Anne wonders if declaring bankruptcy might help her retire. Here’s what the experts say
Published Jun 22, 2023 • Last updated 6 hours ago • 5 minute read
Baby boomers are the generation most likely to divorce. Anne, at 61, is trying to navigate her later life split. Photo by Getty Images/iStockphoto Divorces are occurring at increasingly older ages, with baby boomers the most likely generation to split. Divorce rates for people under age 49 have dropped over the past 30 years, according to Statistics Canada, but they’ve increased for people 50 and older. In 2022, more than 430,000 Canadians between the ages of 60 and 64 were divorced, which is higher than any other age group.
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Access articles from across Canada with one account. Share your thoughts and join the conversation in the comments. Enjoy additional articles per month. Get email updates from your favourite authors. Anne is in the process of finalizing a costly, years-long divorce and preparing for a fresh start. The 61-year-old lives with her two young adult children in Edmonton and is thinking of ways she can put her entrepreneurial experience to work to help her eliminate debt and allow her to pursue a writing career.
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Until then, she is earning about $110,000 a year by working full time in health care, a job she started in 2017 after selling her business. To help pay the bills, she recently started taking extra overtime shifts.
“I have no idea how retirement is even a possibility for me,” she said.
Anne’s past legal fees cost close to $800,000, which wiped out her savings. She has managed to pay off all but $65,000 and retained her credit rating, opting not to declare bankruptcy.
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“The bank believed in me and showed me they had the utmost confidence in my ability to rise above the situation,” she said. “They put their money on me to win. For that, I am forever grateful.”
Now, however, as her peers are preparing for a retirement she can’t envision for herself, she wonders if she should reconsider.
“Would declaring bankruptcy be the wise thing to do?” she wondered.
Anne is thinking about selling her current home, which is valued at $425,000 and has a $275,000 mortgage, and purchasing a property with some form of income potential. She has $100,000 in unused capital losses from the sale of her business.
Ultimately, she’d like to work part time in health care and spend more time writing. She has already started picking up freelance writing projects. She’d also like enough money to go on an annual vacation for a week or two and have some kind of inheritance to leave for the kids.
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Article content “I’d like to get out of debt and pay off my house ASAP,” Anne said. “What should I concentrate on first? Maximizing registered retirement savings plan (RRSP) contributions to get a maximum income tax return each year, paying down debt or paying down the mortgage?”
She also wants to know if it is advantageous to buy a property that can simultaneously provide a home and income by renting out a basement suite, detached garage, campsite, Airbnb, RV storage, etc.) Or would it be beneficial to start a small business and use the capital losses?
Anne would also like to know when she should start drawing Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. Knowing that she will continue to work, she believes it may make more sense to start CPP sooner rather than later.
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Article content What the experts say Yes, Anne can retire or at least semi-retire, but the next 10 years will be critical, so she needs to start saving now, said Eliott Einarson, a retirement planner with Ottawa-based Exponent Investment Management.
“Retirement is about two things: income needs and cash flow,” he said. “It is really the same as in the working years, except in retirement, the cash flow is passive, and this is where she should focus now: building and maximizing potential passive cash flow for her future.”
That said, given the 12-per-cent interest she is paying on her credit-card debt, Einarson believes Anne should refinance and pay this debt off first and then focus on growing her RRSP and tax-free savings account (TFSA).
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Article content Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, agrees and points out there is no need for Anne to declare bankruptcy because she has enough equity to get an unsecured credit line of $65,000, which should cover her credit-card debt.
A credit line at 7.45 per cent today is $600 per month instead of the $1,000 Anne is currently paying — a savings of $400 a month. This, plus her existing cash flow should provide an extra $1,000 a month she can use to start saving.
“When the mortgage comes due, she can roll the unsecured line of credit into her mortgage,” Rempel said. “This will likely save her an additional $100 a month or so.”
He recommends Anne save all she can inside an RRSP.
“An RRSP is most effective since she is in a 30-per-cent marginal tax bracket now — slightly into the 36-per-cent bracket — and expects to retire in the lowest 25-per-cent tax bracket,” he said. “Contributing $1,000 a month to an RRSP should give her a tax refund of $3,500, which she can also contribute to her RRSP each year.”
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Article content To retire at age 70, Rempel said Anne has to contribute $2,000 a month to her RRSP plus her tax refund of about $7,000 each year. A side business that clears $1,000 a month will help get her there.
“She will need to have saved $725,000 in balanced funds yielding five per cent per year, or $575,000 in equities yielding eight per cent per year,” he said. “This, along with her pension, will allow her to generate $72,000 a year to maintain her existing lifestyle and provide $2,500 a year to travel.
Both experts agree that starting a business and/or buying property that can generate an income is a good idea if the price is right and the income potential is sufficient.
“Transitioning to a writing business and income property is a way for Anne to prepare for future passive income, especially if she can continue her current work for a few years,” Einarson said. “The bonus is that this is a transition to something she enjoys.”
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Article content He also recommends Anne defer her employer defined-benefit pension, CPP and OAS to age 70 to maximize those benefits and give her a larger income base that is secure and fully indexed.
Rempel agrees with this strategy if Anne invests in balanced funds.
Looking for the right strategy to draw down retirement income Early retirement a dream for couple who want new Vancouver home The high cost of playing it safe when retired with teenage kids “If she’s an equity investor, she should start her CPP now and invest all of it into her RRSP,” he said. “Her higher return investments should give her more retirement income than deferring the CPP.”
*Names have been changed to protect privacy
Editor’s note: Worried about having enough money for retirement? Wondering how to make ends meet today? Need to adjust your portfolio? Drop us a line at aholloway@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a story about it (we’ll keep your name out of it, of course).
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