Savings crippled by kids’ illnesses, couple struggles to find a way to retire
Parents spent much of savings on their four kids’ disabilities, now have little capital As kids grow up, shift spending on schools and therapies to education, then retirement
In a small town in eastern Ontario, a couple we’ll call Geoff and Maria are raising their four children ages 14 to 18. At their respective ages of 58 and 56, dad and mom, who have a take home income of $11,034 a month, are nearing retirement with a net worth of $254,000. Their $287,000 mortgage will not be paid off until Geoff is 74 and Maria is 72. Their problem — the high cost of treating their children, each afflicted with a rare neurological problem, has limited the couple’s ability to save for their retirement.
The family’s problems break down into 1) the ongoing cost of caring for their children, whose medical needs have not been well covered or even substantially paid by the Canadian health care system and 2) financing their own retirements given that they may have to continue to support the children even after they retire. Maria has her own neurological issue which has impaired her career and initially kept her in relatively low paying jobs.
Geoff trained abroad in transport management. His company crashed in 1988. Then he retrained in computer science and worked his way up from minimum wage jobs to his present management job with a large company. Their story is one of personal struggle complicated by the high costs of medical services they have borne.
“Our children were born with neurological problems our local hospital and health care system did not recognize for many years until the kids were too old to qualify for some programs,” Maria explains.
“We had to pay $136,000 ourselves for their therapy, then $77,000 for specialized private schooling, and $53,000 for after-school programs for kids with their disabilities.
“We have spent a fortune — really our retirement money — on the kids’ medical needs. Those needs have been taken care of. But now, with scant retirement savings, what do we do? What sort of retirement will we have?”
In fact, by gradually shifting spending on what appear to be subsiding medical needs to education funding and then retirement savings, the couple can have a more affluent period after their careers. Unlike most retirees, their disposable incomes available for their personal use will actually rise.
Family Finance asked Graeme Egan, a financial planner and portfolio manager with KCM Wealth Management Inc. in Vancouver, to work with the couple. His strategy — maximize tax benefits associated with the illnesses and then work to increase the children’s education savings and their own retirement savings.
Budgeting
The first step is to add up income and compare it to spending. There is not much fat in the budget. Even large items such as $763 a month for children’s activities and school trips are reasonable for four children.
An argument can be made for immediately shifting at least some of this spending, $9,156 a year, to the family’s RESP, but given the children’s special needs, their programs need to be kept intact until each is ready for post-secondary education, Mr. Egan suggests.
Geoff and Maria have allocated $6,000 of their family RESP for their eldest child, now 18, who expects to start university in the fall. At $3,000 a year plus $600 from the Canada Education Savings Grant, the fund will have the remaining $4,000 plus $7,200 and modest growth when the next child, now 16 is ready for post-secondary education in two years. There is no way to save up enough for all four children’s university or other course expenses, so each will have to get part time or summer jobs to help out.
As the children grow older, the parents can cut back on children’s activities and school trips they are maintaining for now, shifting that spending to the RESPs or to direct payments to the kids’ post-secondary education. Twins age 14 are four years from starting post- secondary education. If the $9,156 a year currently allocated to children’s programs is eventually diverted to university expenses in stages as each child is ready for university, the children can each have $8,000 to $10,000 a year for their tuition and books. If they live at home, basic costs will be covered.
Retirement planning
The couple’s RRSPs have a present value of $103,000, $25,000 from a recent lump sum contribution which Geoff made with borrowed money. Geoff has $6,000 of unused RRSP room and Maria has $43,000 of unused room. His tax rate is higher than Maria’s, so he should fill up his space first. Then Maria, with a lower income, can fill her space, Mr. Egan suggests. They can split RRIF income, so spousal plans are not essential.
At present, Geoff and Maria are putting $6,000 a year into RR SPs which effectively pays off his loan. Even after Geoff’s RRSP loan is repaid in four years, they can maintain this savings rate. If they do this for the three years through to Geoff ’s age 65 and are able to attain a 3% rate of return after inflation, they will have about $145,000 in 2014 dollars. If that money continues to grow at 3% after inflation and all capital and income is paid out in the next 30 years, it would generate $7,100 a year.
Given the family’s continuing need for special education and therapy for their children, and perhaps more uncompensated treatment in the United States, it is likely that Geoff will work to the end of his 65th year. At 66, he would have an employment pension of $58,200 and Maria, then 64, an employment pension of $25,900. Their age 65 CPP benefits, $12,460 a year for Geoff and $9,348 a year for Maria plus $7,100 RR SP payouts, would lift their total pre-tax income to $113,000. Old Age Security at $6,619 each would push their total pretax income to $126,250 in 2014 dollars. If evenly split, they would have $63,125 each and be below the OAS clawback trigger point of $71,592 in 2014.
Geoff and Maria would pay an average of 20% of their individual income in tax with pension and age credits, leaving them with total after tax income of about $8,420 a month.
“As the kids grow up and leave home, the couple can build savings and retire in comfort,” Mr. Egan notes. “Income in excess of spending can go to a trust for the kids, but that will be the parents’ choice given the kids’ needs. Bottom line: Geoff and Maria can have in retirement pleasures they have had to deny themselves in their working years.”