Erma has spent more than a decade living on the edge money-wise, but she fears she might slip through the cracks entirely when spousal support runs out in three years.
"My ex and I hammered out a deal where I was supposed to get spousal support until I turned 65," says the 60-year-old who raised five children.
But a judge recently ruled the payments will stop once her former husband turns 65.
"That means between the ages of 63 and 65 I've lost $900 a month, so that's a real kick in the pants," says Erma, who works part-time earning about $16,000 a year before taxes and deductions.
With a CPP payment of about $324 a month, she manages to balance her budget and sometimes even saves a little. But she has about $5,000 of debt, including money owed from legal fees from the divorce fallout.
Her savings are more than $130,000 mostly in a LIRA, part of the divorce settlement, and they're almost entirely invested in GICs. She also owns a home worth $170,000.
Erma says making ends meet is a daily struggle because her job isn't steady and she suffers from numerous health problems, making it difficult for her to land full-time employment.
Losing spousal support will make balancing her budget all the more difficult, so Erma says she needs a plan to bridge the two-year financial shortfall until OAS starts. Although she figures she will have to dip into her savings, she worries about outliving her money.
"I would like to leave my children something and would prefer not to have to take out a reverse home mortgage on my home."
Certified financial planner and divorce financial analyst Tesia Brooks says Erma's situation isn't uncommon. Many women -- and men -- struggle financially for several years after divorce. But Erma's situation is particularly dire, Brooks says. She is barely treading water, a task that will become much trickier in the future.
"With five kids, she was a stay at home mom most of her working life, so she didn't have the opportunity to build up a lot of savings on her own as well as CPP," says the owner of Brooks Financial, a Manitoba-based firm.
"Spousal support has made up for a lot of that shortfall, so it's unfortunate that it is stopping two years short of retiring."
Brooks says Erma has a couple of options to make up for lost spousal support over a two-year period until she can receive OAS at age 65.
First, she needs to pay off debt. Based on the debt payments in her budget, she should be debt-free in 18 months. With those gone, she will have $500 extra a month to save for the lean years.
In the meantime, she should be able to save a few hundred dollars every month so she can build up a cash reserve when spousal support ends--at least according to her own calculations.
If her current annual income is $30,688 -- that's work, CPP and spousal income combined -- and her yearly expenses are $26,237, as indicated in her budget, she should have an annual surplus of about $4,450.
"If she saved this amount each year for the next three years, she would have approximately $13,500," Brooks says.
Divided by two, that's about $6,750 a year, which combined with the $6,000 that would be no longer going toward debt repayments, should more than make up for the lost spousal support income from age 63 to 65.
"With this option, she's basically deferring some of her spousal support for the next three years to use in the years when she will not receive spousal support or OAS."
But Brooks says people often underestimate their actual costs of living so Erma may not have as much money as she indicates in her budget.
If that's the case, she can always choose plan B, which involves withdrawing money from her retirement savings.
"There is a tax consequence to this option" Brooks says. "If LIRA and RRSP monies are withdrawn while she is still employed, she will pay some tax, but if she waits to start withdrawing after she has stopped earning employment income, she will not pay tax on the withdrawals because her income is quite low."
Based on a two per cent market return and one per cent inflation, she could withdraw about $5,000 a year until age 90 under either scenario. (Although the inflation figure is low, as a GIC investor, Erma should earn a higher return on her savings as inflation rises because interest rates should increase correspondingly.)
"At age 90 she will have approximately $25,000 to $30,000 of registered assets remaining, depending on which option she chooses," Brooks says.
While Erma's budget will become even tighter when she eventually retires, she will be eligible for the Guaranteed Income Supplement (GIS), available to low-income seniors.
"GIS is available to seniors who receive OAS and have income levels between $0 and $16,536, but it is a monthly benefit that is reduced as income increases," Brooks says.
The maximum benefit is $740 a month, and it's not subject to income tax. But because Erma receives CPP and will be withdrawing money from her LIRA and RRSP, the benefit will be reduced.
"The more Erma reduces the amount she takes from her registered funds the more GIS she will receive," she says, adding TFSA withdrawals and OAS benefits do not affect the benefit.
Brooks estimates Erma's income will be about $9,700 a year, based on $4,127 from CPP, $4,800 LIRA payment and $720 from her registered retirement savings.
With GIS and OAS, her annual income will be about $20,076 a year -- substantially less than she earns today.
While Erma always has the option of withdrawing more from her savings, she risks burning through her savings. She can also borrow against her home, but that too will erode her wealth over time.
Erma's best plan of attack is to work as much as she can, while she can, and to save every free dollar for later in life.
"Her situation is tough, but manageable," Brooks says. "She will really, really have to budget carefully and keep expenses as low as possible."
Work: $16,732 ($1,394 a month)
Spousal support: $900 a month
Total annual income: $30,688
Monthly expenses: $2,194
Line of credit: $1,571 a 3.5 per cent
Credit card: $1,500 at 19.99 per cent
Legal fees: $2,000
LIRA: $106,000 in GICs
RRSP: $15,960 in GICs
TFSA: $11,182 in GICs
NET WORTH: $298,071