7-day makeover: A life cut in half

Up until two years ago, Jennifer Gunn was a successful corporate lawyer in Kelowna B.C., with a six-figure income, two happy children and a steadily growing savings account. “Then in 2006, I suffered the death of one of my best friends from brain cancer, signed a separation agreement with my husband that saw me refinance my house for $250,000 to pay what I owed him, and had a car accident so bad I’ve been on disability ever since,” Jennifer wrote us. Her question to us was simple: “Can I ever recover from 2006 and get my life back on track?” At the moment, Jennifer, 44, is supporting herself and her two children on $65,000 a year in disability payments. (We’ve changed her name to protect her privacy.) But those disability payments are under review and may end as this issue hits the newsstands. Under the terms of her disability coverage, she must be disabled from any occupation to continue to receive benefits. So while she suffers from blinding headaches that would make it impossible for her to function in a courtroom, her insurance company has informed her that she may soon be healthy enough to go back to work for her former employer in a part-time junior job. She will earn about $65,000 a year — about $50,000 less than she used to make. “I’m really worried about having to get myself a part-time job as a Wal-Mart meeter-greeter to look after myself and my kids financially,” she told us. Her situation shows how even a well-educated lawyer can overlook some important building blocks of personal finance. Prior to her accident, Jennifer had always diligently paid down the mortgage on her two-storey, four-bedroom home and contributed to RESPs for her two young daughters, Isabel, 12, and Joanna, 9. But she had overlooked some risks. For instance, she had re-mortgaged her home before the break-up of her marriage, but hadn’t bought mortgage insurance. And, as she has subsequently learned, her disability insurance plan at work wasn’t nearly as good as she had thought. The one thing that came through loud and clear when we read Jennifer’s letter was her emotional distress. “I’m a woman separated from her husband and trying to raise two kids on my own. Taking an unexpected $50,000 a year pay cut and trying to get my health back has been hard,” Jennifer wrote. “I’m carrying a $230,000 mortgage and my disability payments could soon run out. How do I move forward and make it on my own?”

Background

Jennifer grew up in Prince Albert, Sask. Her father was a lawyer and a businessman; her mother ran a hotel. Her parents sent Jennifer off to a private girls’ school in Vancouver when she was only 11, so she could be exposed to a richer learning environment. “My parents were hard-working immigrants and they believed in giving me every opportunity,” Jennifer says. Like her parents, Jennifer was also ambitious and hard-working. After completing her legal studies in Toronto and doing a second law degree in London, Jennifer returned to Vancouver and married a young stockbroker. But the marriage lasted only a year. “My dad never liked Jim, my first husband,” says Jennifer. “In fact, as I was walking down the aisle my dad whispered to me that if I wanted to call the wedding off right then he would support me 100%. I went through with it anyway and within a year, Jim had left me for my best friend.” Three weeks after her divorce from Jim, Jennifer met her second husband, Ron, a construction equipment salesman. Jennifer was 30 at the time and Ron was 10 years older. He seemed steady, dependable and shared her desire to start a family. “I remember thinking at the time, ‘This guy will not leave me for my best friend,’” says Jennifer. “But he turned out to be compulsive about a lot of things. He didn’t trust me with money and insisted that we not pool our income. He liked total control. He was also obsessive about doing little things his way — like loading the dishwasher. I would come home from work and there would be detailed diagrams on the fridge showing me the proper way to load the dishes. It was demeaning.” Jennifer’s life began to change three years ago when her best friend, Karen, was dying of brain cancer. Just before her death, Karen talked to Jennifer about the importance of living life to the fullest. As she reflected on what Karen had said, Jennifer grew convinced that she had to leave Ron. “Karen told me that life is not a dress rehearsal,” she says. “I realized I had stayed in my marriage for all the wrong reasons. Mainly I wanted to make my parents happy. But I kept thinking, ‘Why can’t I get this right?’” Convincing Ron to leave the marriage was costly. Jennifer had to pay him $250,000 in cash and gave him sole ownership of a rental home they had bought together. To raise the money, she had to re-mortgage her home. Still, by August 2006, she was a free woman, enjoying her new life. Then disaster struck. Jennifer was driving down the highway when she was hit by a car driven by a 17-year-old boy talking on his cell phone. The accident left her with head, neck and back injuries as well as a ruptured optic nerve in her right eye, memory and spatial problems, a speech impediment and chronic headaches. “I’m on migraine medication every day and my spatial abilities haven’t come back,” says Jennifer. “I can’t do litigation anymore, but I’m looking forward to going back to the office. I’m looking forward to the social interaction the office provides, and seeing all of my colleagues again.”

Her situation

As she headed into the seven-day makeover, Jennifer’s biggest issue was how she could raise her two daughters on her own. It’s a financial stretch. Her disability payments fall short of her expenses, and so will her salary when she returns to work in a junior job. “I’m not divorced from my husband yet and he doesn’t pay child support. But my biggest surprise was that my disability payments ended up being lower than they had to be,” says Jennifer. “If I had known the details, I would have arranged for some extra disability coverage years ago.” Jennifer figures she needs an extra $1,000 a month to balance her budget. To raise funds, she has considered selling her home, which is worth $700,000, but she isn’t sure that is wise. “I don’t know if I could ever qualify for a mortgage to buy another one,” she says. “Being on disability, I can’t even get a new credit card.” Another possibility is taking in a boarder. Jennifer figures she could easily rent out the extra bedroom in her home for $500 a month. She is also pondering whether she should officially divorce her husband and collect child support, an amount that would total about $540 a month. But she is hesitant to do that. “I didn’t sue for child support for two reasons,” says Jennifer. “I kept thinking I was going to get better, and I wanted my kids to stay with me, so I thought it was my responsibility to provide for them.” Jennifer is deeply concerned about her ability to pay for her children’s education. She has a total of $60,000 in her kids’ RESPs, and has continued to contribute $4,000 a year even while on disability, but she doesn’t think that will be enough. Of course, Jennifer also wants to retire at some point. Her home still has a $230,000 mortgage on it. She wants to pay it off by the time she hits 65. Her only other asset is $130,000 in RRSPs, but she isn’t sure how well it’s being invested. “A good friend of mine is my financial adviser, but the annual returns in my RRSP haven’t been good,” says Jennifer. “I’m also confused about what fees I’m paying because I never see them.”

The makeover

Jennifer was happy to find that she was doing a lot better than she thought. “You never spent more than you made before your accident,” said Norbert Schlenker, the lead financial planner in the makeover. “You’re just a bit overstretched — mortgage, income tax, kids — but you’re not overspending. You just need some extra income.” Jennifer was also delighted to discover that she was not as far behind as she thought in saving for her kids’ education. Her eldest, Isabel, 12, has $33,000 in her RESP while Joanna, 9, has $27,000. Our experts figured that those current amounts, if invested conservatively, should be enough to cover a good portion of her kids’ university costs. Schlenker recommended she take a break from contributing to the plans for a couple of years, then spend any extra money she may have to boost Joanna’s plan. Jennifer’s biggest discovery was that her financial adviser has been doing a lousy job of investing her money. “It turns out that my mutual funds charge a lot of fees and sales charges and they’re almost all invested in high-risk equities,” says Jennifer. “I was curious, because even though we’ve had really good markets over the last five years, my returns have been meagre. Now I know why.” Jennifer credited Warren MacKenzie, one of our team of financial advisers, with opening her eyes. “He gave us a simple quiz on growing your money and it taught me how little I really know about mutual fund fees and costs and their effect on wealth-building,”

The advice

Our experts said that Jennifer must take immediate action to balance her monthly expenses. An easy first step is to take in a boarder, which should bring in an extra $500 a month. A tougher, but equally necessary step, according to our experts, is to divorce her husband and force him to pay child support. That should bring in a further $540 a month. “Jennifer should do both of these things right away,” says Schlenker. “It’s time to divorce her husband and move on.” Jennifer’s next priority should be to get her daughters’ RESPs in shape. Since there are less than 10 years to go before Jennifer’s girls go off to university, our experts suggested the money should be invested conservatively and at the lowest possible cost. Schlenker urged her to dump her current mix of high-fee mutual funds and replace them with index funds, which usually charge much lower fees. The online version, or e-series, of TD Canada Trust’s mutual funds offer some of the lowest fees at the moment. Schlenker suggested Jennifer put half her daughters’ RESP money in a Canadian bond index fund, 20% in a Canadian equity index fund, 15% in a U.S. equity index fund, and 15% in an international stock index fund. When the kids are a couple of years away from university, Jennifer should adjust the asset mix so it is even more conservative — as much as 80% bonds to preserve capital. “That asset mix should allow for enough growth to fund much of her children’s post-secondary education,” says Schlenker. Dealing with her RRSP money will require more drastic action. Schlenker told Jennifer to fire her financial adviser immediately. Jennifer is paying close to $4,000 in fees a year right now, but doesn’t even have an appropriate portfolio. “Your $130,000 in RRSP money is invested in 90% equities,” says Schlenker. “That is too aggressive for anyone. It’s absolutely inappropriate for your situation. Your adviser has done you no favors.” Schlenker would like Jennifer to build a Couch Potato portfolio using low-fee index funds. This would cost her much less and, in all probability, produce much better results. “Expect annual returns to be in the range of 6% to 7%, which works out to 3% to 4% after inflation,” says Schlenker. (For more on how to build a Couch Potato portfolio, see Be a Couch Potato or visit www.moneysense.ca and read our articles on Couch Potato investing.) Jennifer may have to build her Couch Potato portfolio in stages. Many of the mutual funds in Jennifer’s current RRSP have what are known as deferred sales charges. These are fees that some mutual funds impose if money is withdrawn before a certain period is up. On a portfolio of $130,000, Schlenker estimated that those fees could run as much as $9,000 if Jennifer cashed in all of her mutual funds at once. He suggested that Jennifer call the fund companies directly and determine the penalties. She could then decide if it would make sense to transfer the money into index funds immediately or wait until the penalties shrink. If Jennifer follows his advice, she should be able to retire mortgage-free. Her RRSP, combined with her pension plan from work and government benefits, should provide her with the income she needs.

Six weeks later

Jennifer had a talk with her ex-husband about her finances and he has agreed to pay $540 a month in child support. She has also managed to open an online brokerage account and transferred most of her RRSP portfolio to that account. But it wasn’t easy. It took two weeks of repeated calls before the transfer was completed to Jennifer’s satisfaction. “I just got really frustrated with the call centre woman who wasn’t helpful at all. I finally just said, ‘Look, I want to talk to someone nice.’ She transferred me to the manager and everything got ironed out.” The good news is that Jennifer managed to extricate herself from most of her old collection of high-fee funds without paying heavy penalties. “I managed to pay less than $100 in deferred sales charges,” says Jennifer. “But in one case, it would have cost me $1,000 if I cashed it in now, so I’m leaving that fund alone until 2010, when the fees will decline to the point where they’ll be negligible. I’ve marked that day down on my calendar and I’ll switch it then.” With the exception of that single fund, Jennifer now has all her money invested in a Couch Potato portfolio oflow-fee index funds. Jennifer has also found a boarder, though she is charging him $300 a month as opposed to the $500 that she had hoped. “He’s in the mechanical program at the local college,” says Jennifer. “He saves me money because he fixes things around the house — like my lawn mower and my power washer. He also has a car and has offered to drive the kids to some of their activities when I’m feeling under the weather because of my headaches. It’s a good fit.” Will Jennifer be able to balance her budget, regain her health and start enjoying life again? To find out, log onto Jennifer’s blog at www.moneysense.ca/jennifergunn.