I'm not broke, but I'm feeling stuck on a fixed income

Question

I'm living on a fixed disability income, with little hope of ever being able to work again. I cannot receive any income of any kind while on disability (or I have to pay it back anyway, and risk losing my benefit altogether).

Assets:

• House: $80k mortgage on a $200k+ home, payments are about $500/month.
• Retirement savings (RRSP): $15k, with no additional payments going into it.
• Cash: About $12k in the bank right now

Liabilities: None, besides the mortgage.

As for reasonably-priced lending, I have a $40k line of credit (with a $0 balance) at 5% that I could use if need be. My credit is good.

My expenses + mortgage come up to about $2750/month, and my post-tax income is about $3250. I'm annoyingly aware that reducing expenses only gets you so far, assuming one lives reasonably and within their means already. Increasing income is where the bigger progress happens, and that's exactly what I cannot do.

So, with that $500 monthly surplus and $12k in the bank, what are my options? Here are a few of my own thoughts on that (think of these as more "desires" than constraints, though):

• I'd like to move into a nicer home (still in my "starter" home I bought 10 years ago). To do this, I would need to put down perhaps another $40k to have an affordable payment.
• I need to get some retirement savings contributions going again. (Based on my calculations, if I put away $550/month starting now, I'll be able to retire reasonably. But, wouldn't you know it, that's a little more than my entire monthly surplus!)
• Disability cuts me off once in a while, just for kicks, it seems. The appeals have been successful (and I get the back pay), but I might need to float 3-6 months with no income, so I'll need some relatively liquid reserves (or use my line of credit if that fails).

Hopefully this isn't too much information to digest. (You should've seen my first draft!)

What are my options to maximize the above desires? I'm in Canada.

Answer 1

IANAL

While I'm not a lawyer, I am fairly decent at researching information, so I hope that some of this information may be of some use to your situation.

First, you say that you have your RRSP with some funds, but you're not adding anything to it. This is a very important service, and you should be taking advantage of it, since you have some extra money available.

The RRSP is designed to help with retirement, and it offers two benefits. First, contributions may be tax deductible, nearly $24,000 a year. Also, it appears that such contributes come before any taxes, which should reduce your tax burden on the taxed disability income. In practice, this means that a contribution of your excess income will pay itself back to you twice: you'll get a little more income each month (it will be less in the pocket, but more overall), and you'll be saving money for retirement. You can also claim unused past RRSP deductions, so feel free to contribute as much as you possibly can-- it will only help you in the long run.

Since you already own a home, you don't qualify for the HBP (Home Buyer's Plan), so moving out of your place is probably not an option at the moment. While it's theoretically possible to do with your current line of credit, it simply doesn't make sense to go in debt just because you're "tired" of your current house. Keep the house you have until you retire (assuming you have the money to do so), or if your situation ever improves (e.g. you win a lottery or have a major windfall).

Next, look into the RDSP, which is similar to the RRSP, but has an additional incentive: depending on your qualifying situations, the government will give you a grant (money which never has to be repaid) for a percentage of the amount you contribute to the RDSP. These contributions are taxed normally, but don't count against income when you withdraw from the account (e.g. you are taxed only once). Interest and grants earned in the account is tax-deferred, so you only pay taxes on that portion upon withdrawal.

The CDSG can grant up to $3,500 for qualified beneficiaries annually, meaning tax-deferred free money the government gives you, up to $70,000 over your lifetime. Also, this is going into savings, so a decent savings account will add up even more. You'll want to look into this plan, since it makes sense given the amount of free space you have in your budget. Without knowing more about your specific situation (kids, family, age, etc), I can't tell exactly what would be optimal, but it's definitely worth a peek.

Also, there is the CDSB program, which can contribute up to $1,000 annually if you qualify (you mention your post-tax is about $39,000, which is less than the guideline, but since I don't know how much tax is taken out, you may not qualify at all, and certainly not for the full $1,000). This bond also goes into a CDSP, so there's another incentive to start contributing. If you've contributed at all to a CDSP, you may be eligible for past years as well.

In short, while you may feel stuck, I would suggest that there are opportunities to at least advance your retirement by some amount. You didn't specify if the $550/month savings plan included the additional benefits I've mentioned in this answer, so it's possible you've already explored this avenue. If you haven't, you may have options to lessen the impact of retirement and saving for retirement.

All information in this answer was gleaned from http://www.esdc.gc.ca/.

Answer 2

Consider staying in your "starter home". It's a luxury to live beneath your means, and makes all the other items on your wish list that much easier to achieve. A $200k home with just an $80k mortgage and a $500 monthly payment is something to be proud of!

Instead, maybe redecorate a little bit. Some new paint and carpet will make it feel like a new home and cost far less than moving.

Answer 3

"I'd like to move into a nicer home" and "little hope of ever being able to work again" don't reconcile.

Assuming you are on a fixed income, hopefully with COLA (cost of living adjustments), I'd suggest doing all you can to reduce expenses, including not dropping $40K on a larger house. That number is larger than your total savings, and would make you house poor. Now isn't the time to increase debt or use any of your savings.

You are right that for most of us, there are two approaches, cutting expenses, and increasing income. If income isn't an option, you are only left with the expense side.

One thought - are you able to rent a room out without having that income count? It's taxable, of course, but it should be viewed as unearned income or passive. This is how it is in the States. I'd ask you to consider that option. If you can handle a roommate, the income can be saved for the long term, and you might even set yourself up for the jump to the next house. Even $500/mo can fund a $100K loan at today's rates. Of course, this is subject to the rules you must follow and to your personal preferences.

Answer 4

In a fixed income scenario, you want to maximize your returns and minimize your expenses. I am ignorant of tax laws in Canada, and for example what might disqualify you from receiving further assistance, but I assume you have access to tax advantaged savings accounts for retirement. It is also not clear whether your fixed income is fully adjusted to match inflation.

The things you can control are expenses and debt. There may be some ways to get creative on expense sharing, but I can't offer any recommendations because I don't have an itemized list of what contributes to the monthly expense total. Also, we don't know what return you are getting on your short term savings vs. what rate you are paying on your mortgage, but presumably it is pretty low. My approach would be a conservative one. I would put most of the monthly surplus toward paying off the house so that my short-term savings could be decreased when the mortgage payment is removed from the 6 months of expenses.

You cannot work in a normal environment, but clearly you can put some amount of time in on the Internet. I'm a software developer, and though I have no idea what level of computer expertise you have, I am confident that you can learn. If I were you I would spend time learning to develop mobile apps. In the short term, the likelihood of you creating a revenue stream from advertising sufficient to replace your income seems low, but if you develop the skills and can put in enough time, you may be able to start a job doing freelance coding. Again this recommendation comes without any knowledge of the nature of your disability, but the only way you can know if you could sustain yourself and increase your income is if you try. Start simple and work your way up.