Chatelaine, Caroline Cakebread
Every week, financial expert Caroline Cakebread answers your money questions. Read on for her advice and send in your personal finance queries.
Q: I am a 38-year-old woman, with no children. My question is will I have enough to retire? It does not seem so right now so how do I put an effective plan into place? Here is what I’m dealing with: I own my own home; my current income is $48,000 per year (after taxes); I have a bank loan with $20,000 remaining on it which I plan to have paid off by December 2008; My credit card debt is about $4000; I have $45,000 in RRSPs and I am not currently contributing to it; I have $25,000 in investments (I am saving $600 per month); I own my own business and would love to retire by 55. I would love to spend my time traveling around the world.
A: Great question. It seems like all those mutual fund companies advertising “freedom 55” show happy people sitting in European cafes and water-skiiing enjoying life without work. But they don’t ever seem to advertise how much you actually need to save to get there. I’ll get to the retirement side of your question in a moment, but I’d first like to deal with the debt part of your financial situation. To help, I turned to Cynthia Kett, CA, CFP, and principal of Stewart & Kett Financial Advisors Inc., an advice-only financial planning firm in Toronto. Kett is concerned about the high pre-tax rate you’re paying on your credit card debt and bank loan — these, she says, are likely very high assuming you’re not deducting them as liabilities (i.e., they’re not incurred for business or investment purposes). Let’s also assume that your non-RRSP investments are earning a lower rate of return than the pre-tax cost of your debt. If that’s the case, Kett recommends that you sell $24,000 of your portfolio to rid yourself of your credit card and bank loan debt.
As Kett explains it “If your after-tax income is $48,000, your marginal tax rate is around 33 percent, depending on your province of residence. Therefore, credit card debt of 20 percent would cost almost 30 percent pre-tax and an equity line of credit of six percent would cost about nine percent.”
Once you’ve wiped out your debt, it’s time to start thinking about your retirement future. And to do that, you need to estimate how much you have to save between now and age 55 to retire in the style you’d like to. Kett advises that you ask yourself a couple of key questions: How much do you wish to spend each year? And what rate of return will you earn on your RRSPs and other investments between now and then? These questions can be tough to estimate on your own, so it’s advisable that you seek the help of a qualified financial planner to help you through the process, especially if you’re not a savvy investor. Once you’ve got that magic number and you know how much you need, then you’re ready to save. The secret says Kett, is to “save as much as you can without starving yourself financially. Much like a diet, you can’t give up everything you love.” If you do, you might end up tossing the whole plan out the window. Instead, she notes, make your goals manageable, with weekly or monthly savings targets and pre-authorized withdrawals from your bank account to your RRSP and/or your investment account to stay on track.