Solid pension and savings mean man on disability can retire comfortably

in Ontario, a man we’ll call Jake, 59, is raising two kids ages 12 and 13. divorced, he is supported by a large company’s disability plan. He has several serious medical issues that have sidelined him. His living expenses are paid by the plan. It provides $4,470 in after-tax monthly income. His kids’ dental costs are covered by Jake’s former partner who also receives the Canada Child Benefit.

Jake is still considered an employee and therefore has personal medical and dental insurance and drug benefits that cover his multiple health issues. If he retires, he will lose those benefits. Ontario’s Trillium drug program’s income test could also limit or exclude benefits when the full retirement income is totalled.

Jake’s employment benefits tie him to his job. While on long-term disability, his employer provides term life insurance and other benefits. Were he no longer employed, his health conditions could make life insurance unaffordable. In theory, Jake could extend his employment to 65, but he would like to be free to retire. He would like to travel when COVID-19 relents and tourism comes back to life. His question is whether he can afford to shift from disability to retirement.

Family Finance asked derek Moran, head of Smarter Financial Planning in Kelowna, B.C., to work with Jake to determine what his income and benefits will be when he retires.

The problem, the planner explains, is not a lack of retirement resources. rather, Jake has diversified financial and other assets and a CPP benefit at age 65.

He can look forward to ample retirement income. His only debt is the mortgage on his house, $21,400, which will be paid in full in two years.

At 65, Jake’s disability benefits will stop. His $439,440 rrsp to which he makes no contributions will, assuming growth of three per cent per year after inflation, will have risen to $523,526 by then. under the same return assumptions, that amount could generate $30,064 for the following 25 years to his age 90. His $125,300 TFSA with $3,600 annual contributions and the same growth assumptions to 65 would grow to $173,600 and then pay $9,680 a year for the next 25 years. $182,869 taxable assets with $6,000 annual additions and the same assumptions would grow to $258,329 and then pay $14,400 per year for the next 25 years.

Pension benefits

Adding those amounts to the anchor of Jake’s retirement — his $64,698 annual job pension — and the $13,140 he will receive from the Canada Pension Plan gives a total of $131,982. He will keep little or nothing of his $7,362 annual Old Age Security. It will be almost fully clawed back. He will have $97,627 after the clawback and 26 per cent average tax but no tax on TFSA cash flow. That’s $8,136 per month.

Jake’s after-tax retirement income will exceed his present disposable income. In four and five years, respectively, his two children will graduate from high school.

He can start paying for his children’s post-secondary education out of RESP funds that currently total $27,902. That’s relatively modest for two children even if they attend Ontario universities and live at home.

Jake is not currently contributing to the RESPS. If he does put in $2,500 per year per child, they would receive the maximum Canada Education Savings Grant of the lesser of $500 per year or 20 per cent of contributions for total contributions of $3,000 per child per year.

If we assume very conservative balanced investments of half stocks and half bonds and the fund grows at two per cent per year, it could provide $27,713 for the older child and $31,327 for the younger.

Averaging the sums, each would have $29,520, enough for books and tuition at most universities in Ontario if the kids live at home. Summer jobs could fill any gaps.

Jake will have ample discretionary income at retirement. For now, he has a good deal of discretionary savings.

His prescription drugs are covered by his disability plan. $200 each month for health and dental benefits are paid in full by his disability coverage so his net cost is zero.

His retirement pension will not cover those costs. Given his six-figure estimated retirement income, it is doubtful that the Ontario income-tested provincial drug cost plan would cover much of his rx costs. Actual retirement will bring a costly loss of benefits.

financial backups

Jake’s financial future should be secure given that half of his pre-tax cash flow will come from defined benefit plans including his job pension and the Canada Pension Plan. If his private investments in his rrsp/ rrif were to evaporate in a bad market collapse, he would still have ample defined benefit and CPP cash flow to maintain his way of life.

His house, almost fully paid for, is likely to appreciate over coming decades. It will eventually provide a taxfree gain.

Jake has a very solid financial package for retirement. His children, too, will benefit.

Jake’s financial future should be secure given that half of his pre-tax cash flow will come from defined benefit plans.