Tax Season

Investment tips for single-parent families

Canada, like many industrialized countries, has seen the number of single-parent families soar in the past three decades. And these families face some unique investing challenges.
No matter how much disposable income the single-parent family has, though, putting something aside for emergencies and retirement is important. ((iStock))
Canada, like many industrialized countries, has seen the number of single-parent families soar in the past three decades. And these families face some unique investing challenges.

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Statistics Canada counted 476,000 lone-parent families in 1971, or 9.4 per cent of all Canadian families. By 2006, that figure had jumped to almost 1.4 million, or more than 15 per cent of Canadian families.

The rise of the single parent has led to different considerations when planning for a financial future.

The first one is simply how to manage a tight cash flow. For example, the average single family headed by a male earned $52,000 in 2007, or 63 per cent of the income of a two-person family, according to Statistics Canada.

The disparity in incomes worsens for female single parents, who earned $39,500, or 48 per cent of the two-parent family income in 2007.

"As the primary caregiver we would discuss her intentions to provide safety and security to a minor child should she become unable to supply this [income]," said Mary Stanley-Beitz, a financial planner with the Meridian Credit Union in Kincardine, Ont., northwest of Toronto.

So while things such as creating a proper will, the relevant powers of attorneys and buying insurance are important to most income earners, they're absolutely crucial to single parents. After all, there might not be another person to pick up the burden if the single parent dies.

Once these considerations are taken care of, the parent should make sure a plan is in place to put aside enough cash for the child's, or children's, education.

Using Canadian Business's online university cost calculator, a four-year commerce degree at the University of Guelph in Ontario would run a family more than $53,000 in tuition and board.

With that mindset, the parent needs to set up a registered education savings plan, a savings vehicle which allows contributions to earn tax-free returns and which can be withdrawn when the child heads to college.

"The RESP offers tax deferral advantages and allows you to take advantage of government grants," said Allison Marshall, a Toronto financial consultant with RBC Wealth Management Services.

Also important for this family is the decision between putting money into an RRSP and paying down a mortgage.

On the one hand, a single income-earner who is holding a pile of debt runs the risk of credit problems if that person loses his or her job.

But, the current rate on a five-year closed mortgage ranges from 4 to 5.5 per cent, relatively cheap money compared to the tax deferral returns on a maximum RRSP contribution.

So do you pay down your mortgage or stash some cash in an RRSP for retirement? The answer depends upon your individual circumstances, Marshall said.

"Generally speaking, the younger you are, the more benefit there is to be gained from the long-term, tax-deferred growth available in an RSP," she said.

Thus, saving towards a maximum of 18 per cent of your income or $21,000 annually (the amount the government allows each person to contribute yearly to an RRSP) would be ideal, advisers approached by CBC News for this story agreed. They also recognized that a single-parent family's limited resources likely prohibited reaching either ceiling.

The advisers also suggested sinking some money into a tax-free savings account. While the contributor does not get a tax deduction they would when putting savings into an RRSP, the gains from the savings account accumulate tax free in a TFSA, and it can double as an emergency account since money in a TFSA can be withdrawn at any time without a tax penalty.

If the strategies for the single-parent family appear kind of simple, remember this person is unlikely to have oodles of money to drop into various investment vehicles.

Using the government's basic 15 per cent tax rate, a 5.5 per cent 25-year $165,000 mortgage, and expenses based upon a 1999 Statistics Canada sample budget, that single-female parent family has approximately $12,600 a year with which to build up long-term savings.

And that does not factor in transportation costs.

No matter how much disposable income the single-parent family has, though, putting something aside for emergencies and retirement is important.

"Depending upon the resources available, we would advise her in options to provide housing, transportation, education needs and in generating sufficient income in retirement," said Meridian's Stanley-Beitz.

The rule of thumb is that in a world where you have a smaller income but long-term costs, your budget planning tends to get simplified, experts said.

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