At the age of 54, a Halifax resident we'll call Lydia is recently divorced after a marriage of 30 years during which she stayed at home to raise their five children, four of whom are now financially independent.
Lydia has begun her financial life anew with $4,325 in her savings accounts, prospects of receiving $270,000 - half of her former husband's government pension - and, in future, a $22,000 share of her husband's military severance pay. Her after-tax monthly income of $4,110 consists of pay for part-time office work that brings in $225 a month, child and spousal support payments from her ex-husband, and various tax benefits such as GST credits. Her support payments will end when her youngest child, age 15, reaches age 21.
"I had to sell the family home and some furniture during the divorce, which has still left me with $7,650 in legal fees," Lydia explains. "There is nothing left to sell and I have no car. So what am I to do? I started late saving for retirement, but I still have to pay for one child's university, provide him with a home and plan a retirement."
What our expert says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Lydia. The problems are complex, but there are ways to create some stability in her retirement, he says.
Lydia's first obligation is to pay for a fifth of her child's post-secondary education costs, part of the divorce settlement. She has two contribution years left to qualify for the Canada Education Savings Grant (CESG). She can establish a Registered Education Savings Plan for the child, contribute $2,500 a year and receive the $500 CESG. That would provide $6,000, which is 20 per cent of $30,000, the balance being her ex-husband's obligation to cover. The parents' contributions would cover a four-year degree program if the child lives at home. The money should be invested in nothing riskier than a savings account or a ladder of guaranteed investment certificates that mature as the money is needed, Mr. Moran recommends.
In the six years to her age 60, she could grow the $270,000 settlement by investing it. If she can generate a 3-per-cent annual real return, she would have $322,400. If she were to spend that sum over the 30-year period beginning at age 60 to her age 90, and assuming the money continued growing, she could spend $15,970 a year in 2009 dollars, the planner estimates.
At age 65, she could add money from the Canada Pension Plan (CPP), which would be based on half her husband's CPP credits earned during their marriage. That would give her half the maximum CPP benefit of $10,905. Under the divorce settlement, she would have to split half of her CPP benefits, just 20 per cent of the maximum, earned during the marriage. Those two benefits total $6,543.
Add in her investment income of $15,970, and she would have total annual income of $22,513, Mr. Moran calculates.
If Lydia works to age 65 and allows her savings to grow five more years, then she would have $373,745 in capital. That would boost her sustainable investment income to $20,840 a year. Adding in CPP based on payments beginning at age 65, as calculated, plus Old Age Security benefits of $6,204 a year, she would have $33,587 before tax, the planner notes.
The largest part of Lydia's financial future depends on how she invests her share of her husband's pension and eventual severance pay. Federal pension regulations require her to withdraw the money, Mr. Moran says. Yet Lydia's odds of achieving a return as high or as risk-controlled as those of a pension fund are poor. She will have to take her ex-husband's pension money into a locked-in retirement savings vehicle or use it to buy a life annuity.
An annuity could guarantee income for as long as she lives, but only at the cost of giving up hope of pacing inflation. If Lydia rejects an annuity and elects to manage her own money and then lives a day past 90, then she would be broke except for her public pensions.
If she chooses to invest on her own, she should reduce risk of loss by maintaining about 55 per cent of her financial assets in high-quality bonds or a bond fund or bond exchange-traded fund. Her stock portfolio should emphasize diversification and, if she uses mutual funds, reasonable fees. A professional manager might be willing to take charge of her portfolio for a fee of 1 per cent or less a year, Mr. Moran notes.
"Lydia has come out of her marriage financially weakened, but she has time to fix her finances and have a dignified retirement," Mr. Moran says. "What is essential is that she control her risks and not overpay for asset management."
"This analysis helps me see what is ahead," Lydia explains. "The clarity is important. Just as importantly, I see that my future will be brighter."
The Person: Divorced mom with a teenager at home
The Problem: Raise income and invest assets from former spouse
The Plan: Plan low-risk investments and seek professional asset management
The Payoff: Adequate funds for child's education, comfortable retirement
Monthly after-tax income: $4,110
Assets: Half husband's pension $270,000; Half future severance pay $22,000; Savings account $4,325; Cash settlement for legal fees $7,650; Total: $303,975
Rent $1,400; Utilities $640; Food $900; Bus $80; Ins: Medical, life & home $170; Entertainment $50; Gifts, charity $100; Clothing $130; Pets $140; Education $100; Misc. $200; Savings $200; Total: $4,110
Liabilities: Legal fees $7,650
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