Divorcée faces tough decisions

Bob has proposed that he move into Jennifer’s mortgage-free house in Toronto, worth $800,000, but that the couple also spend a good deal of time at his place in Florida and at his cottage north of Toronto. He says they have enough income between the two of them to support the proposed lifestyle.

Bob has an indexed pension, currently paying $80,000 a year, plus $1 million in non-registered financial assets. His place in Florida is worth $300,000 and the cottage is worth $400,000.

Jennifer likes Bob’s idea but isn’t sure it’s sensible for her to stop working. She also is concerned that if the relationship doesn’t work out, Bob could claim half the value of her house as the marital home and that she could be left with insufficient assets to live a comfortable lifestyle on her own. She also is uneasy about how much she will end up contributing to their expenses without well-defined guidelines.

Jennifer had been planning to work until she is 65 in her marketing position with a small firm; she currently earns $65,000 a year with no benefits. She has $400,000 in RRSPs, $400,000 in non-registered assets and $20,000 in her tax-free savings account. She is currently spending about $40,000 a year, and contributes the remainder toward her TFSA and RRSP.

Jennifer would want to continue spending $40,000 in today’s dollars during retirement if she was on her own. She also would like to leave her children $500,000 each in today’s dollars.

Jennifer wants to know how to ensure she retains full ownership of her house; how much she can afford to contribute to her and Bob’s joint expenses annually in today’s dollars if she stops working now; and how much that would leave her with to spend annually to age 95 if she ends up on her own again.

The Recommendations: Cartier says that as long as Jennifer’s home remains in her name, Bob won’t have any claim on it if they split up. “If a common-law relationship ends, each partner walks away with whatever is in his or her name.”

Nevertheless, both advisors urge strongly that Jennifer draw up a cohabitation agreement, before they start living together, that specifies that Bob has no claim on her house as well as the expenses each partner will cover.

However, Cartier would first discuss with Jennifer whether she really wants to have Bob move in right now. It’s not something Cartier would recommend for a couple who has known each other for only six months. As a starting point, Cartier suggests that both Jennifer and Bob fill out a questionnaire about their expectations for how they want to live at various points in the next 20 or so years. The resulting revelations might cause one or both to rethink the idea. In fact, this type of discussion has led several of Cartier’s clients to decide they don’t want to live together.

If Jennifer and Bob still think they want to live together after this exercise, Cartier recommends discussing a cohabitation agreement, which will bring out their respective expectations about financial arrangements while they live together.

Twietmeyer recommends that Jennifer prepare a budget of her personal expenses — including clothing, personal care, insurance, house maintenance and repair, miscellaneous and savings for unexpected expenditures — and show it to Bob, so he will know how much money she will be able to contribute to their travel and other shared expenses.

Cartier agrees this is a good idea, noting that Bob has to be comfortable with the amount Jennifer spends on personal care, clothing, hobbies and so on.

If Bob is OK with that, Twiet-meyer recommends that the cohabitation agreement include the specific expenses allocated to each partner and how much money each is going to contribute to a “shared pool,” the spending of which would be decided jointly.

Another approach, Cartier says, is for Jennifer and Bob to agree that each will pay a specified percentage of joint expenses, based on their respective after-tax incomes.

Twietmeyer notes that there’s a higher rate of failure for second marriages or common-law partnerships that are entered into at Jennifer’s and Bob’s ages than for relationships between younger individuals. Many of these failures are the result of financial problems or the failure to discuss financial expectations when entering into the relationship. “There is no right or wrong way to handle money,” Twietmeyer says. “You just need to find a way that works for both parties.”

Both partners are required to reveal all of their assets when making a cohabitation agreement — and Twietmeyer recommends that Jennifer have documentation to back up the value of her current assets so there are no questions down the road.

Both advisors recommend strongly that Jennifer continue working until she is 65 and that she makes maximum RRSP and TFSA contributions during those years. This will increase Jennifer’s assets and, thus, her future available income; it will also give Jennifer and Bob time to see how they like living together.

Cartier notes that Jennifer had planned to work to age 65 anyway and, presumably, that she is happy with her job. Cartier adds that she believes it’s particularly important that Jennifer work for at least another year or two because if the couple splits up, Jennifer may not be able to find another job.

Jennifer also would not be able to afford the insurance Twietmeyer recommends if Jennifer doesn’t work until age 65. Twietmeyer suggests a $1-million term-100 life insurance policy, with Jennifer’s children listed as beneficiaries. That policy, combined with the house (which Jennifer must specify in her will that it go to the children), should ensure that Jennifer will leave each child $500,000 in today’s dollars. The cost of this insurance would be around $16,000 a year.

In addition, Twietmeyer suggests a lifetime long-term care policy that would pay a monthly benefit of $3,000 a month and would cost $2,600 a year, with possible increases every five years.

Cartier doesn’t think either the life or the LTC insurance is necessary because she believes Jennifer has enough assets both to pay for long-term care, if it is needed, and to ensure she leaves her children $300,000 each in today’s dollars, which Cartier thinks is plenty. If Jennifer wants to leave more to her children, she might consider asking them to pay the premium for life insurance.

However, Cartier does recommend $500,000 in critical illness insurance with a term of 20 years, at a cost of around $2,700 a year. She says this policy would make Jennifer very comfortable if she develops a critical illness.

Twietmeyer also suggests supplementary health-care coverage for things such as ambulance service, dental and prescription drugs, which, she says, can be obtained at a reasonable cost.

Cartier agrees that this would be a good idea. Travel insurance, she adds, will also be necessary when they are out of the country.

Both advisors have used conservative assumptions in their projections. Cartier assumes an average annual return of 4.5% after fees, with 3% annual inflation; Twietmeyer assumes a 5% return, with inflation of 2.3%. Both assume Canada pension plan and old-age security indexing of 1.5% and house appreciation of 1.5%.

Twietmeyer diversifies portfolios by income source in co-ordination with asset class. In Jennifer’s case, Twietmeyer recommends 30% interest income (mostly in her RRSP, for tax efficiency), 30% dividend income and 40% capital gains to start with, then moving more and more assets toward “less risk-inherent investments” once Jennifer retires. To generate sufficient income to cover Jennifer’s fixed costs when she retires, Twietmeyer suggests a guaranteed minimum withdrawal benefit product, noting that usually about 30% of assets will cover these expenses.

Cartier agrees that a GMWB or an annuity would be a good idea, but she would also put aside sufficient money to cover three to five years of expenses in cash or cash-like investments, such as laddered guaranteed income certificates or high-interest savings accounts.

Twietmeyer prefers seg funds, both for their guarantees and the fact that they are exempt from probate fees. “The benefit to retirees,” she says, “can often offset the higher fees.” She might also suggest some mutual funds, a few dividend-paying, blue-chip stocks and lower-risk bonds with varying terms.

Cartier would recommend a portfolio of high-yield bonds, real-return bonds, real estate investment trusts and dividend-earning stocks to generate income. She would combine these investments with mutual funds so that Jennifer has exposure to global growth — assuming she has a moderate risk profile. Cartier adds that the use of seg funds are an option for non-registered assets to take advantage of the tax benefits to the family.

Both advisors would suggest Jennifer start withdrawing from her registered assets as soon as she retires, on the theory that she wouldn’t want her estate to have to pay a big tax bill on those assets when she dies.

Cartier charges $150 an hour; a plan such as this would take 10 to 12 hours, for a total of $1,500-1,800.

Twietmeyer charges a minimum of $2,500 to develop a financial plan — about 10 hours of work at her hourly rate of $250. IE