Woman on the Edge – a Boomer Finds her Financial Footing after Divorce
Judy sat alone in the kitchen nursing a cup of tea. The dark night of the soul. Aged 47,after 20 years of marriage, she and Ron were finished; divorce discussions were well underway. Losing Ron is one thing – but losing a second income and doing all alone is terrifying. What will it cost to put the kids through school, even continue to eat? Could she even afford the house, or should she sell it? Where would they live then? How long will she be kept on at work? Where will she find the energy to be a support to her parents.And retirement – Good Lord, who could even think that far ahead? A bag lady in a parking lot – was that her future?
The traditional definition of family is changing in Canada, with four in 10 first marriages ending in divorce, as reported in the 2006 census. For the first time in Canadian history, there are more unmarried people than legally married people. The percentage of Canadian marriages in a given year that will end in divorce before their 30th wedding anniversary has increased slightly from 36.1 per cent in 1998 to 37.9 per cent in 2004. Divorce rates peak in the 55-60 age group, and with severe financial consequences; by age 60, women earn one-third less than men their age. Add that to women’s propensity for living longer, their reduced earning power, shorter careers and multi-tasking to care for children and aging parents, it’s a gloomy outlook indeed.
Not necessarily, says Mary Robertson who has counseled numerous Boomer-aged women through this experience, and has a wealth of valuable advice. She outlines a basic, comprehensive approach:
Get your Bearings
Grit your teeth and haul out all the bills, receipts and paperwork. Fold a sheet of paper and get started.
What is your income from salary, child credits, child support – write them on one side of the paper. What are your expenses, from mortgage or rent, child care, car payments, gas, utilities, groceries, credit card payments – write them on the opposite side.Add them up – does the money coming in total more than the money going out? If not, the shortfall means you have a negative cash flow.
What are your assets –home, car, other valuables. What are your liabilities – mortgage, loans, credit card debts. Total them both; assets minus liabilities equal your net worth. If it’s a negative number, you have a deficit.
Don’t panic. Pick up the phone and call a financial advisor – see the sidebar for researching and choosing one – make an appointment, and take your paperwork with you.
Why share this intimate information with a stranger? A professional can remove the emotion from the situation and help you see things more calmly. They have experience with your situation – and usually far worse – and can apply a structured process that resulted in success for others. They can partner with you to keep things in perspective. You may indeed be stuck – but you’re not alone.
There may be options to enhance your cash flow with additional income. Divorce settlements must include child support and contributions for major expenses such as education; these should be pro-rated in accordance with each partner’s income, so the spouse making more income will contribute more. One option may be spousal support for a period of time until a manageable plan is put into place, or a plan for the wealthier to assume some expenses, such as kid’s sports costs, for a period of time.
Develop a Plan to Regain Control
Create a spending plan – yep, like those financial makeovers shows – to track all outgoing funds, especially cash, for a month. Look at the patterns. You may discover the ‘latte factor’ of discretionary items that can be easily trimmed; others will take more discipline. Recognizing patterns and knowing where the vulnerable spots are help you gain insight into things like emotional spending, feel a sense of logic and allow to exert some control.
Face up to Debt
Look realistically at your debt – many people are too ashamed to even open their credit care statements. List all debts, including their interest rate, and pay off those with the highest interest rate first. Take advice on consolidating debt into a single low-interest loan, secured by the equity in your home. If a debt is tax-deductible – such as a small business expense – pay it off last, since you can deduct it from income tax. Your advisor will have more ideas.
Don’t be tempted by the idea of declaring bankruptcy – the bankruptcy trustee works for the creditor, not you. Instead, approach a credit counseling agency that will work with your creditors on a manageable repayment program.
Take advice when it comes to saving strategies. For example, you may hold RESP contributions as sacred to your child’s future; in fact, you may be in such a low-tax bracket that the tax savings are minimal compared to the interest being paid on credit card debts. You’d actually be more financially responsible by using the funds to pay down debt.
By paying down debt, you are actually saving for your future. Again, be realistic in your outlook – if you are in a low tax bracket, the tax savings of an RSP or Tax-Free Savings Account (TFSA) may be far less than the interest being charged on your credit cards – pay down the debt first.
It may seem like heresy, but your home is not generating cash flow and you’re likely house-rich and cash-flow poor. If you are working and at your peak income, you could take out a home equity line of credit and use it ONLY for emergencies, such as a catastrophic illness. Having these funds available would prevent you from raidingthe savings you’ve earmarked for retirement. A multi-purpose product (Manulife One is an example) lends up to 80% on your home equity to consolidate and pay off debts and save interest; your advisor can suggest other products.
Planning for Retirement
An excellent place to start is Service Canada’s website, www.servicecanada.gc.ca / Retirement Planning to use the Retirement Planning Calculator. It guides you through what government benefits you would receive, and prompts for your CPP statement, financial information about your employer pension, recent RSP statements and statements for other savings income (annuities, foreign pensions; survivor pensions, etc.), resulting in a projected income flow for your retirement years.
For example, a woman retiring now would receive a maximum income of $9,945 CPP per year – much less if she had not worked full-time – and Old Age Security Benefits (payable to all Canadians over 65) of $5,661. She would be also qualifyfor guaranteed income supplements. Let’s say Judy’s divorce settlement included $42,000 in RSPs – invested at 4%, she’d have $1,600 per year, for an annual income of $17,000. Uh-oh.
‘But that’s not enough – don’t I need 70% of my current income?’ Once again, consult with your financial advisor. Let’s say the major expenses such as college fees, settle down in a few years. Revisit the spending plan again, looking for retirement savings, perhaps via a Guaranteed Minimum Withdrawal Benefit plan, that essentially lets you design a pension plan for yourself. These plans allow you to deposit into the plan; for every year you do not withdraw, a 5% deferral bonus is added, building up the fund. Other annuity plans, such as deferred income plans, allow deposits to accumulate until you define when you need the income.
Remember that at retirement – in 25-30 years – Judy’s house will be paid off; as a senior, her health care and medications will be subsidized; her children will be ‘off the payroll’ and she may even have received a small legacy from her parents. In fact, StatsCan reports that those earning the average national wage – $50,000 – retired successfully at 59% of their retirement income.
The good news for a Boomer woman is that she still has time to accumulate wealth for retirement, depending on her level of risk. All Boomers plan to work longer than the conventional 65, often starting new careers; deferring collecting CPP from age 65 to age 70 increases the eventual monthly payment by 42%. When transitioning from a long-time job to a ‘sunset career’, evaluate any company pensions and RSP plans – both yours and your ex’s. ‘If it’s a group RSP, take it with you’, advises Mary. If it’s a defined benefit plan, get professional advice on the transition.
Settling your Affairs
Be sure to review your Will, (marriage invalidates a Will); make a new one if your ex is either beneficiary or executor. Appoint reliable executors and Powers of Attorney for Property and for Care, including a Living Will outlining your advanced directives regarding care. Arrange life insurance, critical illness and long-term care insurance –now, before age or illness makes it too late to qualify. Suggest that your aging parents do likewise, making your own caregiving task a little easier. Be sure these documents are safely filed where they can be accessed when necessary.
And what about Judy? She took a very long time to seek help and stayed in a deep depression. It wasn’t until she heard her 16-year-old on the phone to a friend saying’ no, my mom can’t help me any more’ that she realized she had to pull herself together. She educated herself on financial basics, got a desk and set up a financial binder. Once the panic subsided she was able to, work with an advisor, take small steps and make reasonable requests from her ex to assist with life insurance payments, demonstrating a good co-parenting example for her kids.
Divorce and economic setbacks are daunting, but they are not a recipe for financial disaster and personal ruin. Facing up to your financial future is terrifying, liberating, a fantastic example to your children and ultimately, the very best reward you can give yourself – and no one can take it away.
Sidebar – Checking Out Your Expert
He or she may have rave reviews from friends – but before making an appointment, be sure they are:
– Paid on a fee-for-service basis, not commissions based on what they sell
– Using a third-party custodian for investments (not their own coffers); cheques should be made payable to the investment firm, not the advisor
– Governed by the codes of their professional accrediting body, such as the Investment Industry Regulatory Organization of Canada or Mutual Fund Dealers Association
– Registered to provide advice and sell investments with the Canadian Securities Commission at
www. canadiansecuritiescommission.com / Ontario Securities Commission – www.osc.gov.on.ca
– Clear of any issues with regulators:
– If they are licensed to sell stocks, ETFs or other individual securities (over and above just mutual funds) they are regulated by IIROC (Investment Industry Regulatory Organization of Canada) for disciplinary search or information request.
– If they are licensed to primarily sell mutual funds they are regulated by the MFDA (Mutual Fund Dealers Association) to check for any disciplinary hearings
And lastly, don’t forget your old friend, Google – just check them out online!
Photo Credit: SalFalko