Paul Richardson, West Vancouver, B.C.
Now: June 2014
Paul Richardson had no clue his life was about to fall apart. After a routine day at the office, the 48-year-old environmental consultant opened the door to his West Vancouver bungalow, and saw nothing but empty rooms and bare carpet. His wife, Anna, their three young sons and all their furniture had disappeared. Twenty-four hours later, Anna delivered an ultimatum over the phone. She wanted a divorce and was determined to have custody of the boys.
Since that soul-crushing day three years ago, Richardson has clawed his way out of depression, negotiated an expensive divorce settlement with Anna, and tried to put his life back together. (We’ve changed the couple’s names and details to protect their privacy.) Richardson’s biggest goal these days is being a good father to his boys, aged 11, 9 and 8. The kids spend every Wednesday night and every second weekend with him. But while he loves the time he spends with his children, he’s also feeling financially suffocated. “The divorce has really restricted my ability to rebuild,” says Richardson, who earns $83,000 a year plus overtime. “With child support payments, a huge mortgage and daycare costs, some days I can’t help but feel trapped.”
Richardson has a tough time seeing how he can do anything but scrape by for years to come. “I’m concerned because I won’t pay off my mortgage until I’m 70 if I keep on my present course,” he says. “My job has grown stale and I really should move on to something else, maybe in another city. But I want to be close to the boys so I can watch them grow up. I really need a financial plan that can help me create a bit of room for myself.” What can Richardson do?
Richard grew up in Kamloops, B.C., the youngest of four boys. His mom was a homemaker; his dad, a city worker. At 19, he enrolled at the University of Saskatchewan and earned a masters degree in resource management. At 27, he moved to Vancouver, met a woman named Rose, and married her six months later. The marriage ended in a painless divorce three years later. With no children, he and Rose simply went their separate ways.
A year after his divorce, Richardson’s employer transferred him to Yellowknife. There he met and married his second wife, Anna, a hairdresser. Their three boys soon followed and in 1996 the family moved back to Vancouver. Problems began two years later when Anna decided to market aromatherapy products from their home. She had no experience running a business and began running up debts. “She kept borrowing more and more money,” says Richardson, “and then I would have to bail her out. I’m not complaining. I was a willing participant until four years ago, when she began lying to me about her financing arrangements.”
Richardson didn’t know that Anna had put a lien on his car until a collection agent knocked at their front door one day and took the vehicle away. From that moment, the couple’s money problems accelerated. Then came the day when Anna left with the boys and all the couple’s possessions.
He spent months in a daze. “I felt like I was sleepwalking. I really don’t remember doing much but eating, sleeping and working.” When the divorce negotiations ended, his mood wasn’t much better. Anna had been awarded their home and he was obliged to pay $18,900 a year in child support and daycare.
His one piece of good fortune came when he bought a two-bedroom condo in a nice neighborhood. The price was $250,000—modest by Vancouver standards—and it was close to one of the city’s best schools. “I had a chance last year to transfer to another part of the country,” says Richardson. “But I don’t want to lose this really excellent learning environment for the kids.”
The condo proved invaluable when the opportunity came to reunite with his boys, at least temporarily, after Anna remarried this summer. She and her new husband are moving to Ireland for three years so her husband can take a lucrative job there. After much negotiation, Anna has agreed to give Richardson custody of their two youngest boys, Dylan and Nicholas, for each of the next three school years, beginning in January. Come summer, the kids will swap places. Richardson’s eldest son, Jake, will spend July and August with him while the two younger ones spend it in Ireland.
Having his sons with him is great news for Richardson. So is Anna’s agreement to suspend child support and daycare payments for those three years. “But I’m sure grocery bills and clothing costs for the boys will eat up some of those savings.”
Richardson won’t be able to gauge his living expenses until he’s lived with his boys for a few weeks. For now, he’s saving money any way he can. He takes public transit to work, brown bags his lunch, never eats out unless it’s with the boys, and restricts holidays to short camping trips. He’s even given up smoking and put the savings into an RESP for his sons. “At first, I thought I would buy myself a congratulatory present, like a TV,” he says. “But over time, this is going to make more sense.”
Richardson’s plan during the next three years is to use the money he was paying for child support ($13,200 a year) to pay off a car costing $12,800. Any extra cash will go to his RRSP and the boys’ RESPs. Once his wife returns in 2007, the boys will go back to living with her. Richardson will then be off the hook for daycare ($5,700) since his boys will be too old to need it, but he must resume paying child support payments until all the boys turn 18.
Given all that, Richardson is wondering if 2007 might be a good time to downsize. With no live-in kids, Richardson will no longer need a two-bedroom condo. He figures he could sell it for $375,000 and net a $125,000 profit. “I don’t want my mortgage payments to constrain my lifestyle for 20 more years.”
The money from his condo sale could come in handy for retirement. Richardson has only a modest $40,430 in his RRSP. Even if he were to stay with his current employer until he was 65, he could count on a pension of only about $1,200 a month.
At the very least, Richardson would like to have some spare cash to do more dating once Anna is back from Ireland. “I’ve had a relationship with a woman for about a year, but it’s not going to be a permanent thing. Believe me, I’ve learned my lesson.” When we put Paul Richardson’s situation to two financial planners— Fabio Ventolini, a certified divorce financial analyst with The ECC Group in Toronto, and Constance Button, a certified financial planner with The Family Office, a financial planning company in Calgary—they suggested two very different plans.
Ventolini’s plan centres around using debt to create options for Richardson. For starters, Ventolini suggests that Richardson forget about trying to pay off a new car within a year, because Ventolini thinks he will find the payments too onerous, especially with a couple of young kids to clothe and feed. Instead, Ventolini thinks Richardson should arrange a line of credit against the equity in his condo. He can tap that line of credit for $12,800 to buy a new car. He should then strive to pay off the loan over the next five years at $250 a month.
Ventolini also wants Richardson to use his home equity line of credit to fund regular RRSP contributions. “If he writes a cheque for $14,500 from his line of credit and puts it directly into his RRSP, his 47% marginal tax rate would entitle him to a tax refund of $6,815,” notes Ventolini. Richardson could use that tax refund and the money he’ll be saving in daycare fees ($5,700) to pay down his line of credit, bringing down the net annual amount he’s borrowing for his RRSP to about $2,000. “That would leave him with the $13,200 in child support payments that he can spend on the kids,” says Ventolini. “He’ll need that to feed, clothe and entertain them.”
If Richardson follows this borrow-to-contribute-then-repay strategy over the next three years, he’ll owe $9,800 on his line of credit ($3,800 on his car loan, plus $2,000 net each year for RRSP contributions). However, his three annual $14,500 contributions coupled with the $40,430 he already had in his RRSP will have grown to about $90,000, assuming a modest rate of return. At this point, says Ventolini, he should sell his condo. “It’s not absolutely necessary that he move, but if he downsizes in 2008, he can be almost debt-free shortly after.”
Assuming real estate prices stay where they are, Richardson could sell his condo for $375,000 and buy a smaller unit in a less desirable neighborhood for $225,000. He would then be without a mortgage and with a lot more cash to spend. “He could use that increased cash flow to pay off his line of credit as well as the balance of his car loan,” says Ventolini.
Even then, Ventolini urges Richardson to continue saving through RRSPs and use his tax refunds to make his life less stifling. If he can continue to max out his RRSP contributions, Richardson will hit 60 with more than $200,000 in his retirement fund and a paid-off condo—albeit a smaller one than he has now.
Button, the Calgary financial planner, sees things completely differently. She argues that a nice two-bedroom condo is key to Richardson’s lifestyle. It’s also a financial resource that can be tapped in many ways. Since Button doubts that Richardson could find any suitable replacement condo in the Vancouver market for $225,000, her recommendation is that Richardson focus his energy on paying off his current condo as quickly as possible.
One way to do that is to start making weekly mortgage payments instead of monthly ones. If Richardson follows this path, he’ll wind up spending about an extra $1,000 a year on his mortgage, but he’ll slice about five years off the amortization, meaning he’ll own his condo free and clear when he’s 65 instead of 70. Once the kids are a bit older and he has a little more money to spend, he can start contributing to his RRSP again.
Richardson will have a couple of options when he hits 65. He could downsize to a small rental apartment and rent out his condo to provide a regular monthly income. Or he could stay put and take out a reverse mortgage, allowing him to borrow against the equity in his condo for some extra income. At that point, he can also collect Canada Pension Plan and Old Age Security. In addition to his RRSP and company pension, the government pensions and the money from his condo should provide him with a decent financial foundation for retirement.