It would be interesting to know whether John and Leslie acquired the non-registered savings by way of inheritance or personal savings. Based on incomes and goals, it seems as though more than John’s bonus has been applied to savings. Their solid financial base allows for adding expenditures for risk protection. They appear to be very careful and methodical with their financial decisions.

Since John’s friend recently had a heart attack, he understands the risk that a serious illness could have on his finances. It’s likely that John would be willing to discuss purchasing the right amount of health insurance. A critical illness insurance (CII) policy with a conversion option to long-term care insurance (LTCI) would provide a lump-sum benefit if he became very sick with a covered illness such as cancer, a heart attack or a stroke. In later years, he’d have the option of converting some or all of the CII policy to LTCI as his health needs change. A CII policy of $250,000 with return of premium on cancellation or expiry would cost about $10,000 per year and would be convertible to $1,250 per week of LTCI. The return of premiums would cover much of the ongoing cost of LTCI, starting at about age 65.

I’d ask John for the details of any insurance he has through his group plan, including what level of coverage will remain following his retirement. This, along with additional term insurance, could be used to help to cover Leslie’s survivor income needs (since John’s salary is their primary source of income for the next 15 years). But they also need to think about a more permanent solution.

If John and Leslie were to both die today, based on their current registered assets and the significant gain from their cottage, their tax liability would be around the neighborhood of half a million dollars. This liability will continue to grow until they are well into their retirement.

John and Leslie could apply for a permanent participating life insurance policy offering the opportunity for future dividends. I’d suggest a joint last to die policy. Annual premiums would be about $12,000. If the non-guaranteed policy values generated by dividends are sufficient in 15 years, John and Leslie may be able to elect premium offset to coincide with their retirement.

A face value of $500,000 would provide a sizable death benefit to help cover any estate taxes owing at the death of the second spouse. The non-guaranteed dividends received from their policy can be used to purchase additional layers of paid up insurance, resulting in a policy death benefit that keeps pace with their growing tax liability. Their participating policy, however, can offer more than just protection against a tax bill. They could use the cash value growth building within the policy to supplement future income. More important, it’s also helping them provide a lasting legacy for future generations.

In terms of retirement funding, a reasonable target for John and Leslie to consider is 85% of their current lifestyle expenses. It’s important to measure this against their current lifestyle expenses, since they’re obviously savers and do not spend all their after-tax income. This works out to around $135,000 after-tax. To generate this amount, based on their current savings and a conservative rate of growth, they’ll need to maximize RRSP contributions every year until retirement. John’s annual bonus would help with those RRSP contributions.

Another obvious planning device is to take advantage of the Tax-Free Savings Account (TFSA). It may seem like a small impact based on $5,500 per year, but if there is current contribution room and they make maximum deposits until age 82, the total accumulation will be over $1,000,000. They could contribute to this account by transferring some of their current non-registered funds into the TFSA.

Given John and Leslie’s ages and assets, a generally conservative asset allocation target of 60% equity/40% fixed income allows for potential growth and diversification. I suggest they split the funds between a managed/balanced portfolio and individual funds with Canadian equity, U.S. growth and Canadians bond funds. Any income generated from the funds can be reinvested towards the retirement asset goal.

I would also set up a $77,500 emergency fund (based on six months of after-tax salary) and suggest funding it from John and Leslie’s joint non-registered savings.

For the children and grandchild, I suggest a strategy tailored for each family member:

  1. While every parent wants their children to be set financially, sometimes helping too much can mean they lose valuable lessons in learning how to budget. To give their son Kieran a head start on this, but still ensure he learns the value of money, John and Leslie could consider paying off half his student loan – $40,000 – with surplus cash.
  2. To be equitable with their children and help ensure daughter Rachel is successful attending college part-time, set aside $40,000 to cover the costs of her program. Part of that money would go to a monthly income for her.
  3. Start contributing toward an RESP for Rachel’s son Max, and take advantage of the Canada Education Savings Grant to help grow those funds even faster. Also pay for a life insurance policy for Rachel, in case anything would happen to her, and name Max as the beneficiary.

These last three items are optional, since $120,000 of expenditures will mean they will have to reduce their retirement objectives a little. John and Leslie are entitled to all the rewards of their hard work.

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Originally published on Advisor.ca