Can I retire and still pay for my husband’s health care?

In British Columbia, a couple we’ll call Hugh, who is 52, and Ruth, who is 51, anticipate a financial bind when each hits 65. It’s a common situation for anyone going from an active career to retirement, but in Hugh’s case, it’s far worse for he has been sliding down the income ladder for decades, the result of a progressive neurological disorder.

Hugh retired two decades ago from his job as a marketing researcher. His annual salary, the equivalent of $60,000 in 2013 dollars, was the main support of the family that included three children, each of whom has left home and is self-supporting. His current combination of pensions and disability payments is $46,120 a year.

Ruth, who works for a private financial management company, earns $47,700 in salary and dividends from company shares before tax and has become the family’s main breadwinner. Their total income, $93,820 before tax, pays for a comfortable life with no debts other than a $45,000 business loan that pays for itself. But it isn’t going to last.

Were Ruth to retire at 60, as she would like, total family income would drop by half. Their income has hit a ceiling and though it may rise with the indexation built into some of Hugh’s government pensions, their real spending power is not going to increase.

To the contrary, they face declining income and, because of Hugh’s illness, rising health care costs.

THE DILEMMA

Hugh and Ruth are caught in a bind that affects many people for whom age and illness go together. Hugh’s illness could turn critical, raise care and living costs and confront Ruth with the choice of taking care of him at home or working more years to pay for his care. That would break the couple’s financial security.

“Can I retire, given that some of my husband’s disability payments will stop when he is 65? And if I can retire, when can I do it without excessively prejudicing our finances?”

Family Finance asked Graeme Egan, a financial planner and portfolio manager with KCM Wealth Management Inc. in Vancouver, to work with Hugh and Ruth.

“The answer to the question of when Ruth can retire has to be answered by doing income projections,” Mr. Egan says. “She can retire in nine years at 60 and the couple can maintain their way of life without major sacrifices. But they have to plan for the income slump, which will be substantial. While she is working, her income will cover some special care, if it is needed. It’s what comes later that needs to be planned.”

Ruth works four days a week. If she retires at 60, she would receive a CPP benefit of about half the maximum $12,150 a year with a 36% reduction for early application. Her net pre-tax CPP benefit would be $3,888 a year.

On top of her CPP benefits, she and Hugh could withdraw money from their RRSPs. At present, she contributes $1,200 a year to her company RRSP, which the employer approximately matches with a contribution of $1,155 and she adds $6,500 a year to her own self-directed RRSP.

Hugh is able to put $6,500 into his RRSP to fill available space. Total an- nual contributions from the couple and the employer, $15,355, will grow in nine years at 4% after inflation on top of their present $251,000 of RRSP to a total of $526,250 when Ruth is 60. The RRSPs could provide a pre-tax income flow before tax of about $26,500 a year at 3% per year after inflation in more conservative investments than during the period of accumulation to Ruth’s age 90, the planner estimates.

If Ruth retires at 60, Hugh’s income will not have changed, so their total income, including RRSP withdrawals at $26,500 a year, would provide total income of about $76,500 before tax. Assuming pension splitting and a 15% average tax rate, they would have after-tax income of $5,420 per month to spend.

Ruth has $110,000 of company shares in her employer that she must sell back to the company at retirement. They are her only non-registered investment and their present income, $6,300 a year, offsets interest she pays on the line of credit used to buy them. Their net value after deducting the $45,000 line of credit used to buy the shares, which costs her 5% a year interest, is $65,000. Gains she may realize could be parked in tax-free savings accounts. At a 3% annual return over inflation, the shares merely at cost would add $3,300 to their annual after-tax income, Mr. Egan suggests.

When Hugh turns 65, their income will decline when his CPP disability benefit drops and he loses wage replacement and other insurance benefits. The net loss would be $2,150 a month. However, half of that income drop would be made up two years later up by Old Age Security, which Hugh would get at age 67 at $546 a month and a year later, when Ruth receives the same benefit at her age 67.

So their total income drop would be $1,058 a month before tax to about $64,000 before tax or, after 15% average income tax, $4,535 a month. Their present $3,965 monthly spending net of RRSP contributions, line of credit payments and property tax that they can defer at age 55, would be sustainable, Mr. Egan says.

There would be money for more travel. If they shed one vehicle, probably an old pickup truck, there would be even more cash for travel or good causes.

If Hugh remains in relatively good health, the couple’s budget and lifestyle will be sustainable. If his illness worsens and he requires home care, the cost will be unavoidable. Given his illness, it is unlikely that he could buy critical illness coverage or longterm care insurance, Mr. Egan notes.

Ruth, on the other hand, should investigate the cost for herself. The death of the first partner, depending on when it occurs, will end pension splitting, eliminate one OAS payment, and cut CPP benefits. However, Hugh and Ruth have life insurance policies with death benefits of $60,000 and $50,000, respectively, that will offset some of the income losses. The insurance should be retained, especially because Hugh is no longer insurable.

“This couple has done everything possible in their situation,” Mr. Egan says. “As long as Hugh’s condition does not worsen, they can look forward to a comfortable retirement at Ruth’s age 60 with no significant reduction in their way of life. If he does get a lot worse before she retires, there will be tough choices to make.”