At 65, Kate* is rebuilding her life and finances in a new province after a costly divorce wiped out her savings. “I want to make sure I am setting myself up for a successful old age. My dream is to buy a house, but I don’t know if that’s out of reach or even practical.”

Having spent most of her life in Ontario, Kate moved to Alberta to be close to her son and grandchildren. She

retired

from her full-time government job at age 58 and from her part-time job last year, after realizing the minimum wage earnings weren’t worth the effort and increased income tax hit.

Kate’s monthly income is $5,351.68 after tax. This includes $4,624.01 a month from her indexed employer pension, and $727.67 a month from Old Age Security. She plans to apply for Canada Pension Plan (

CPP

) benefits (about $1,100 a month) next year. She wondered, “Does this make sense?”

Her primary focus is paying off $42,625 in debt held in lines of credit. She makes monthly payments of $500 to $600 and plans to have the debt paid off within five years. She asked, “Is this a good goal? Is there a better way to restructure debt repayment?”

Until then, Kate plans to continue to live with family but ideally would like to purchase her own home. However, she is not sure she would qualify for a mortgage or if she would be better off renting. Home prices in her desired area are in the $350,000 range and rental prices average about $2,200.

Kate’s total monthly expenses are about $3,100. She has contributed $14,000 to a registered retirement savings plan (

RRSP

) invested in a bank sponsored growth oriented mutual fund, and has $37,000 in cash in two soon-to-be-merged tax-free savings accounts (

TFSAs

).

“I’d like to invest the money in my TFSAs and reinvest the earnings and dividends to increase the value but I don’t know how to go about it,” said Kate. “How can I grow this tiny nest egg? I just turned 65 so I’m feeling RRSPs are probably not the best way to go, since I only have six years before I’d have to convert to a registered retirement income fund (

RRIF

). I do not have an investment adviser or a non-registered account of any kind. If I am advised to purchase

ETFs

(exchange-traded funds), I wouldn’t know what to do. I’m also worried about the global economy and (U.S. President Donald) Trump’s next move. I do not want to support the American economy.”

What the expert says

Kate’s frugal lifestyle and large employer pension have put her in a solid financial position, said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger. “She does not really need any retirement savings, and should be able to buy a home and live comfortably.”

Rempel recommended Kate apply for CPP now rather than wait until next year for three reasons:

  • Deferring CPP to age 70 gives her an implied return of 6.8 per cent a year, which is a bit lower than the interest on two of her credit lines, and probably lower than her investments would make as growth mutual funds.
  • Starting CPP now and saving it will help her pay off her credit lines in three and half years, instead of four and half years.
  • CPP will not push her into a higher marginal tax bracket, leaving her at a reasonable 30.5 per cent tax bracket.

Rempel agreed with Kate’s focus on paying off her credit lines before investing more, especially if she wants to buy a home. “She has been paying $500 to $600 a month on her credit lines, but should actually have enough cash flow to pay $3,000 a month once her CPP starts.

“Paying off the loans of $42,625 and then saving $75,000 for the down payment, closing and moving costs is a total of $118,000. If she can save $3,000 a month, she should be ready to buy her home in about three and a half years,” he said.

Rempel estimated owning a home will likely cost Kate at least $300 a month more than the average rental rate of about $2,200 in her desired location. “A mortgage of $280,000 with a long-term average mortgage rate of 4.5 per cent would have mortgage payments of $1,550 a month. Adding property tax, utilities and some maintenance costs puts her cost of owning at about $2,500 a month.”

Though not her first choice, Kate could also rent within about a year at lower expense and with more flexibility. Or, if she stays with her family for a few years while paying off her loans and invests $3,000 a month before moving out and renting her own place, she could save $75,000 or more to invest, Rempel said. This money should be able to grow to about $300,000 in 15 years, assuming a return of seven per cent to 8 per cent. “This could allow her a more comfortable lifestyle.”

That said, Kate could be just as well off if she buys a home, said Rempel. “Homes in Alberta have been rising in value about two per cent to three per cent a year on average over the last decade, so she should gain some growth in value over time. Thanks to the income from her employer and government pensions ($91,000 a year), if she pays off her loans and buys a home, she does not need to save or invest more to have her desired lifestyle.”

If Kate decides to invest more, which Rempel said she could easily do if she stays with family for a few years and then rents a home, he recommended she prioritize investing inside a TFSA and working with an investment adviser who can explain the risk, expected returns from various types of investments and help take the emotion of investing. “Investing globally is the broadest diversification and the U.S. is about 70 per cent of the world’s stock market and the main investment growth area, so avoiding it for political reasons could cost her a lot over time.”

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Kate is in a 30.5 per cent tax bracket now and is expected to be in the same tax bracket regardless of claiming RRSP tax deductions or taking income from a RRIF in the future.

*Name has been changed to protect privacy

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).