BC Man’s recent divorce has left his equity destroyed, cash flow negative, placing his future and retirement plans in serious jeopardy
In a high stress job, earning high income, paying maximum taxes and support while assigned unequal division of family debt by the courts has left him tied to obligations on a shoestring budget.
In British Columbia, a man we will call Charlie, 44, is a Senior Manager in a large corporation. Now single, 35% of his gross income goes to mandatory deductions including pension plan contributions, 41% of gross income is paid in support, 7% of gross income is repaying family debt leaving 17% of gross income for his living expenses and his future. The divorce has taken him from a net worth of $3.4M to a net worth of $1.3M now living on 43% of the average after tax income of households1 in his city.
His allocations for rent, car loan, fuel, insurance and groceries add up to $33,212.16 per year, $2,767.68 per month. He has $1.3M in assets locked in retirement savings and continues to contribute 7.5% of his income to retirement. He owes $91k in debt with servicing payments of $13,728 per year, $1,567 per month. A recent error by his employer in income tax deductions has left him with a $24k tax bill in addition to his heavy debt load. Charlie does not know what to expect from his Canada Pension Plan at age 65 due to a recent mandatory credit split following the divorce. His retirement assets should generate $92,879.52 per year, $7,739.96 per month in retirement income leaving him better off financially in retirement that in his next eleven years of employment.
Charlie’s career has become unstable as a result of the economic impacts of COVID. He has extensive experience within his company and industry to draw from and this loss of security places further strain on his financial future and goals. Charlie had hoped to obtain financial independence and retire early (FIRE) so he could enjoy years of travel and new experiences with his now x-spouse. Prior to the divorce he taken all the correct steps to achieve FIRE but he is now certain he must let go of this dream.
PAYING DOWN DEBT AND TAX OWED
Greg, from MisterWestCoastTM, was asked to work with Charlie. At 55 his base income from his pension should generate $92,879.52 per year before tax. His challenge is in reducing his debt load before retirement while saving for his daughters’ education. Charlie is not confident he will ever be able to own a home again but has always seen home ownership and travel as an important part of his life in retirement. Action and a new perspective are needed.
Charlie has made good decisions in keeping his expenses low shopping around for phone and internet service coming in at $2,222.40 per year, $185.20 per month. Utilities are included in his rent.
Charlie should begin by documenting all current debts including the cost of servicing these debts then prioritizing high interest revolving credit reduction first. He has already taken steps to eliminate use of credit cards for any future expenses by cutting all non-essential expenses. For income tax owed Charlie will negotiate a repayment plan that will allow him to pay his income tax in installments. In addition, he will apply any future income tax deductions to this tax bill.
Charlie’s earnings are strong and if his employment future stabilizes, he will continue to be exposed at the highest tax bracket with no strategy or tax savings plan in place. His Spousal support is partially deductible creating potential for future tax savings that can be applied to his tax bill, then applied to debts until they are eliminated. Charlie should discuss tax savings options and a tax strategy with an accountant allowing him to start taking control of his financial future. Charlie must also take steps to create emergency savings to help buffer the unexpected events that continue to plague him financially.
Regardless of future employment stability Charlie should begin to offer his experience and expertise to others by starting his own business to protect himself from future economic volatility. This may be the best opportunity for him to exit the rat race and start to make a larger impact in his career.
SAVING FOR HIS DAUGHTERS EDUCATION
Next move — Charlie has contributed annually to his daughters’ RESP and should continue to contribute enough to gain the maximum government matching grant each year. This savings will soften the potential impact of special expenses related to his daughters’ education and allow Charlie some cushion for future expenses coming from the high cost of education once she enters the post secondary market.
BUYING A HOME
Although mortgage interest rates are at an all time low, home prices are at an all time high. Home purchasers are paying a premium for property and homes in Charlie’s current living environment. Banks may offer a mortgage with mortgage insurance to Charlie even though his debt service ratio is very high. We advise Charlie against purchasing a home for two reasons: 1. Charlie must focus on debt reduction and building a strong asset base if he hopes to get back on track for his retirement dreams, and 2. Obtaining a high leverage loan with minimum down payment will certainly keep Charlie locked into the rat race continuing to limit his ability to gain financial freedom.
We recommend Charlie revisit his goal of home ownership in 3 to 3 years once his financial assets are headed in a healthy direction.
FAT FIRE
In addition to prioritizing debt elimination Charlie’s dream of financial independence and early retirement are not gone. In fact, if Charlie were to take steps over the near term to take full control of his money and assets his financial future may be stronger than he could have imagined. Certainly, a future better than his current circumstances allow.
Greg recommends the following steps for Charlie:
- Eliminate Debt and hire and Accountant
- Take control of his money and financial future
- Start his side gig now
- Build investment knowledge
- Build Assets and generate independent wealth
In the future after Charlie has gained financial independence, he may elect to leave the rat race and enjoy financial freedom along with travel and the potential to invest in real estate. Charlie should strive for FAT FIRE.
Star Ratio: One * out of Eleven
We will check in with Charlie to see his progress regularly. Next >>
