Sometimes a family’s breadwinner can’t retire, even at 65. An Alberta woman we’ll call Maeve is the principal support for her husband, whom we’ll call Tom, already 65, stricken with a progressive illness that will eventually reduce his mobility, and for her daughter, who we’ll call Louisa, 35, who has been diagnosed with a severe psychiatric disorder.
The family gets by now in financial terms, but if Maeve retired after her 65th birthday, the cash crunch would be severe. They will have to sustain almost all their present monthly expenses on an income that will drop by about 80%.
They cannot support their present way of life on future income, says financial planner Caroline Nalbantoglu, nor their child’s future welfare with present net worth. There is not much choice but a few more years of work for Maeve. Even Tom should continue to work when he is able, she concludes.
The financial plan created by Ms. Nalbantoglu, of PWL Advisors Inc. in Montreal, is complex. It has to max out Registered Disability Savings Plan contributions for the daughter, pay off credit-card debt, sell some properties that will be a devastating debt load in retirement and prepare for the day when both husband and daughter will have to be cared for by others.
“We need to know how and when to sell our rental properties and what to do with the mortgages,” Maeve says. “We have to make the right decisions for our daughter too.”
Maeve would like to retire in March at 65 and work part-time, but even that modified retirement might not be enough, especially considering this family has more than $1-million in debt.
Their current gross income, $113,130 a year, comes from Maeve’s $87,400 annual salary, Tom’s Canada Pension Plan benefit of $11,460 a year, $6,456 of Old Age Security payments and $7,814 from his variable part-time clerical work. Their disabled daughter contributes $3,600 a year from part-time work and a provincial disability plan to family income for total pretax family income of $116,730. Take off 20% estimated income taxes for three people, two of whom have low incomes, and their take-home family income is $93,384 or $7,782 a month.
They have three rental properties worth a total of $1,085,000 that, after mortgage expenses, depreciation and upkeep, produce negligible income.
Debt has to be cut down before Maeve’s retirement. The couple has $1,016,000 of mortgages and secured lines of credit and $25,000 of credit-card debt, plus condo fees and various property taxes of $840. That’s a monthly total of $4,214 of fixed obligations or $50,568 a year, which is 57% of their take-home income. It’s a heavy burden to carry into retirement.
The first to go should be $25,000 of credit-card debt. Maeve has a total of $10,000 in her Tax-Free Savings Account and Canada Savings Bonds. Tom has $50,000 of GICs that pay 3% a year. Maeve’s TFSA is invested in GICs that pay 2% a year and her CSBs pay less. Her credit-card interest is 19% a year. They can use $10,000 of Maeve’s low-interest savings and use some of Tom’s cash to eliminate the balance of the debt.
If Maeve were to retire and take a part-time job to provide supplemental income, they would still be at the mercy of interest rates without her income as a cushion. In total, the rental properties have assessed value of $1,085,000 and carry mortgages of $692,000. Sale of all the properties for, say, $980,000 after sprucing up and selling costs would leave them with $288,000 of cash they could use to pay down a mortgage balance of $324,000 on their $520,000 house. If they do this transaction, they would have $36,000 remaining due on the house mortgage. They could pay off this mortgage by using $40,000 of loans to family members they have coming due or carry the remaining mortgage for about $200 a month, depending on interest rate and amortization. In retirement, with no more mortgage costs for their house or rental properties, no more RRSP contributions, and elimination of property taxes on the rental units, their expenses would fall below $3,000 a month.
Assuming that their RRSPs get a $6,475 contribution from Maeve this year and generate a 3% rate of return after inflation adjustments, the accounts would grow from $180,000 today to $229,500 by the time they RRIF them in six years. RRIF income would be $17,167 a year. They would also have Maeve’s $1,550 defined-benefit pension from prior work. Added to two OAS benefits after Maeve turns 65, each $6,456 in 2011 dollars, and combined estimated CPP payments of $18,867 a year according to the couple’s history of contributions, they would have a pretax income of $50,496 in 2011 dollars when RRIF income flows, beginning in 2018, the planner says. If that income is taxed at an average rate of 15% — allowing for pension splits and credits for the elderly and the disabled, the family would have $42,922 a year after tax or $3,577 a month to spend. They would be able to cover their projected expenses.
But until that RRIF income flows, Ms. Nalbantoglu suggests Maeve not only keep her full-time job but Tom should continue to maintain his part-time work when possible.
Their greatest financial challenge will not be paying for their own lives, but assuring a decent life for their daughter. They should maximize contributions to the daughter’s Registered Disability Savings Plan, which, as her own asset (not the parents’) currently has a $21,000 balance. If contributions are $1,500 a year and Louisa receives grants of $3,500 a year and $1,000 a year in other support, the fund, growing at 3% a year after inflation adjustments, will have $146,400 by the time she is 49, which is the age limit for payment of government grants. To ensure that Louisa can benefit from the money and available forms of public assistance, her parents will need to create a financial arrangement that is in compliance with Alberta statutes, which restrict the use of structures available in other provinces. An Alberta solicitor who does wills and estate work should draft the documents, Ms. Nalbantoglu notes.