Financial Planning for the Single Person
“This whole notion of marriage is out of date.” Maybe. Or maybe this whole notion of marrying for love is out of date. Let’s bring back arranged marriages. Do you think that is farfetched? Although in decline, the practice of arranging meetings between prospective spouses, known as an omiai, is still done in the advanced country of Japan.
I suspect arranged marriages are not going to make a comeback in the more individualistic western nations anytime soon. However, it might help to solve the problem of individuals who would like to get married but who, for whatever reason are not successful in finding a partner. For something as important to life as marriage, should the outcome be left to chance? But I digress.
Regardless of the reason, many people never get married and never have children. Of course, many married couples do not have children either, but my point is that the single person does not have a spouse or partner upon whom they can lean for support, or in later life, no adult children who are likely candidates to watch over their affairs.
Financial Disadvantages of Being Single
This is not to say that the state of singleness is inherently somehow less than the status of marriage. Indeed, for many, it may be preferred. I mentioned Japan earlier. Not only are arranged marriages declining but marriages in general are becoming less frequent. For many, then, marriage is not perceived to be advantageous.
In Canada, the trend away from marriage is also increasing. This is happening despite the relative financial benefits that marriage can bring. Consider:
- Taxation. Married couples have methods of splitting or evening out income, resulting in an overall reduction in income tax. These options are not available to people without spouses or common-law partners (CLPs).
- Shared Housing Expenses. While nothing necessarily stops a single person from finding a roommate, having a spouse or CLP tends to make housing more affordable. This includes not only rent or a mortgage but utilities as well. Consider that when saving for a first home purchase, a couple can each withdraw up to $35,000 from their RRSPs for the Home Buyers Plan as well as each contribute up to $8,000 per year to the First Home Savings Account (FHSA). After five years of contributing to the FHSA, excluding investment growth, a couple could build up to $150,000 in savings (HBP + FHSA) x 2 = $35,000 + $40,000) x 2 = $150,000. The single person maxes out at half that amount.
- Shared Food Expenses. It is generally the case that buying in bulk is cheaper than buying in smaller amounts. For example, a 2 L carton of 2% milk at a supermarket near my home is $5.19 while 4 L of milk is $5.89. For a 100% increase in volume, you only pay about 13% more.
- Canada Pension Plan Survivor Benefits. A surviving spouse can receive up to 60% of a deceased spouse’s CPP pension. Obviously, if there is no spouse, there are no benefits to the survivor.
- Registered Pension Plan Survivor Benefits. Similar to the situation with the CPP, typically if there is a surviving spouse or partner, the survivor receives at least 60% of the pension entitlement in the case of a defined benefit plan. In the case of a defined contribution plan, the entire accumulated value may be passed on to the survivor. Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) are usually treated the same way.
- Extended Health Care Benefits. Not every employer offers a group benefits plan, but the odds improve if you are one-half of a couple since these benefits are often available to the spouse of the employee as well as the employee her- or himself. A single person may, therefore, feel the need to be more selective about the jobs chosen, buy private extended benefits, or pay “out of pocket” for those added health care needs.
- Social Costs. This may be an issue. Couples typically have each other to turn to for social interaction and mutual support in decision-making. A single person may choose to spend more on social activities to build supportive relationships. This in itself can be costly.
Steps You Can Take
Without additional support from a spouse or CLP, a single person may find it even more important to build some financial safety nets to counter some of the challenges of living alone.
Financial Management
Given some of the vulnerabilities of living alone, the requirement to be self-sufficient makes it all the more important to be prepared for the financial rough spots. Among the first things that come to mind for me is to build up an emergency fund. If you lose your job, you are unable to rely on the continuing income of a spouse, so an emergency fund is imperative. I am not a big fan of having a budget, but understanding your “cash flow,” your income and expenses, will help you understand how much you need to set aside in case that kind of fiscal emergency occurs. Review your expenses over the last year and work toward having up to a half-year of that spending set aside.
Where should you keep your emergency fund? You want to keep it accessible and available to be withdrawn within a day or two, so putting it in risky investments like stocks or bonds, both of which can lose money over the short term, is not ideal. Instead, choose a high-interest savings account or a cashable GIC. As for an account type, if you have the contribution room, consider a Tax-Free Savings Account (TFSA). My first choice for the TFSA is to use it for long-term investing, especially if your income is below about $50,000 per year. If the room is there, though then the TFSA is a good choice. A second option is to put the money in a non-registered savings account or cashable GIC. The various online banks tend to have rates superior to the major Canadian financial institutions, so those should always be considered.
Investment Planning
Investing is often done in the service of meeting one’s needs in retirement. And again, the issue of not having a partner to share the investment planning with means that you need to be solely responsible for the approach you take.
The lowest barrier to investing is through a local bank or credit union and having one of their advisors open a mutual fund account for you. If you are reasonably comfortable online, you may wish to use a so-called robo-advisor, a kind of online investment portfolio manager that does the investing for you. The best service I think that most robo-advisors offer is the policy of diversified investing. If you are more adventurous or confident in your approach, you can also choose the discount or online broker approach. With this service, you need to make the investment decisions yourself. Finally, if you lack the ability or willingness to manage your investments, you may wish to consider a full-service investment advisory firm or an independent low-cost mutual fund provider. These firms will provide you with investment recommendations and implement the recommendations you accept.
Depending on your income and your retirement account options through your employer – defined benefit pension, defined contribution pension, group RRSP, or deferred profit-sharing plan – you will want to start with either an RRSP or a TFSA. If these account types are maximized, then a non-registered account is the next step.
Beyond the account type, you will want to get some guidance on your tolerance for investment risk, your need for a certain level of return on your investments, and the time horizon you are considering for using the money you are investing. These considerations will help you or your advisor decide how you are going to allocate your money among riskier, less risky, and risk-free products.
There is nothing here that is meaningfully different for a single person than for a couple, except that with only one person involved, the single person needs to rely entirely on him or herself, whereas it is often the case with couples that one or the other has a stronger interest in the investing side of things.
Tax Planning
There are several tax-saving opportunities available to couples that simply do not apply to single people. Nevertheless, there are actions you can take to reduce taxes. If your income warrants using an RRSP, then maximizing that contribution will help defer more of your taxes. The TFSA doesn’t give you a tax deduction, but like the RRSP, income received in a TFSA is not taxed and it can be withdrawn tax-free.
If you have medical expenses that you must pay for “out-of-pocket,” you can collect your receipts and claim a medical expense tax credit.
In retirement, there are potentially more tax savings available. Tax credits for those aged 65 or older include the “Age amount,” which, however, does reduce as your income exceeds certain thresholds. There is also a “Pension income amount,” which allows for a tax credit based on the first $2,000 of qualifying pension income.
Another category to consider is charitable giving. Donations above $200 per year qualify for a 29% federal tax credit. This is nearly double the standard 15% credit for donations not exceeding $200. Since donations can be carried forward up to five years, if you do not tend to give more than $200 in a year, you may wish to defer the claim for a year or two to increase the size of your tax credit.
Retirement Planning
Retirement planning is about saving a portion of your income now so that it can sustain your spending needs in retirement. However, probably the first step is to understand what you are likely to receive from government-sponsored programs. For example, if you expect that you will have little in the way of savings because of a career of low earnings and/or no pension, then you may be eligible for the Guaranteed Income Supplement (GIS) at age 65 along with Old Age Security (OAS). If you do have savings in a low-income situation, then focus on the TFSA rather than the RRSP. Reading John Stapleton’s work will help you understand these strategies.
For those with incomes that will exclude them from receiving GIS, using a TFSA may still be a good idea to prepare for retirement, but the higher your income now, the more value the RRSP has in terms of reducing your taxes now and allowing tax-deferred growth.
One of the big questions about retirement has to do with when to begin receiving CPP. While many retirees begin receiving CPP well before 65, with the general increase in the longevity of the Canadian population, you may wish to seriously consider delaying CPP until as long as age 70. Each month past age 65 that you delay increases your payment by 0.7% or 8.4% per year. This would, of course, require you to find income from elsewhere if you retire before age 70, but exchanging the uncertain returns from an investment portfolio for the guaranteed, inflation-adjusted payments from the CPP certainly makes sense.
Overall, the approach here is to understand your potential sources of income during retirement and assess where you need to put more away in savings to reach your retirement income goals.
Insurance and Risk Management
Annuities are a product sold by insurance companies that address one of the biggest risks in retirement planning – longevity risk, the risk of living longer than your money lasts. Insurance is about protection against risks, so while the discussion about annuities could easily apply to retirement planning, I have included it here. If you are uncertain about the adequacy of your retirement reserves, an option that is available to you is to take a portion of your assets set aside for retirement and use them to purchase an annuity that will provide you with income that will last a lifetime. I should note that annuities are not a popular product, despite research indicating that they are often a superior choice. However, for a single person without heirs, I would argue that they should be more popular since there is no one else who is going to need your assets after you are gone.
Disability Insurance is another insurance product that I think needs more attention. People often focus on life insurance, and this is indeed important when a spouse/partner and dependants are involved. However, in the case of a single person without dependants, the more important risk protection is against disability. A single person who is unable to work due to disease or injury will need a source of income that is likely well beyond what is available through personal savings. While many employers offer group disability benefits, it may not be suitable for your needs. However, for those who might not be able to qualify for privately purchased disability insurance, group coverage may be your only option.
Another insurance option that may be more important for a single person than for a couple is Critical Illness Insurance. Meant to pay out if you are diagnosed with cancer, stroke, heart attack, or other diseases, you may well survive the disease but need significant refitting of your home to accommodate a consequent disability, or to pay for home care or other medical expenses.
Finally, Long-Term Care Insurance (LTCI) is another consideration that may be even more applicable to single people than to those who have a partner. However, LTCI has become increasingly less available from most insurers unless paired with another form of insurance.
I would not necessarily regard life insurance as a necessity unless someone who is depending on you would be left in a financially difficult situation after your death. Regardless, an appointment with a life insurance broker to discuss these options should be a high priority. The younger you are, the more I would emphasize disability insurance. Critical illness would fall second in order of importance. After that, you might want to investigate long-term care insurance or its equivalent. Finally, annuities should be investigated at or around age 70 or 71 since the older you are when you initiate the payments, the more you are going to receive.
Estate Planning
Even if you have no particular desire to leave financial assets to family members or a charity, if you have any assets that are likely to last longer than you are, a will is a good idea. One way or the other, your estate will need to be wound up. You should at least plan according to your desires rather than letting the courts distribute your assets in a way that you would not have intended.
More important than a will, however, is the Power of Attorney. Along with disability insurance, this is one of the most important exercises you can engage in. Disability insurance will help provide you with the financial resources you need, but if you lack the capacity to manage those financial resources, or even make decisions about your health care, you need to get this paperwork in place so that you can appoint someone you trust to act on your behalf.
Reviewing Appropriate Actions
Even as much of society seems to be built for couples, the single life is increasingly common. If that is your situation, then there are certain matters that you would do well to address. If I were to summarize the financial actions a single person should undertake, the goal is to mitigate the risks that are unique to single persons versus couples. Often, the things that need to be addressed are not that different than the issues associated with couples; rather, it is just that single people are exposed to risks that are more crucial to address: To summarize:
Financial management: address the risk of an interruption in cash flow with an emergency fund;
Investment planning: address the risk of a poor investment strategy by choosing an investment option that serves your particular needs;
Tax planning: address the risk of not having access to the tax advantages available to couples by being more diligent in maximizing the options available to you;
Retirement planning: address the risk of living beyond your financial resources by careful consideration of the sequence of available options you should use to set aside money for retirement as well as the sequence from which you should withdraw your financial resources;
Insurance and risk management: address the risk of not having a partner’s help or financial resources when in need by purchasing appropriate levels of insurance for the particular times of your life when the insurance might be necessary;
Estate planning: finally, address the risk of not being able to manage your affairs by granting power of attorney to a trustworthy friend, relative, or professional trust company.
This is the 207th blog post for Russ Writes, first published on 2023-07-24
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.
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