In Toronto, a registered nurse we'll call Penelope, 51, worries about retirement.
"I am feeling too old and burned out to work as an RN for much longer," she laments.
Quitting nursing will mean giving up a $40-an-hour paycheque, the top rate at her hospital. Moreover, her goal to travel the world, perhaps doing volunteer work in developing countries, could be costly.
"Are these realistic and reasonable goals?" she asks. "Can I afford to leave nursing? And should I buy a condo now and take advantage of today's low interest rates?"
What our expert says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Penelope. "It would appear that she is caught in what she feels is an unsolvable dilemma. The opportunity to help people is what drives her, but the 12-hour shifts day or night are killing her."
But Penelope does have choices, Mr. Moran says. She has financial assets of $625,382 and just $4,164 of liabilities. She earns $50,000 a year and receives child support of $69,600 a year taxable. The payments are for her children ages 19 and 17. When the elder child reaches 21, payments will be cut in half and will end when the younger child reaches 21 in 2013. At that time, Penelope will be 55.
Looking ahead, it is clear that Penelope will need to slim down her expenses if she wants to get by on $38,000 annual after-tax income from her job.
Currently, her expenses are inflated by money she spends each year looking after her children. Her $347 monthly payments for her 2005 compact car will end in a year. She incurs other car expenses that include $804 a year for car maintenance, $1,200 for gas and $2,688 for insurance. Selling the car in a city with excellent public transit would save $4,692 a year just in operating costs. Add in parking and other costs and the savings would be higher, Mr. Moran says.
Penelope sold her house a year ago but is considering buying another home. Buying a condo would compromise her wanderlust, Mr. Moran notes. Moreover, when her children leave home, her housing needs will change. It's probably too early to buy a home, he advises.
Rather than investing in real estate, Penelope should use her savings for RRSP contributions, as she has been doing. She put $27,500 into her plan in 2008, using up some available contribution room. For 2009, she has $13,320 of contribution space. She should use it, for her employment pension will be modest.
She has worked in the Canadian hospital system for only two decades, much of that part time. She should be eligible for half the maximum Canada Pension
Plan (CPP) payout of $10,905 at current rates or $5,453 a year. She will also be eligible for Old Age Security (OAS) based on 35 years of residence in Canada when she is 65. At that time, she would receive 88 per cent of the maximum $6,204 or $5,460. Her total public pensions at age 65 would therefore be $10,913 a year, Mr. Moran estimates.
In addition to these pensions, Penelope will receive a Hospitals of Ontario Pension Plan benefit of $576 a month or $6,912 a year plus a bridge of $103 a month or $1,236 a year payable until the earlier of death or age 65. Her total would be $8,148 a year.
Penelope's RRSP, currently $253,654, should grow with contributions and investment returns. If she adds the maximum 18 per cent of $50,000 or $9,000 a year and grows the portfolio at a real return rate of 3 per cent a year, it will have a value of $425,140 by her age 60. If she were to spend these funds over the next 30 years to her age 90, her capital would support an annual inflation-pacing income of $21,060 a year in 2009 dollars, Mr. Moran estimates.
If Penelope buys a home, she would have to use up some or all of her $371,728 non-registered cash, currently invested in GICs. However, if she were to invest this money in a financial asset with an annual 3-per-cent real return, this capital would grow to $453,133 by her age 60 and support further payments of $22,455 a year to her age 90, the planner says.
Penelope's choices therefore break down as follows:
If she quits work at age 60, she will have $8,148 of employment pension income, including her $1,236 annual bridge to age 65, and $21,060 from her RRSP for a total of $29,208 a year.
If she invests her non-registered money instead of purchasing a home, then at age 60 she would add $22,455 from non-registered capital for a total of $51,663 a year. If she buys a house at age 60 with the non-registered funds, her pretax income would fall to $29,208 per year.
At age 65 with no house purchase, her income would rise with her OAS and CPP benefits, but she would lose her bridge of $1,236, for total income of $61,340.
What to do? "This is a case in which renting makes sense for a few years," Mr. Moran says. "Once her children are independent, she will be free to choose to buy a home or to travel the world, though her means will be limited."
Toronto nurse, 51, burned out and seeking a new life of travel
Whether to buy a home or save money and travel more
For now, rent, build capital and boost retirement income
More money for travel, fewer anchors holding her back
MONTHLY AFTER-TAX INCOME:
$6,770 (incl. $3,770 after-tax child support due to end in 2013)
RRSP $253,654; Non-reg. $371,728; Total: $625,382
Rent $1,629; Food $500; Parking $135; Storage $27; Car payments $347; Utilities, cellphone $322; Car insurance $224; Car maintenance $67; Gas $100; Parking at work $50; Laundry $100; RRSP $300; Clothing $150; Entertainment $350; Travel $416; Charity & gifts $97; Children's needs (sports, recreation etc. until end of support pmts in 2013) $1,556; Misc. $200; Saving $200; Total: $ 6,770
LIABILITIES: Car loan outstanding: $4,164