Unemployed dad and disabled child put family in financial jeopardy
A British Columbia couple we’ll call Harry and Evelyn, both 60, have accepted the reality of retirement. Harry was laid off a few months ago and accepts that he is unlikely to find more work in his hightech field. Evelyn did retire a few months ago from an administrative position and has a modest defined benefit pension. They live with Kim, their mid-20s child, who has a learning disability.
The family’s combined income from all sources, about $5,350 a month after tax, contains Harry’s soon- to-expire employment insurance benefits of $2,172 a month before tax, Evelyn’s $ 1,710 pre- tax pension, $875 monthly bridge pension before tax that expires at her age 65 when Canada Pension Plan benefits begin, and $930 monthly pre-tax income from her gift shop. Kim currently earns $232 a month from part time work and receives $941 each month from a B.C. Persons with Disabilities Benefit plan. Kim lives with Harry and Evelyn but would like to live independently. Another child almost 30 is independent.
For now, Harry and Evelyn are financially secure, but they are apprehensive about the future. Kim will be dependent as long as she lives. Two- thirds of their approximately $1.9 million net worth is in their house — a common feature of B.C. families’ financial lives. Another two per cent is in cars and other vehicles. That leaves financial assets that are just 32 per cent of net worth.
BETTING THE HOUSE
“Should we sell the family home in order to increase money for our investments?” Evelyn asks. “A real estate market correction could easily wipe out a third of our equity. We could downsize to a townhouse or move to a cheaper market, rent or just wait out the correction. What should we do?”
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Harry and Evelyn. “My thinking is that if they want to stay in their home forever, which they say they do, then if they can afford it, the residence’s current and future value does not matter,” he explains.
There are needs t hat should be considered. Kim could own a home one day or live in assisted housing through various B.C. plans. There are many questions the answers to which lead to other issues. If the house is sold and if they extract $ 400,000, they can fund Kim’s needs and their own.
For now, with no mortgage to pay and property tax deferred until sale of the home at a cost of less than 1 per cent a year with no compounding through a B.C. loan program for persons over 55, their house costs little to own save for the money they could earn with the $1.2 million it’s worth were they to sell and rent or move down- market and invest the difference.
Their problem is to balance a defensive strategy, which is keeping their house, with an aggressive plan that would see them sell the house, downsize or move to a condo, and invest cash harvested. The defensive plan is low stress. The aggressive plan would cut their nearly two- thirds portfolio allocation to one piece of property and allow them to diversify into financial assets or perhaps a second property for Kim.
INVESTING FOR RETIREMENT
Let’s look at how much money t he c ouple has. Their cash and GICs total $ 125,446. $ 11,000 of that is due to be transferred to their TFSA next year. They want to keep $ 20,000 cash balance for emergencies. The money available for Kim’s condo would thus be $94,446. That would be enough for a down payment, but the couple would be giving up their liquid cash and then be forced to draw on TFSAs or their non-registered cash.
If that $ 94,446 were invested in a 60/40 fixed in- come to equities portfolio expected to yield five per cent a year less three per cent inflation, it would support payments of $ 4,217 for 30 years to their age 90.
From now to age 65, assuming that neither Harry nor Evelyn return to work other than Evelyn’s part time gift shop work that pays $11,160 a year before tax, her defined benefit pension from former employment which pays $ 20,520 a year and a bridge to 65 of $10,500, both before tax, RRSP potential income from present assets of $ 415,646 able to support payouts of $18,560 a year for 30 years, TFSA income enhanced with $11,000 of contributions this year to a total $ 112,997 and then able to support payouts of $ 5,045 a year, and $4,217 payouts from present cash balances. All annuity payments are based on a conservative two per cent growth rate after estimated three per cent inflation. The total, $70,000 before tax with no tax on TFSA payouts and no EI benefits would leave them with $ 60,945 after 13 per cent average tax. That sum would easily support present annual spending of about $47,800 net of savings and allow money for travel, emergencies, and support and gifts to Kim.
The couple’s income picture changes at 65, for Evelyn would keep her $ 20,520 annual pension, lose her $ 10,500 bridge but gain $ 12,730 from the Canada Pension Plan, two Old Age Security benefits of $ 7,004, add $ 12,928 from Harry’s CPP, maintain $ 18,560 from RRSPs, $ 5,045 from TFSAs, and cash income of $ 4,217. The total, about $ 88,000, would l eave t hem with $77,500 per year after 13 per cent tax a year including untaxed TFSA payouts.
RISKS TO THE PLAN
As long as Kim lives at home, Harry and Evelyn need not give up any income generating assets. They should consult tax counsel to determine if they can set up a discretionary trust that would allow continued receipt of public disability assistance.
If Harry and Evelyn were to divert several hundred thousand dollars of capital from generating retirement income to a house or condo for Kim, they could not meet expenses nor provide extra financial benefits for her, Moran concludes.
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