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Facelift for Saturday, March 27, 2010.

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Betty and Archie face a prospect most people dread and not everyone can resolve: They're approaching retirement with too much debt and too little income.

Archie, who is 59 going on 60, has been collecting disability insurance of $57,800 a year for the past several years. But the insurance will run out when he turns 65 in five years and his income will decline.

"Returning to work is not an option for health reasons," he writes in an e-mail.

Betty, who is 58, retired from her teaching job eight years ago and gets a small pension of $2,900 a year.

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Their house near Halifax needs $40,000 worth of repairs soon and they also need a new car. They have a mortgage of more than $90,000 and a line of credit surpassing $40,000. What they need most, Archie writes, is to "establish an affordable lifestyle."

We asked Norm Collins of Collins Financial Consulting in Dartmouth, N.S., to look at the couple's situation.

What the Expert Says Archie and Betty do not live a lavish lifestyle, Mr. Collins notes. After debt payments, property taxes, insurance and utilities they live on less than $25,000 a year. While any cut in their spending would further their goal of wiping out their debts, they simply don't have enough money to do so before Archie retires in five years.

As it stands now, their annual expenses of $57,100 are easily covered by their income of $67,200 with $10,100 to spare. But when Archie retires, they will face a shortfall - money that would have been used to pay off their debts.

When Archie retires in 2015, his disability payments will be replaced by a defined-benefit pension from his former employer of about $23,500 a year, Canada Pension Plan payments of $12,400 and Old Age Security of $7,000, for a total of $42,900. That, plus Betty's pension of $3,000, will give them a household income of $45,900. (All figures are adjusted for inflation.) The shortfall will be offset if Betty begins collecting her CPP when Archie retires in 2015, adding $4,900 to the family income, which will boost it to $50,800, Mr. Collins notes.

Their expenses will fall, too, because their income taxes will be lower. Mr. Collins assumes expenses of $54,200, for a final shortfall of $3,400 a year, which will have to come from Archie's locked-in retirement account.

Archie and Betty are simply going to have to learn to live with their debts for a while longer, Mr. Collins concludes. Not only will their current debts still be there, but they will have to add to them to repair their house and buy a car.

"To help the situation, Betty, a teacher, may want to consider doing some substitute work to add to the household income," he suggests.

The amount of tax being withheld on Archie's income is greater than necessary, which could lead to tax refunds that the couple could use to pay down their mortgage, which is the debt with the highest interest rate, Mr. Collins says.

When it comes time to renew their mortgage in 2012, the couple will need to borrow more money to finance the house repair and the car purchase, pushing their debt load up again.

Still, the situation is not hopeless. Archie and Betty could have their mortgage paid off by 2021, after which they could focus on the line of credit, paying it off by 2024, when Archie is 74. The forecast assumes the prime lending rate will rise to 4.5 per cent by the end of 2012 and inflation of 2.25 per cent.

There are other alternatives, Mr. Collins points out. Archie and Betty could sell their house and buy a less expensive house or apartment. They could sell one of their cars, buy a less expensive used vehicle instead of a new one and do only the house repairs that are absolutely necessary.

"These are quality-of-life decisions that need to be considered in the context of their comfort level with their debt."

When Betty and Archie look at the situation in terms of their net equity, "the situation is not so bad," Mr. Collins says. He figures their house will appreciate in value by 2.25 per cent a year, in line with the rate of inflation.

"Net equity is forecasted to consistently, albeit slowly, increase, surpassing $250,000 in 2020 and $300,000 by 2024." In the meantime, close management of their expenses will allow the couple to maintain their existing lifestyle.

Client Situation

The People:

Archie, 59, and Betty, 58.

The Problem:

Carrying too much debt, major expenses looming and an inability for Archie to work due to a disability.

The Plan:

Manage expenses, minimize major purchases, consider downsizing the house or part-time work for Betty; accept the lengthy time frame to retire all debt.

The Payoff:

Assurance that with the passage of enough time, they will pay off their debts and their net equity will slowly grow.

Monthly after-tax income:

$3,765

Assets:

$229,000; registered investments (LIRA and RRIF) $80,800; Total $309,800

Monthly disbursements:

Mortgage $600; line of credit $155; property taxes $190; home maintenance $38; heat and power $347; water $45; phone, Internet and cable $262; vehicle insurance $202; house insurance $47; life insurance $145; gas $224; vehicle maintenance $125; groceries $600; restaurants $55; clothes $50; gifts $50; dog $83; gym $55; camping $158; household and other $334. Total $3,765

Liabilities:

Mortgage $90,600; line of credit $40,400; Total $131,000

Special to The Globe and Mail





The Invest for Life series:

  • Part 1: Ten money tips for young people
  • Part 2: Ten money tips for people entering the work force
  • Part 3: Getting married? Ten money tips
  • Part 4: Having kids? Pull out the wallet and get set to invest for the future
  • Part 5: Married, with kids? Ten investing tips
  • Part 6: Financial tips as you climb the financial ladder
  • Part 7: Preparing for retirement: 10 tips
  • Part 8: The retirement years: 10 financial tips

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