Advisor analysis – Sterling Rempel

It is regrettable that Sheila’s husband died without a will…and it could happen to her. Does she have a will, an enduring power of attorney and a personal directive? If she became incapacitated, would her son have the authority to deal with her affairs? I would deal with those issues quickly.

The next matter of concern: if Sheila continues to spend at the same rate she has in the past, she’s going to drive herself into a ditch financially.

Most people’s first thought when dealing with a cash shortfall is that they’re going to have to reduce expenses. But there may also be some opportunities to increase income. Sheila’s $40,000 salary sounds low. She should consider shopping her services around to other firms or even within her own firm to get a higher-paying job.

She also has a house that now has one person fewer in it. She could rent out a portion of the home, perhaps to a medical student like her son. Picking up some rental income would help her pay off the mortgage.

Sheila could look at selling the house and taking those proceeds and buying a condo, but in many markets across Canada she might not be saving much money.

I wouldn’t recommend a reverse mortgage on Sheila’s home. She may see only the benefits: specifically that she would be able to stay in her home until she dies or sells and still receive up to 50% of the home’s value. And in the interim, she wouldn’t have to make mortgage payments or pay any interest or principle.

The problem I see is this: if she moves out of the house (perhaps into a long-term care home) or dies, the entire principal plus accrued interest and service fees must be paid in full to the lender. Start-up fees and higher rates of interest make reverse mortgages more costly than conventional credit and mortgages. So, from an estate planning perspective, Sheila would be effectively removing the home as an asset.

A Home Equity Line of Credit (HELOC) would be a more flexible option. Sheila would have access to the funds she needs in the short term. She could draw on the HELOC or pay it down as she has funds, and ultimately her son would still inherit the remaining value in the home.

As it stands now, if Sheila doesn’t access the equity in her home and she retires today, she will have only $25,500 per year in after-tax retirement income until age 90 (assuming a 5% return and 2.5% inflation); that’s about only half of the target $50,000 per year she’d like to have in retirement.

By delaying retirement until age 65, however, she will allow her investments time to grow and have access to higher CPP payments, giving her an overall income of $42,000 per year to age 90. That shouldn’t be an untenable amount considering her expenses right now total about $42,000.

If Sheila wants to achieve 100% of her retirement income goal, though, she would have to delay retiring until age 70. Should she do that? I can give you the financial answer to that question, but what is the emotional answer? Only Sheila can say.

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