Free songs

Single blog// see post details

A little market savvy

  • 2042 Views
  • /
  • 0 Comments
  • /
  • in english
  • /
  • by Admin

Woman’s huge debts and costs of paying child’s tuition make it impossible to retire with desired income Use line of credit to pay high interest debt, economize to boost savings, retire with adequate income. The first move is the easiest — consolidate the $10,600 credit card bill with its sky-high interest rate, 19.99% per year, into her present home equity line of credit. The HELOC has a $70,000 balance and costs her $300 per month to service. She would save $2,120 a year in interest charges on the plastic but have to pay about $35 more per month on the HELOC. Priscilla has not made this obvious move because, she says, she prefers to keep the concept of the credit card separate from the idea of the line of credit. The home mortgage carries an interest rate of 3.95% and the HELOC loan a rate of 4.0%. The same security, her house, covers both. For the purposes of the analysis, they are one loan. The problem is to find money to pay off the combined loan, which will be about $240,000, in nine years. It will not be easy. Priscilla spends all of her income. Were it not for the $1,000 per month she receives for renting garage space, an arrangement not covered by a formal lease and which may not be renewed by the car owners, she would run a deficit, Ms. Nalbantoglu notes. If Priscilla can cut her $600 a month food bill by perhaps $200 and her other expenses by another $200, she can save $4,800 a year. The car loan, which costs her 0.9% on an annualized basis — less than the current rate of inflation — will be paid off in the normal course in 2½ years. The $367 she allocates to the loan each month can then go to savings at $4,400 a year. Finally, her daughter’s tuition and other university expenses, $542 a month or $6,500 a year, will end within six months. That sum can then be saved. Total savings will be $15,700 a year. If these monies are added to her present mortgage paydown at $16,152 a year, a total of $31,852, she would be mortgage free in about six years at age 62. The exact timing will depend on interest rate changes if any when she rolls her loan next year and lender’s pre-payment penalties. She would still have her home equity line of credit to pay off. If she continues to use the $31,852 payments, the HELOC would be eliminated by age 65. Retirement income In retirement, Priscilla has aimed for a pre-tax income of $65,000 a year. In fact, her pre-tax income will be based on a company pension plan generating an estimated $18,300 a year at age 65. On top of that, she will have $6,612 in Old Age Security and $12,000 annual Quebec Pension Plan benefits. The total, $36,912 will leave $31,000 after 16% estimated average tax. If she can still rent her garage for $12,000 a year, she would have total pre-tax income of $48,912 and Alady we’ll call Priscilla lives in Quebec. At age 56, she is in a quandary for her debts are 3.9 times her annual take-home income. She has no spare cash at the end of the month and no idea of what to do. The facts are as straightforward as her dilemma. She owes $253,844 on her mortgage, line of credit, car loan and credit cards. Her annual take-home job income, $52,800 plus rental fees she gets from leasing a garage to neighbours, $12,000 a year, leaves her with total take home income of $5,400 a month — just enough to cover her expenses. She would like to retire with $65,000 per year after tax. It will be a struggle even to get near that figure. What has driven up Priscilla’s debts are the costs of putting her two daughters through university after they exhausted their education savings and maintaining payments on her $160,572 mortgage and $93,272 of other debts. Before she can retire, she must reduce the lot drastically. Family Finance asked Caroline Nalbantoglu, head of CNal Financial Planning Inc. in Montreal, to work with Priscilla. “The problem in this case is that there is no financial surplus to use to accelerate paydown. She must generate a surplus over what she now spends. If not, her $160,572 mortgage and her other debts will not be paid off when she is ready to retire.” $41,806 after tax. She would be far from her income target, Ms. Nalbantoglu explains. At age 71, Priscilla’s RRSP, which has a present balance of $130,000, would have a value of $162,000 with the very conservative assumption, based on its present structure, that it grows at just 1.5% per year, that there are no further contributions and that there are no withdrawals until age 72 when, under regulations, she would have to take about 8% or about $13,000 as income. That would push her total income to $61,900 before tax or $49,900 without the garage rental. Allowing for average taxes of 20% with the garage still rented at $12,000 a year or 15% if not, her after-tax monthly income would be $4,126 a month with garage rental or $3,534 without it. With no debt service charges, though she would not be able to meet her initial retirement income target, she would have a surplus of $1,055 with no garage rental or $1,647 with continuing rentals over present expenses with all debt service, retirement savings and tuition removed, the planner says. Priscilla can, in fact, do more. She has been a passive investor in a rather negative way, accepting advice from her bank on what to do with her RRSP investments. The result is a poorly allocated batch of equity funds with relatively high management fees, balanced funds with fees sufficient to eat up most of the interest they produce on their bond content, foreign content with even higher management fees. She has too much equity exposure in growth type funds and too little fixed income in funds holding investment grade corporate bonds for her age. Her small RRSP contribution of $83 per month should be switched to a taxfree savings account, the planner adds. The cure, of course, is for Priscilla to invest time in studying capital markets. It is not necessary that she become conversant with corporate accounting or even pick stocks and bonds. Rather, she needs to be able to judge the performance she is getting and to understand the criteria for making various investment decisions. If she can learn to evaluate her managers, chances are she can enhance the performance of her portfolio and improve her own prospects for having a comfortable retirement.