Raising three kids, one disabled, challenges couple’s retirement plans

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In Alberta, a couple we’ll call Larry and Sally, ages 56 and 52, respectively, have three children. Two have graduated from university.  A third is disabled and lives independently with the assistance of government funded caregivers. Their goal — $10,000 monthly post-tax retirement income.

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The family’s monthly income consists of $15,000 from Larry’s job and $3,750 from Sally’s work plus $1,500 per month from government assistance plans for their disabled daughter, for a total of $20,250 monthly.

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Financial outlook

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Their retirement plans are as complex as their family budget. Larry would like to retire in nine years at age 65. Sally would like to retire in five, at 57, when she can expect a pension from her provincial government employer. But that timeline for Sally is wishful thinking, as their mortgage will still have several more years to run before it is extinguished.

Both will be eligible for full Old Age Security, $667 monthly at present. Both will also be eligible for full CPP at 65, when Larry can receive $1,254 per month and Sally $667. Their assets, including their $1.8 million home, a $250,000 rental, $1.265 million in RRSPs, $80,000 in TFSAs, their disabled child’s $26,500 Registered Disability Savings Plan, her $220,000 condo and two cars worth $65,000 add up to $3,706,500. Debts including a $630,000 home mortgage and HELOC and mortgages totalling $345,000 for the rental and daughter’s condo, add up to $975,000, leaving net worth of $2,731,500. Their disabled child will benefit from a discretionary trust that allows her to receive provincial financial assistance indefinitely.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Larry and Sally. “The challenge is to avoid taking on too many costs,” he explains.

They have one grandson now. They are putting in $1,200 per year into his Registered Education Savings Plan, which attracts an additional $240 in Canada Education Savings Grants. Assuming a return of six per cent less three per cent inflation, the RESP account, maintained by the grandson’s parents, will have $32,275 in 2022 dollars in 17 years when post-secondary education looms. They may have to supplement this sum, for it will be barely sufficient for four years of post-secondary education if the child lives at home. If they have more grandchildren, the parents will have to pick up the slack, Moran explains.

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Financial engineering of their total assets including their home will help. Their $500,000 home mortgage has ten years amortization left. Its present 2.15 per cent interest rate will rise when the mortgage note is renewed. To generate a higher after-tax return on savings and thus ease the pain of rising mortgage payments, Larry can make a spousal loan to Sally, let her make investments in her name and pay a lower tax rate. He must charge her the prescribed rate, which recently rose to two per cent per year, and use the returns to pay down their daughter’s $165,000 condo mortgage.

Funding retirement

Sally has a defined contribution pension, effectively an RRSP, with a $65,000 market value. Employer contributions are $5,300 per year. Assuming six per cent growth including three per cent annual inflation, the RRSP will have a value of $104,335 at her age 57. If she then spends the money in the four years before Larry has started to draw down his retirement accounts, she can take out $26,084 per year as a boost to income for the period. Doing this with income splits would allow withdrawal at a low tax rate compared to drawdown after Larry’s RRIFs have started.

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Larry will get $15,043 annual CPP per year, at 65. Sally can expect $8,000 in CPP. Both will get full OAS, currently $8,004 per year. Larry has $80,000 in his TFSA. He should move $45,000 to his RRSP, leaving a balance of $35,000 that could fund gifts to children, Moran notes.

Larry’s RRSP holds $1.2 million to which he adds $2,000 per month. If he puts another $45,000 in from his TFSA, as suggested, the balance will rise to $1,245,000. The $45,000 contribution will generate a tax refund of 48 per cent, which is $21,600, and that can go back to the TFSA. If he continues to add $2,000 per month from his cash flow for eight more years to his age 65, the RRSP with three per cent growth after inflation will have a balance of $1,797,000 in 2022 dollars. That capital will support spending of $91,680 per year to Sally’s age 90.

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At age 65

When their $53,496 of annual house mortgage payments end in about nine years at Larry’s age 65 and they end $24,000 annual RRSP contributions, they will relieve their budget of $77,496 of annual expenses. If the $500 monthly present annual cost HELOC loan is paid off in nine years with additional contributions of $900 per month from non-registered savings — total $16,800 per year, total annual savings will be $94,296 per year. Reducing spending further with $21,960 per year for paid up vehicle loans and the total of all cuts, $116,256 in retirement, would reduce present spending of $243,000 per year to $126,744 per year or $10,562 per month. They could also sell one car to save perhaps $700 monthly fuel and repairs to drop spending to about $9,862 per month, not including government support for their daughter.

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When Larry is 65 and Sally is 61, they will have RRSP income of $91,680 per year, Larry’s CPP of $15,048, and his $8,004 OAS and Sally’s $45,000 pre-tax salary for total income of $159,732. With splits of income, each partner will have $79,866 taxable income, a negligible amount over the OAS clawback start point of $79,845, and pay tax at an average 20 per cent rate, so that disposable income will be $127,548 per year or $10,648 per month excluding funding for their daughter. That is more than projected retirement spending.

When both are 65, they will not have Sally’s income but can add her $8,000 CPP and her $8,404 OAS for total income of $130,740. After 18 per cent average tax, they will have $107,060 per year or just under $9,000 per month to spend. That’s below their $10,000 target but sustainable, Moran suggests.

Retirement stars: 4 **** out of 5

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