Their choice to close the gap is either to spend less or to sell their $400,000 antique car
In Alberta, a couple we’ll call Roger and Jan, both 45, are raising Mary, 12, who has physical disabilities, and Pat, 10. Roger is a consulting engineer; Pat is an accountant. They bring home $11,590 monthly from their jobs. They want to retire at age 60 if they can provide for Mary’s needs for the rest of her life. Given that Mary is expected to live a full life, that is no small financial challenge.
Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Roger and Jan. They have to pay off their $650,000 mortgage which currently costs them $2,537 per month and an $11,000 truck loan that costs $588 per month.
Family assets are complicated. Roger and Jan have already made preparations for retirement. They recently sold $400,000 worth of raw land, leaving them with $600,000 of undeveloped land. Their RRSPs have a value of $588,000, plus $145,000 in their TFSAs, an $18,000 RESP and $7,000 in a Registered Disability Savings Plan. In addition to their financial assets, they also own a truck and a car, together worth $55,000 and a rare car worth $400,000.
They cherish their antique car and would only sell it under duress. But they could liquidate some of their $1 million in investment real estate and pay off the $600,000 mortgage on their house. They would be left with an $11,000 truck loan which costs $588 per month to service. There’s no rush, for the truck is used in business. Its costs are mostly tax deductible, they explain.
Mary’s financial dependence
Mary’s future cost of living will depend on her condition. She has a Registered Disability Savings Plan, which, though small, will grow over time. The $7,000 present balance with the addition of $4,800 per year growing at three per cent per year after inflation for the six years to her age 18 will grow to $40,400. RDSP rules provide bonus grants akin to the Canada Education Savings Grant, but they decline as family income rises. In this case, the RDSP can get a grant of up to $1,000 per year, adding $6,000 plus growth to the capital of the RDSP. The RDSP can be a foundation for a discretionary testamentary trust for her so that, when her parents die, independent trustees can distribute money for her care. The parents should consult their own counsel to ensure they can comply with rules and manage the trust for Mary’s benefit.
If the couple’s remaining land appreciates in value and they are able to sell it for $700,000, then they can pay off their remaining mortgage and car loans, total $661,000. They would have $39,000 of cash left, which can go to the family RESP, which currently holds $18,000. That combined sum, growing for the five years to Mary’s age 17 at three per cent per year after inflation, would rise to $66,100. Given her disabilities, she would have other supports to draw on, so much of the RESP might continue to grow for Pat’s benefit. The RESP with these additions would support Mary and Pat for four years at any Ontario post-secondary institution provided that each child lives at home.
If Roger begins to add $1,500 per month to his current RRSP with a $308,000 present balance, it will grow at three per cent after inflation to a value of $824,680 in 2021 dollars in 15 years at age 60. That sum will provide an income of $37,260 per year to his age 95.
Roger’s TFSA with a $60,000 current balance and additions of $6,000 per year will grow to a value of $208,420 in 15 years with the same assumptions. The TFSA will then be able to add $9,417 of non-taxable income per year to his age 95.
Roger will have $9,000 taxable Canada Pension Plan income at age 60 and Old Age Security benefits of $7,500 per year at 65 using 2021 rates. Jan will have an age 60 CPP benefit of $7,400.
Adding up retirement income
Jan’s income and benefits, assuming she works full time, will grow her present RRSPs with a value of $280,000 to $987,949 over the next 15 years assuming combined contributions of $2,400 per month. The RRSPs would then be able to pay her $44,640 per year for 35 years to her age 95. Her CPP payable at age 60 would be $7,400 per year, Einarson estimates. Her OAS would match Roger’s at 65. Her $85,000 TFSA with additions of $6,000 per year will grow to $247,370 in 15 years and then be able to add $11,177 of annual, tax-free income.
Combined, their incomes at age 60 would consist of $81,900 from their RRSPs and $16,400 from the Canada Pension Plan. That’s a total of $98,300.
After splits and tax at an average rate of 17 per cent, they would have $81,590 per year. TFSA incomes, $9,417 for Roger and $11,177 for Jan, total $20,594 would lift total cash flow to $102,184 per year or $8,515 per month. They’d like $10,000 per month in retirement, so this projection is $1,485 per month short of that goal.
At 65, the couple could add two OAS benefits, $7,500 each, so that total taxable income would rise to $113,300. After tax at an average 18 per cent, they would have $92,906. Addition of $11,177 TFSA cash flow would bring income to $104,083 or $8,673 per month, still short of their $10,000 monthly income goal.
Their choice to close the gap is either to spend less or to sell their $400,000 antique car. If that sum were invested at three per cent after inflation for 15 years or kept for that time with the same growth rate, it would have a value of $623,200 and then be able to pay $28,160 for 35 years to family income assuming a three per cent annual return less taxes of about 20 per cent per year. $15,924 could go to parents’ retirement and the balance, $12,236 to Mary.
Her annual income would be enhanced with payouts from her RDSP and disability grants. Parental support could continue for decades, delaying the time Mary has to draw on her trust. The parents might also convey part of their home’s future value to the trust. However, the discretionary trust concept allows Mary to have her endowment and to apply for supplemental income.
In that package, she could count on a $30,000 annual income before taxes with many concessions for her disability, such as the disability supports deduction that could make most of her pre-tax income tax free. Of course, if Mary can have a career of her own, her income would rise, but it would be premature to estimate that eventuality. Nevertheless, she would always have a base income cushion of at least $30,000 after negligible taxes. Legal and accounting advice for the trust would be essential.