can work, she can just squeak by with some additional spending cuts; if not, deeper cuts or alternative solutions (see below) would be required.
Helen’s income at 65 would be based on $300,00 RRSP, $60,000 TFSA and $17,000 cash savings, a total of $377,000. That sum could generate $18,700 per year for 30 years to her age 95. She could add Old Age Security at a current rate of $7,362 per year and her Canada Pension Plan benefits at $7,860 per year. That would add up to $33,922 before tax. With no tax on $2,975 TFSA cash-flow included in the $18,700 income, she would pay tax at a nine per cent rate after age and pension credits, and have $2,595 per month to spend. That’s not quite her reduced cost of living, $2,900 per month. She could close the $300 gap by foregoing $200 on restaurants and taking $100 out of clothing and groomIng. The better adjustment would be to continue to work at $700 per month less 10 per cent taxes and benefits net $630 per month.
It may not be possible to maintain job income if her job does not exist. There are other possible adjustments. Her present level of rent, $1,800 a month, is high for her income. Either now or at 65, she might move away from the city and save a good deal. A mid-sized town with public transportation could make it unnecessary to fuel, repair and insure her car, a $200 monthly saving.
An alternative, which Helen has mentioned, is finding someone with whom to share costs. That might be a co-tenant in her $1,800 monthly rental apartment. On a 50/50 basis, the rent saving of $900 plus half her $210 utilities and cable and some part of her home insurance, say $40 per month, would total $1,045 monthly saving. That’s a fourth of her present income.
Helen has few choices other than to live modestly and watch her purse strings. If she defers making decisions, especially on $1,800 for rent, she will cut other choices in future, Einarson concludes.
“What Helen needs is a survival strategy,” he says. “We have provided it.”
Retirement stars: 2 ** out of 5
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