Higher education for kids means later retirement for mom | Family ...

Situation: Recently divorced woman has inadequate funds for family goals

Strategy: Divert savings to kids? RESPs, postpone early retirement

Solution: A secure but more modest retirement at 65

Can a single mom raise and educate three teenagers in B.C. on an average income and then retire in comfort at 60?

That?s the dilemma of a woman we?ll call Patricia, 52, who brings home $4,282 a month from a local government job and adds $800 in rent and $975 in child support for total monthly cash flow of $6,057. The rental payments, which are from a foreign student who boards with Patricia and her children, are so far only for the school year from September to June.

Patricia is far from financially strapped, for she has a net worth of approximately $611,600. But she is committed to supporting her children through university before she retires ? at 60 perhaps, when her youngest finishes a four-year university course, or as late as 65 if necessary.

Patricia is carrying the weight of her family and her own future. It?s a lot of responsibility

Her eldest child, 18, begins university next year. Next comes a 16-year-old, then the youngest, 14.

For now, there is $29,000 in their family?s RESPs. Patricia hasn?t been making additional contributions and her ex-husband is unwilling to support the education fund. Had the means been available and this family had been able to take full advantage of the RESPs by contributing $2,500 a year for each child, the Canada Education Savings would have chipped in with a 20% bonus of $500 a year.

But with that underfunded savings, the costs of educating her small brood could put Patricia?s retirement in jeopardy. She will have less on which to retire or will have to work more years. There is no alternative, for her income is not likely to rise substantially nor her costs, especially of debt service, to fall very much.

The average cost of a university education in Canada in 2011, according to Statistics Canada, was $5,138 a year plus $702 in compulsory fees. We can round it up to $6,000 a year. That?s a total bill of $72,000 for three kids each in university for four years. That leaves $43,000 to be paid before Patricia can retire.

Patricia is carrying the weight of her family and her own future. It?s a lot of responsibility.

?I have purchased a home for stability for the children and feel confident of my ability to meet the payments,? Patricia says. ?My goals are to see the kids through university, then retire and maybe try to live the snowbird lifestyle.?

Family Finance asked Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver, to work with Patricia.

?This is a tough case,? he says. ?Patricia wants to pay down the mortgage, help the kids pay university costs and then have a retirement income of $72,000 before tax at age 60. That income, after tax, would keep her on a level field with current expenses.?

Patricia already has a $369,000 mortgage and saves sporadically. The mortgage? costs $1,368 a month, or $1,568 including property taxes. The $1,568 sum is 37% of her take-home pay.

Therefore, for university costs, she can suggest her kids get student loans. She might also ask her own healthy parents, who may leave her and her kids with a substantial inheritance, to help with tuition costs. She should also encourage her children to apply for scholarships, grants and bursaries. They all have summer jobs and will contribute to tuition and other university costs.

Downsizing the house, a final alternative, would be a poor choice, especially if the kids live at home to save university costs, Mr. Mastracci says.

Enhancing savings

There are some things Patricia can do to boost savings or lower costs. She could extend her mortgage amortization by five or six years, but such a move would increase her leverage and exposure to interest-rate increases. She could also borrow against her home?s equity for the RESPs, which is much the same thing with the same risks.

The most realistic course for Patricia is to pay down the mortgage and lower her retirement income expectation to her $30,300 annual employment pension plus $11,840 Canada Pension Plan benefits at age 65 and $6,540 Old Age Security at age 67.

Her RRSP, if she makes no other contributions, could grow at 3% after inflation to $123,500 and then pay $3,700 a year. That would push her total retirement income to $52,380, or $47,142 a year ($3,930 a month) after 10% average income tax. Retirement before 65 would impair her savings growth, could force her to dip into capital, and require her to take a cut of 0.6% per month, or 7.2% per year, for each month prior to age 65 that she begins CPP benefits.

She can?t afford those cuts if she wants to maintain her present way of life in retirement, the planner says.

In retirement, she will have to trim present expenses by $2,100 a month to get by on her income. By then, with her food bill slashed by several hundred dollars a month, kids? activities expenses ended and other costs trimmed, she will be able to close the gap, the planner says. ?It will be tight, but she can make the plan work,? Mr. Mastracci says.
What is not in the offing is the snowbird plan.

?There is no money for her wish to be a snowbird,? Mr. Mastracci says. ?Patricia?s best bet is to make the most of what she has, trim expenses, get the kids through university and then accept that her retirement is going to be secure but far from what she had in mind.?

Need help getting out of a financial fix? Email andrewallentuck@mts.net for a free Family Finance analysis.

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Source: http://business.financialpost.com/2012/09/14/higher-education-for-kids-means-later-retirement-for-mom/

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