When can this single mom retire? I really enjoy reading the Globe and Mail’s Financial Facelift series or the Financial Post’s, but sometimes I find them a little un-relatable and ridiculous.
Often it is a couple with $5 million in the investable income producing assets who feel like they don’t have enough money to retire.. like this one from The Financial Post “Pessimistic Couple with $1.58 million net worth certain they’re on the brink of financial disaster“.
Some are more realistic though, check out this one by the Globe and Mail “Can this single mom afford to retire early?”
Well, I had the opportunity to have a pseudo- ‘financial facelift’ on this blog!
I got a lovely email from a female reader interested in finance and investing, let’s call her Jane:
I’m 57 years old single mother of 4 children, new to Canada and self-employed.
My financial situation isn’t fabulous, but I managed to dig my way out from some really stupid financial mistakes. In the meantime and while I’m learning how the Canadian financial system works I paid my mortgage in 10 years exactly. My house was purchased for $350,000 plus $34,084 total interest. Today’s market value is $550,000. I sacrificed fancy shoes and handbags for that 😉
So, with one income and raising my kids, it was impossible to save money as a mother. I have both a TFSA and an RRSP but they are empty right now.
I’m not particularly interested in the RRSP, I think I’m too old to start now! (My contribution room is only $20,000).
My TFSA contribution room is $63,500.
Related: TFSA vs RRSP Which One to Invest in First?
Now, with CPP, OAS, and GIS I estimate that I will generate about $21,000/year when I turn 65 years old and that’s about almost what my yearly living expenses will be at that time. I intend to collect my government retirement benefits when I turn 70.
I estimate my living expenses to be maybe $20,000/year at that time. I still have a 12 year old daughter to raise.
I need to look for ways to secure myself a passive income of another $24,000 per year to be able to live decently and comfortably with a bit of travel incorporated.
Now that I’m debt & mortgage free, I can save 75% of my income towards investing…although my house needs some renovations, it is not urgent (meaning I just want to renovate the basement and bathrooms). I want to DRIP my investments.
My question is, how much do I need to invest each year and for how many years?
Also, I only need to collect that passive income at the age of 70, it means that I will reinvest my investments to grow my capital until then. I had the thought of saving for a rental house but again I have to ask myself do I have as much power/energy/flexibility and not to mention time to take care of tenants, property tax, and capital gains? I’m not sure.
However, what I’m sure of is that I’m healthy enough to continue working until I hit 70, so 14 years more with $50,000/year towards investing. Total is $650,000 in 14 years of investable assets. That is is my goal for financial freedom.
Finally, I want an efficient, safe, low-cost, tax-efficient all-in-one financial system that runs without me for long-term (I estimate 15 -25 years) until I reach the age of 90. My mother is 85 and in very good shape.
I wanted to let you know that there are women out there who still want to beat the odds and be successful at mid-life, age 56!
Thank you SO MUCH in advance for your time and effort and looking forward to hearing from you soon.
- How Much Should I Have Saved by 35?
- How Much Should I Have Saved by 40?
- Cashflow and Portfolios Retirement Projection
The Analysis of This Single Mom’s Money
First of all, I have no financial background nor training but I just have a keen interest in personal finance. I’m not qualified to give any financial advice and this is just for entertainment and to just analyze the situation. Jane kindly agreed to share her email in a post with you, so thank you!
First of all, kudos to being a single mom of FOUR children (I can barely handle ONE CHILD right now, haha), a relative newcomer to Canada, and being so amazing with money that the mortgage is paid off for the primary residence! Which means there is no debt (I am assuming there is no car debt or business debt as well- you mentioned that you have your own business). I can’t imagine what it must be like to be a single mom to 4 children. Your children are very lucky to have such an amazing, strong, and dedicated mom to inspire and guide them.
Sure, she probably qualified for more Canada Child Benefit on the Child Tax Benefit Payment dates, but being a single mom of four and working is an amazing feat nonetheless.
Related: Financial Checklist for New Parents in Canada
To summarize, Jane wants to generate another $24,000 in passive income on top of the government pension and benefits she estimates she will be receiving at age 70. She currently has $0 invested at the age of 56. She has paid off her mortgage and doesn’t want to factor in her home for retirement planning, or bank on her primary residence to be her nest egg.
She is self employed and estimates she can work for another 14 years until she hits the age of 70 and hopes to save at least $50,000 a year towards her retirement nest egg every year. With the money that is compounded, she wants to reinvest it to add to her nest egg. She wants to know what she can invest in now until when she turns 70.
She also wants to know what she can switch her portfolio to later so that her retirement nest egg will last another 15-20 years (she estimates her life span to be around 90 years of age).
There are a few questions here that would affect the answer to this question. Like for example, does Jane plan to leave an inheritance for her four children? Does she want to withdraw from her nest egg annually when she turns 70?
Let’s assuming she plans to and doesn’t want to do the 4% safe withdrawal rate and instead wants to never touch the principal.
One of my favourite financial/ government websites, Get Smarter About Money has a great “Compound Interest Calculator“. Using a very conservative estimate of 5% annual gains in the stock market that is compounded, it will take about 10 years for Jane to reach a portfolio value of $710,339 if she invests $50,000 in the stock market on an annual basis.
Here’s what the compounding math looks like- ignore the ‘interest rate’ (because we’re not investing in high interest savings here) but just focus on the final numbers.
And with that $710,339 nest egg, a conservative 3.5% annual dividend yield on $710,339 generates about $24,860 in annual dividend income.
So to answer the question of when can this single mom retire, there are a few different ways to approach this. I would be cautious to start right away with dividend investing because this is Jane’s first foray into investing.
She could either sign up for a robo advisor service (read the pros and cons of roboadvisors here) and pay about a 0.70-1% roboadvisor fee in addition to the MER of the ETF fee, or do a modified DIY investing and sign up for a discount brokerage like Questrade and purchase ETFs (so that there would be no commission paid to buy, but commission when she sells ETFs). I would probably pick the latter since it will be lower cost and obviously Jane has no trouble with discipline since she paid off her mortgage so quickly!
What should Jane include in her investment portfolio? Well, I think the Vanguard line up of ETFs that have automatic asset allocation is a great start. It’s the ultimate couch potato portfolio that doesn’t involve rebalancing or anything complicated like that.
Vanguard Canada recently came out with two more “all in one ETFs” (basically they are an ETF that include a number of ETFs within the ETF). The cost of VBAL, for example, is 0.22% MER (around 0.25% after all is said and done). Since it’s free to purchase ETFs with Questrade (there is an ECN fee which is quite negligible) the main fee would be when she sells.
Given that Jane has a bit of a shortened timeline to retirement (versus someone who is a millennial starting to invest, e.g. in their 20’s or 30’s) and only 10-15 years before retirement, I would be a bit more conservative.
The VBAL is the Vanguard Balanced ETF Portfolio is comprised of 60% Equity and 40% Fixed Income. The distributions are approximately 1.9% (reviewing what was distributed last year in 2018) and there is a reinvestment plan set up available. Growth last year (first year of inception) wasn’t that great, it’s just 0.67% but this was with January 2019 data.
Another option is VGRO if Jane is more interested in capital growth (80% equities and 20% fixed income) which might get her to the goal of a $700,000 + nest egg faster.
For both of these, I would do the dollar cost averaging approach with the $50,000 and invest a certain amount each month or each quarter.
Once she reaches her retirement age she should again switch it up to something that produces her targeted income (3.5% return) and also preserves her capital. Or she could switch it up and slowly transition things over as she gets closer to the big retirement date.
An alternative is the Horizon’s All-In-One Portfolio which Frugal Trader from Million Dollar Journey covers nicely- they are very tax efficient.
And in terms of tax efficient investing, I think Jane should use up her RRSP room even though she doesn’t feel like there’s much point to it. I would probably invest through the TFSA first and then when that contribution room fills up (after all, Jane is plunking down $50,000 a year) and it will fill up fast, go through the RRSP and then non-registered.
Anyway, that’s a very simplified and rudimentary approach (and this is just for entertainment value and not meant as financial advice!!) to answering the question- when can this single mom retire? Anyway, I think Jane is doing a great thing by taking the first step to get into investing!
Hope that helps Jane! Thanks for reading!
Do you have any other tips for Jane? Would you do anything differently?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
10 thoughts on “When Can This Single Mom Retire?”
I always thought that the management fee is included in the MER. Therefore the total cost of an ETF like VBAL is 0.25% including the management fee.
@Kevin- oh yes you are right! I will correct this now thanks for pointing that out. https://www.moneysense.ca/save/investing/etfs/finally-everything-an-investor-needs-in-a-single-etf/
Great reader. They are the type (as a PF blogger) you hope keep coming back over and over again. Great job helping her out with your insight, experience and recommendations. Tom
@Tom- I know, what a lovely email to receive!
Hi GYM, you have done a great analysis. Paying off a mortgage in 10 years is a huge achievement. Not many people can do that. Congrats! Glad to hear Jane is going to start investing aggressively and consistently. Around the age of 70, Jane will be able to accumulate a decent portfolio for her retirement.
@Helen- ESPECIALLY on a single income. So amazing. And starting a business with 4 kids!
Awesome job providing Jane with tips what she can do investing wise. That is an accomplishment paying off her mortgage in a 10 year span and also having being debt free. I think your suggestion of investing in ETFs for her is a great idea. Maybe invest in Vanguard’s conservative and balanced portfolio since she has about a 14 year time span grow that money. By investing about $50K a year, she should be fine with the balance when she turns 70…assuming the market will at least have a 3-5% of annual gains.
@Kris- Yeah, I liken her situation to something similar to how I would invest in an RESP (since there’s about a 17 year timeline to receiving the money). $50K a year investing is amazing!
Great analysis GYM! I can relate to the single mom in her 50s:) But then I only have 3 kids!
Whenever I read those type of cases, I always have so many more questions! Drives me crazy.
@Caroline- Hah, IS THIS YOU? I know, I had a few questions too- it’s definitely not ‘black and white’ or a clear cut answer. So many variables- like how profitable is the business, what about growth of the business, does that need to be factored in? Or paying for tuition for children? Lots of questions 🙂