Consider a tale of 2 singles: Sharon and Dave both went to school for graphic design and, by working part-time, managed to graduate debt-free. Now in their early thirties, both earn $60,000 a year, and have found affordable apartments in the city where they work.
Then, at 33, Dave gets married. Along with his wife’s income, they now have combined annual earnings of $140,000. This allows them to purchase a house and start planning for a family.
Sharon, still renting and making $45,000 after tax, might look at Dave’s situation and question her own financial future. She’s carrying all the expenses and tax burden herself, and her budget is tight. She represents the struggle of many independent singles, which make up over a quarter of Canadians1 and growing: how can she thrive financially in a world that seems to be built for 2?
It’s possible for Sharon to achieve the same level of financial security and retirement lifestyle as Dave. How? By working with an advisor to set out a plan, and above all, starting early.
THE ISSUE: Less income.
THE SOLUTION: Make your client’s money work harder, for longer.
The common estimate is that a single person needs to save about 70% as much as an individual in a couple to achieve the same lifestyle in retirement.2 How can you help your single clients achieve this?
Start early: Single clients may be enjoying their freedom and spending on their lifestyle in their 30s. But with a single income, they may have less to work with, and lack the opportunity to save on expenses available to couples. By extending the time horizon of their savings, you can help single clients offset the smaller amount they’re able to put aside each year.
Make saving easy: More of a single client’s income is going to be dedicated to managing daily expenses, which can make it harder to save. In 2005, the median savings deficit for singles approaching retirement age was $30,000, while couples had a savings surplus of $172,000. The key for singles on a budget is to determine a manageable amount, however small, to invest regularly. A pre-authorized contribution plan (PAC) is ideal for single clients on a budget. For example, if your client puts aside $100 a month, in 15 years they could have $26,728. By doubling their contribution to $200, their savings could grow to $53,456.3 Ask your client: would it be easier to find $100 a month now, or $26,728 at retirement? This incremental savings approach also allows your client to take advantage of the benefits of dollar-cost averaging.
Develop a budget: Singles living on a single income have to bear the burden of expenses alone, and saving can seem unrealistic on top of bills, food and other living expenses. The majority of Canadians who eat out twice a week spend $1,000 a year.4 Then there’s movies, shopping, decorating, take-out coffee … when you crunch the numbers, the amount is substantial. Help your clients divert a reasonable portion of lifestyle expenses to savings, and calculate the compound interest — this can be a very persuasive way to illustrate how small adjustments now can pay off later.
THE ISSUE: High individual taxes.
THE SOLUTION: Take advantage of tax-sheltered savings accounts.
Income-splitting means each person in a couple may pay less tax than a single person who has a similar net income. And couples have access to a host of other financial advantages that singles don’t; the National Post recently counted 17 federal programs that provide benefits, tax deductions and credits to couples and families.5
When it comes to tax, single clients can use all the help they can get. By encouraging them to start saving earlier, and to put more of their money into tax-sheltered savings accounts, your single clients can protect more of their retirement savings from taxes.
Registered retirement savings plans (RRSPs): RRSPs provide a tax savings for clients who anticipate they’ll be in a lower tax bracket in retirement. In addition to potentially paying less tax on the money they withdraw in their retirement years, you can also help your clients re-invest the income tax returns they receive today.
Tax-free savings accounts (TFSAs): The annual contribution limit for TFSAs has increased from $5,500 to $10,000. What does this mean for your clients’ savings? Whether they’re saving for short- or long-term goals, with their money invested in a TFSA, they keep the interest it earns, tax free. It’s a great way to maximize the growth of their investment and offset the higher taxes they pay as singles. With a range of investment options available for a TFSA, you can help your client choose the one that best suits their investment style.
And with the increase to the annual contribution limit for TFSAs, increasing your client’s PAC amount is even more valuable with the potential to shelter more of their savings from tax.
THE ISSUE: Shouldering the risks of illness and disability alone.
THE SOLUTION: A well-rounded insurance strategy that protects clients over time.
Protect your clients with living benefits: With no safety net provided by a dual income, single clients may find themselves in financial trouble if they get sick or are involved in an accident. For clients without employee benefits, consider personal health insurance (PHI) to cover what provincial governments don’t. Disability insurance and critical illness insurance (CII) can offer further protection from catastrophic health events or accidents. By supporting their earning power in their working years, you can help single clients protect their savings, setting them up for success in retirement.
Manage care costs in retirement: Long term care insurance (LTCI) is critical for a single client. Many Canadian seniors move through different stages of long-term care, gradually increasing the level of care as they age. Relying on family to help with the heavier tasks and day-to-day chores like shopping and home maintenance is common before clients require more permanent assisted living services. Many single clients don’t have this option, and may have to earmark more of their money during their early retirement years for professional help, leaving less money to pay for long-term assisted living arrangements later on. LTCI can help cover those costs, as well as build in a safety net if your client finds themselves needing around-the-clock care earlier than anticipated.
Build an emergency fund: Insurance can protect your clients if disability and illness strike, but unemployment is another major consideration, especially for singles that rely solely on themselves for income. Help your clients analyze their monthly expenses and build a savings plan, with the goal to achieve the equivalent of about 3 to 6 months’ worth of living expenses. Here, time can be on your client’s side. The earlier they start building those savings, the more likely they’ll be covered if they lose their job unexpectedly.
Minimize unnecessary debt: Debt isn’t inherently a bad thing, but it does raise the stakes if your client experiences a sudden spike in expenses or decrease in income. Because your single clients bear the full debt burden on one income, encourage them to keep unnecessary debt to a minimum. Carrying balances on credit cards can be avoided by following a budget and saving for larger purchases. And if your clients do find themselves with consumer debt, explore the option of debt consolidation to lower their interest rate and pay the loan down faster.
Consider granting power of attorney: It’s an inevitable reality that some clients will experience the degeneration of their mental capacity as they age, particularly with increasing life expectancies. It’s a hard conversation to have, but helping clients ensure their personal and financial well-being is taken care of by a trusted representative will go a long way to providing peace of mind. Consider including power of attorney as part of your single clients’ retirement planning strategy.
Helping single clients become self-sufficient and achieve their desired standard of living in retirement comes, in large part, from your ability to compel them to take action early. It’s not easy to fund retirement alone, but careful planning can help your clients avoid the common pitfalls of being their own sole provider.
3 Assumes monthly contributions at 5% interest rate over 15 years.
4 2012 Visa Canada survey