Can this couple still afford retirement if one of them quits to support disabled daughter?

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In Ontario, a couple we’ll call Sid, 48, and Heather, 46, are raising two teens. One, 13, is physically disabled. Sid is a civil servant with a defined-benefit pension. Heather is a technical advisor for a financial firm. They have gross incomes consisting of Sid’s $91,138 base pay and Heather’s $120,000 salary and bring home $60,000 and $72,000 per year, respectively.

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The sum of their house, RRSPs, TFSAs, non-registered assets, RESPs and accounts for their children add up to $2,447,000 including $977,000 in several term and permanent life insurance policies. They have no debts.

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Despite their solid financial position, they feel caught in a bind. Heather would like to quit her job to care for her disabled daughter, but that would slash their take-home income by about half. Can they devise a way to compensate for such a drastic cut in earned income?

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Sid and Heather.

Retirement cash flow

The couple’s expenses, $7,557 per month or $90,684 per year, include $1,217 TFSA and RESP savings, so their real spending is $6,340 per month.

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They have 625,000 in cash and $95,000 in GICs with long maturities in non-registered assets, Heather could generate income by investing her half. As much as $37,000 could be tax-free in Ontario thanks to dividend tax credits, though targeting such an amount with that little capital would entail a good deal of risk. An allocation of perhaps 30 per cent to regulated utilities with earnings and thus returns supervised buy government would mitigate risk.

Heather will have no income in early retirement, so Sid can loan her additional funds and charge her what is currently the two per cent prescribed rate for a loan. If the couple needs to spend money on large assets such as a car or a house reno, the money can come from this documented loan. Heather has to make interest payments before Jan. 31 of each following year.

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If Heather and Sid stay in their home, they should have $1.7 million to $2 million to leave to their children, plus the proceeds of $200,000 in permanent life insurance, for which they pay $6,000 per year.

Sid has a defined-benefit pension that will pay him $65,238 per year at 65 with a 50 per cent survivor benefit. Heather’s pension will pay her $5,000 per year starting at age 60.

Sid should have the maximum Canada Pension Plan benefit, currently $15,043 per year. He can take it at 65 at retirement. Heather’s 50 per cent survivor benefit will give her $7,522 per year.

Both will be eligible for full Old Age Security, currently $8,004 per year, starting at 65.

Adding up income

The couple has $160,000 in TFSAs. If they add the maximum $6,000 each per year and their money grows at six per cent less three per cent inflation per year, they will have $398,942 in 17 years when Sid is 65. That fund will generate $21,134 per year for the following 27 years to Heather’s age 90.

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The couple have $177,000 in RRSPs at present. Sid has $38,571 contribution room. His taxable income for 2021 was $91,138. Heather has $9,040 RRSP room. Sid should use his cash to maximize his RRSP contributions. That will generate a 29.65 per cent refund based on his contribution room of $11,436. The contributions should go to Heather’s spousal RRSP. Sid gets the deduction and Heather gets future income.

If they add $38,571 just once to boost RRSPs to $215,571 plus $3,073 per year for 17 years and the account grows at three per cent over inflation, it will become $425,186 when Sid is 65 and Heather is 63. If that sum is spent over the following 27 years to Heather’s age 90, it would support $22,524 per year in payouts in 2022 dollars.

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Assuming that the couple has $625,000 taxable cash and buys a $35,000 car and puts $27,135 net into RRSP (a $38,571 contribution minus the $11,436 tax refund) they will have $562,865 for investment. That sum generating three  per cent in dividends after inflation could produce $16,886 annually.

Retirement by stages

We can estimate the couple’s retirement income in stages. In the first stage, Sid will continue working but Heather will be retired. When she hits 60, her pension will kick in.

In stage 1, the couple would have Sid’s $91,138 base salary and $16,886 of taxable income for a pre-tax total of $108,024 in Stage 1. With splits of eligible income, they would pay 15 per cent average tax and have $7,650 per month to spend, slightly more than present allocations including savings. That amount will increase when Heather hits 60 and can draw her pension.

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In stage two, when Sid hits 65, both will be drawing their pensions, while Sid will also receive CPP and OAS, and their RRSP and TFSA drawdowns would begin. They would thus have: Sid’s $65,238 pension and Heather’s $5,000 pension; $22,524 in RRIF income; $21,134 in TFSA income; his $8,004 OAS and $15,043 CPP; and $16,886 taxable income. That’s a total of $153,829. After splits of eligible income and 18 per cent average tax on all but TFSA cash flow, they would have $130,000 per year or $10,830 per month to spend.

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In Stage 3, they would have all of Stage 2 cash flow plus Heather’s $8,004 OAS and her estimated $7,522 CPP for total income before tax of $169,350. After 19 per cent tax on all but TFSA cash flow, they would have $141,188 per year or $11,765 per month to spend.

The couple can plan a Henson Trust that allows trustees to provide discretionary income to the beneficiary but leaves the beneficiary without guaranteed income and thus able to receive public benefits. This is often done via a will. The couple should also establish a Registered Disability Savings Plan for their child. Contributions to the plans are not tax-deductible, but money earned in the plan is tax-free. Canada Disability Savings Grants attract federal matching grants for savings. CDSGs are worth investigation for their long-term benefits. They provide an independent income source for the beneficiary. Moreover, they are probably here to stay, independent of changes of tax policy, Moran says.

Retirement stars:  Five retirement stars *****out of Five

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