This Ontario couple wants a retirement plan that ensures support for their disabled son

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In Ontario, a couple we’ll call Oliver and Julia, both 60, have raised two children, now in their early 30s. One, who we’ll call Fred is independent and the other, Sid, is disabled and in need of constant care. Oliver brings home $5,000 per month from his job in charity administration. Julia, already retired, has net income of $1,100 per month from her work pension and $460 per month from the Canada Pension Plan, bringing their total income after tax to $6,560 per month. Their question: Will their work pensions, OAS, CPP and investment incomes allow them to sustain their present way of life when they are fully retired? And what can they do to support Sid when they are gone? Planning for decades ahead is a challenge.

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Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based private investment management company Exponent Investment Management, to work with Oliver and Julia.

Retirement goals

Looking ahead, they are concerned that their condo, purchased last year for $395,000 with a $312,000 mortgage, could become an albatross if interest rates have risen substantially from their 2.39 per cent level when their loan renews in 5.5 years. For now, they pay $1,131 per month, about 17 per cent of take-home income.

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Oliver would like to retire in 2024 when he will be 62 or, if they have to wait, at 65. At 62, they will still be making $616 monthly payments for two cars (a third is already paid in full) but at 65, the cars will be fully paid and they will no longer need to feed $200 per month to their RRSPs. But they would like to have $500 per month for travel. Altogether, their retirement budget will have to support $6,000 per month of expenses and help their disabled child as much as possible. The task is doable.

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For now, the couple’s assets include their condo, a $600,000 cottage, $33,500 worth of cars, $195,900 in RRSPs, permanent life insurance with present cash value of $26,000 less the $312,000 condo mortgage and $26,000 of car loans. That makes for a net worth of $912,400.

If Oliver were to retire at 62, his pension would generate $4,370 per month including a $370 monthly bridge to 65, while Julia’s pension income would add $1,560.

Their RRSPs with a present value of $195,900 with additions of $2,400 per year should grow to a value of $212,848 in 2022 dollars in two years assuming a three per cent rate of return after inflation. That sum would support additions of $9,950 of annual taxable income to their age 95, assuming the same rate of growth after inflation. Pension and RRSP income would then total $81,110 per year or $6,759 per month. After 13 per cent average tax, they would have $5,880 per month to spend, barely enough to support present expenses with no margin for error.

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If they wait until age 65, things change dramatically. Oliver’s pension will provide $4,340 per month before tax. He can add $1,430 CPP per month and $642 OAS. Julia’s can add her $642 OAS gives them total pre-tax monthly income of $8,614 or $103,368 per year without any RRSP income.

Their $195,900 RRSPs with another four years of growth and $2,400 in annual contributions will grow to $230,829 and then provide $11,434 per year for the following 30 years to their age 95 when all income and capital will be exhausted. That would push total annual income to $114,802. After splits of eligible income and 15 per cent average tax they would have $8,130 per month to spend. That exceeds present spending and will provide extra cash for travel or for support for Sid, their disabled child.

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Permanent child support

In Ontario, it is possible to arrange a so-called Henson Trust for permanently dependent people. The device gives absolute discretion over management and disbursements to trustees. Capital belongs to the trust, not the beneficiary, who then may qualify for public support. Such trusts need to be created by counsel experienced in wills and estates. They can provide support for beneficiaries even after parents are gone.

So why did Oliver and Julia not set up a Registered Disability Savings Plan for Sid? “We had cash flow worries and did not want to commit money when we might need it,” Oliver explains.

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That fear of needing cash but not having it also explains why the couple has not used Tax Free Savings Plans. In fact, money going into a TFSA is available at any moment with no withdrawal penalties.

RDSPs and TFSAs are among the most advantageous of federal income subsidies. There is time to make TFSA catchups and to create and fund a modest RDSP.  The RDSPs qualify for government supplemental contributions up to the beneficiary’s 59th year with supplements called Canada Disability Savings Grants similar to the Canada Education Savings Grant available. CDSGs go up to $3,500 per year with totals capped at $70,000 with an age 49 limit for grants and a 10-year carryforward for unused entitlements. Oliver and Julia would do well to investigate making use of RDSPs as a means of funding a Henson Trust, Einarson suggests.

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Hiring counsel to set up a Henson Trust, to find suitable trustees and to position the trust in the context of the family’s wider financial concerns will take time and perhaps some money. It will be worth it. Indeed, it could have been done years ago. However, there is time to plan.

A long view

Five years from now when both parents are 65, they will have a cash flow surplus which they can use to fund an RDSP for Sid. He will have about 14 years to have his RDSP attract government contributions. That would be a good way to make use of his parents’ increasing income as they reach 65, Einarson suggests.

With income surplus to their immediate needs, Oliver and Julia can establish Tax-Free Savings Plans. With no employment income to shelter in RRSPs, TFSAs offer the best long investment shelter available.

3 Retirement Stars***out of 5

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