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March 8, 2019 | Better Than Never

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Life doesn’t always go according to plan. Then, one day, too late. No time to recover. Too old to advance. Too little tucked away. Aging sucks. There’s no defence. “I’ve been reading you for years while recovering from some hits from job loss, death in the family and illness,” Ann writes me. “Now hubs (70) and I (64) are trying to figure out what to do next. “

Money won’t turn back time, but it sure makes the days more comfortable as they fly past. Let’s see if we can help her.

“He still works full-time and commutes nearly an hour each way. An unexpected chronic illness took me out of the job game 2 years ago. We have $55,000 in RRSPs and a mortgage of $150,000 (home valued at about $250,000). Debt of $30,000+-. His salary is expected to be about $90,000 for the next few years. He hopes to stay full-time til the end of 2021 and then work part-time for 2 years if his health holds.

“His OAS is $600 (although he will only see about $40 of it after tax this year), his CPP is $840. My CPP is $400. Debt pay down is our focus and we are hoping that $30,000 will be paid off by the end of this year or early next year (there’s a sales and commission component to his job, so hard to know exactly what it will be). Our projection is having no debt but the mortgage when he retires, and about $120,000 in savings/TFSAs plus the $55,000 in RRSP’s. Mortgage will still be around $130,000 and currently the monthly payment is $760 – far cheaper than even a one bedroom crack shack rental. It’s up for renewal in 2022.

“Not sure what to do with the RRSP’s or saved cash, other than switching it to TFSA’s so withdrawals aren’t counted against GIS, which sadly, we will qualify for and will  need. Would love thoughts about how seniors who aren’t going to be retiring with hundreds of thousands have managed. Thank you, Ann in Anticipation”

First, a word on how badly most people have managed their finances. According to StatsCan, the average after-tax senior income in 2016 was a lousy $27,600, of which the lion’s share ($17,700) came from the government. For senior couples, the total income was $58,300, with about $28,000 in government transfers.

What does this tell us? Three things. (a) Corporate pensions are scarce, inadequate and piteous for most people. Those group RRSPs run by some fruity life insurance company just don’t cut it. They provide a false sense of security, then fail to deliver livable savings. (b) Nobody can make it on public money. Those programs were never intended to support people, just supplement. And (c) we’re saving and investing too little. Obviously. The stats are regularly published here. Four in ten are one paycheque from disaster. And an equal number pay no income tax. How is that sustainable as a society?

Back to Ann & hubs. Hubs is commuting like a fevered 30-year-old and if he gets sick, they’re screwed. The best-case scenario is as Ann presents – pay down debt by retirement, save another $120,000 (sounds ambitious) then maybe find part-time employment. In that instance their government income of $1,840 a month could be augmented by investment returns of $875 a month (6% on $175,000) for a total of $32,580.

To accomplish that, almost all of the savings need to be stashed into TFSAs, so the income stream would not affect the pogey payments. No GICs or high-interest savings accounts, either. The money would have to be invested in an ETF-based portfolio providing reasonable growth. Or they will run out.

Doable? Of course. Maybe. If he holds out. If the car doesn’t die. If he keeps the job and isn’t the victim of an ageist Millennial (ageism is the only discrimination still freely tolerated).

What of the house?

Well, it doesn’t cost $760 a month. Add in property tax and insurance (at least $300) plus the equity of a hundred grand generating nothing (a cost of $500 monthly), and the real estate has overhead of $1,560 (plus maintenance). That amount might rent you a better place in the hood. Have you researched it, Ann?

The key point about the house is debt. The mortgage is $150,000 now and will need to be renewed in three years, possibly at a higher rate. Given your low retirement income, odds are one of you may die before it’s retired. If you sell and add the hundred grand to your portfolio, overall income will increase to just under $40,000. Still no picnic, but your debt will be zero and you’ll have $275,000 in liquid assets to help deal with whatever life throws. Renters? Yeah. But owing nothing and having liquidity are big plusses as the clock moves forward.

No recommendation here, Ann. You and your husband have had six decades to prepare for this time, and the paths forward are now limited. If the house is more important than increased income, freedom from debt and liquidity, so be it.

Thank you for making others think. May your choices be wise.

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March 8th, 2019

Posted In: The Greater Fool

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