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Things to know
Job: Collette is the project management director at a small management consulting firm. She likes her job well enough but would still certainly like to retire one day. Her husband is an elementary school teacher.
- Marital status: Married 26 years
- Children: 2 (ages 19 and 24)
- Purchase price of home: $650,000
- Current value of home: $800,000
- Mortgage remaining: $22,000
- Spouse’s salary: $90,000
- Vehicles: 2
Other notes: Collette’s son graduated from university last year with a degree in liberal arts. He has since moved back into the family home and isn’t sure what he wants to do for work. Lately he’s been talking about going back to school to get his masters. Collette’s daughter is in her second year of university right now.
Collette’s father-in-law passed away two years ago. Ever since then her mother-in-law has been hinting to Collette’s husband that she would like to move in with one of them. Collette is less than thrilled about this prospect.
The savings that Collette and her husband set aside for their children’s education is about to run out. Collette is considering dipping into their RSP to pay for her daughter’s last two years of school but she’s worried about the tax repercussions.
Collette’s son returning home has caused more financial strain than she was expecting. She wants to ask him to start paying rent, but worries that might be unfair given how tough the job market is for young people.
Collette and her husband are both willing to downsize their home to build a retirement nest egg, but how do you downsize when no one is moving out and people are trying to move in?
By the numbers
|Collette’s average income:||$90,000|
|Combined spousal income:||$180,000|
|Combined After-tax monthly income||$8700|
|Daughter’s university tuition||$1,150|
|Son’s living expenses (miscellaneous)||$300|
|Life insurance premiums||$100|
|Vehicle insurance, expenses, lease payments||$1,300|
|Phone/ TV / internet||$260|
|Meals and take-out||$350|
|Clothing, beauty etc.||$400|
Financial goals and dreams:
- Un-mortgaging the future- Collette is tired of making mortgage payments and would love to pay it off once and for all.
- The mother load – Collette would also like to set some money aside so that she andher husband could contribute to a nice retirement residence for her mother-in-law.
- Retire-meant to be or not to be? – Retirement didn’t used to feellike a dream! But now Collette and her husband wonder if that day will ever come. Will they ever actually be able stop working?
Q: This is certainly the most complicated case we’ve looked at in terms of relationships. Collette’s finances are largely dependent on her family situation and it looks like she has a lot of commitments to juggle!
A: Absolutely! This case is much more philosophical than the others. I feel guilty just talking about some of these issues because I don’t want to seem mean or as though I’m telling her to kick her family members out (laughing). It looks like Collette might have a lot of tough conversations in her future.
Q: Let’s jump right into that. Collette’s son has recently moved back home. Are there warning signs that your adult children are starting to damage your financial health?
A: Well first off let me say that her son living at home is not a problem. Parents in her situation don’t need to be booting their kids out of the house! But there could be an issue if she is still funding him at this point.
Even if he can’t find a job in his field, he could pick something up at a restaurant or coffee shop. It’s unrealistic to let him think that as an adult he doesn’t have to work and it’s important to teach him financial responsibility. It’s a tough conversation to have but it’s important to teach him independence.
Q: Charging adult children rent is always an interesting debate. Do you think that would be a good idea here?
A: Yes, in this case, I think Collette and her husband do need his rent for their own expenses and savings. But I’ve also had clients who don’t need the money. So they’ll just collect rent and then give it back to their children to help them with their down payment when they’re ready to buy their first home.
Q: That’s interesting, why do you think Collette and her husband need their son’s rent?
A: The first thing I noticed about Collette is that she’s 53 and thinking about retirement, but only has $55,000 in her RRSP. That’s much less than I would want her to have at this point, especially since she works at a small company where she likely has no pension. Right now I’d say she’ll likely have to work until 65 or 70.
Q: But Collette’s husband is a teacher. Won’t they be fine regardless just because of his pension?
A: Well, remember that once he retires his pension will only be about 60% of his income and then that amount is taxed. That will only leave about $45,000 a year for the two of them to live on. That will be a lot less than they’re used to.
Q: Honestly, I’m finding this all a little mind-boggling. Collette and her husband are making a combined $180,000 a year! That’s way more than anyone else we’ve analyzed so far. So why does it seem like they’re in trouble?
A: I think you’ve really hit the nail on the head! The reason is because it’s not what you make, it’s what you spend. We often see people with fancy cars and big houses and assume they must have a lot of money, but you never really know – they could just have a lot of debt. I can tell Collette is a caring person who wants to help everybody, but she needs to start putting herself first a bit more. It all comes down to a conversation about priorities.
Q: So where should Collette and her husband start? They’ve mentioned possibly downsizing their home.
A: They do have a fair bit of equity in their home so that strategy may help. But the good news is they only have $22,000 left on their mortgage, which they should be able to pay off in less than two years. They could focus on paying off their mortgage sooner. Having that extra $1,500 per month in disposable income will be huge for them.
Q: How about in the short term?
A: If I was Collette I might start by looking at the $400 per month she’s spending on clothing and beauty. Also, their “miscellaneous” spending is $300. It’s worth taking a step back to figure out exactly what those expenses are.
They could use some of this money to increase their long-term retirement savings (RRSP or TFSA). I’d also suggest investing their annual tax refund in their RRSP or using it to pay off their mortgage faster.
Q: Speaking of their RRSP. Collette is thinking about withdrawing from her RRSP to pay for her daughter’s last two years of university. Good idea or bad idea?
A: She should absolutely not withdraw from her RRSP. In her tax bracket Collette pays around 43% on her top dollar of income tax. If she were to withdraw $10,000 for her daughter’s tuition she would have to pay $4,300 in income tax on that money!
It might be best to ask her daughter to shoulder more of the load or take a student loan. But as a parent I can completely understand why she’d feel guilty about paying for all of her son’s university but not for her daughter’s education. If that’s the case, she could use the equity in her home to get a line of credit to pay for the rest of the tuition. Another option is to use the rent money received from her son to help fund the tuition payments (although I doubt her son would be happy about that).
Q: Finally, we need to talk about the elephant in the room. Where is Collette’s mother-in-law going to live?
A: Well obviously having her move into their house would be cheaper since retirement homes can be quite expensive. But on the other hand Collette doesn’t seem to want to live with her mother-in-law either. Since the amount in Collette’s retirement savings is so low, she really needs to think carefully about this decision.
It also depends on her mother-in-law’s financial situation and her reasons for wanting to move in. Is this a money issue or is it a loneliness issue? How is her health? These are all important factors.
Final recommendations for Collette:
- Increase mortgage payments to pay it off faster
- Build up savings! Look at the budget and determine wants vs. needs. Start contributing more to retirement savings and possibly contribute annual tax refunds into RRSP or TFSA.
- Encourage her children to make the jump to financial independence to help take the pressure off
Lyn’s Bio: Lyn Greer is a Chartered Accountant and independent Certified Financial Planner with Investment Planning Counsel in Richmond Hill, Ontario. She is a past member of IPC’s National Advisory Board and has also volunteered on the Financial Standards Planning Council. Lyn’s specialty is in comprehensive tax planning which is a key focus of her wealth management approach, alongside cash flow analysis, disciplined savings, insurance, and estate planning. You can contact Lyn or learn more at The Greer Team’s official website.
Eric has an extensive background in content marketing and professional writing. He loves to write about personal finance and life insurance issues for the Lifenotes blog because he enjoys the challenge of making complicated topics fun for readers! Eric also covers community outreach initiatives.
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