Bill and Amy’s financial circumstances are challenging and unpredictable. In addition to raising children, maintaining a satisfying standard of living and saving for retirement, they now have to financially support and care for Bill’s parents. The health and day-to-day living issues are stressful enough. Now their financial responsibilities have taken on even more demanding and complex dimensions as they care for elderly parents.
The first area Bill and Amy should focus on is reducing the outflow of cash. There are numerous tax reduction strategies they should look at, including the disability tax credit, caregiver amount, and writing off medical expenses. Because Bill’s father is disabled, he should be able to qualify for the disability tax credit. If Bill is able to apply the full disability tax credit against his income, they would save more than $1,700 a year. They should work with an accountant who has experience in the disability arena.
It makes little sense for them to contribute $450 a month to a TFSA set aside for emergency purposes, assuming it is in a low-interest savings account, while they are paying 4.5% on a $15,000 line of credit. They should pay off the line of credit with some of the non-registered funds and take a longer-term investment strategy with the funds in the TFSA. Assuming they are contributing $250 a month to the line of credit, they will save at least $1,600 in interest charges — likely more as interest rates will probably increase over the coming years. They should then shift a significant portion of the TFSA funds into equities to capitalize on greater growth opportunities. The line of credit can act as a short-term emergency fund and they could move $15,000 of their non-registered funds to fixed income, liquid investments as another safeguard against unexpected expenses. Better to have a more aggressive strategy in the TFSA where tax is not an issue, than in the non-registered account where tax reduces gains.
Both Bill and Amy must have a considerable amount of RRSP contribution room, given they only have $100,000 in RRSPs between them. If they withdraw $40,000 net from the non-registered account and contribute $20,000 to Bill’s RRSP and $20,000 as a spousal RRSP for Amy (since Bill earns more than Amy and already has more RRSPs than her), they should save approximately $18,500 in taxes this year, which could be used to accelerate their younger son’s RESP, since it too has not been maximized.
Transferring another $32,000 from the non-registered account to their TFSAs to maximize their allowable contributions in those accounts will reduce tax costs. TFSAs are much better vehicles than non-registered accounts, given the tax advantages.
Increasing their RRSP and TFSA accounts and increasing exposure to equities in the TFSA will help to accelerate their retirement fund. Transfers from the non-registered account to their RRSPs and TFSAs would still leave $78,000 in the non-registered accounts, before tax.
Their monthly net income is approximately $18,500 and their monthly expenses are $6,000 after eliminating the monthly TFSA contribution, leaving them with a little more than a $12,500 monthly surplus.
If they contribute a total of $6,000 on a monthly basis to their TFSAs and their RRSPs, where $916 goes to their TFSA accounts to maximize their TFSAs in future years and the remainder to their RRSPs and non-registered investments, over the next 10 years they should have almost $1.2 million, based on a 6% annual rate of return, which in addition to their defined benefit pension plans, should be enough to support their retirement.
With the remaining $6,500 they can fund two vacations a year, and consider insurance to protect their income. Since they are in their fifties, they may first want to focus on life and long-term care insurance as critical illness insurance becomes fairly expensive at their age.
They could each secure $100,000 of participating whole life insurance and $1,000,000 of 20-year term for a cost of approximately $1,800 a month. This would not only leave enough behind for their ailing parents and their children in case of premature death, but also build up cash value. This cash value would be another source of funding they can tap into to support their retirement.
Bill and Amy can easily understand the value of long-term care insurance as they have assumed the costs to care for Bill’s parents. If Bill’s parents had appropriate coverage, Bill and Amy would not have to cover the related health expenses. To protect their own kids from assuming the same financial burden as they themselves enter their senior years, Bill and Amy can purchase long-term care policies offering a $1,000 weekly benefit for each of them at a total cost of $567 a month.
After putting aside $1,000 each month to fund their two vacations per year and $209 to their son’s RESP (maximizing government contributions), they are still left with a surplus of about $3,000 a month. A portion of this surplus can be used to increase their emergency fund in a non-registered account, which will protect them against unexpectedly large medical expenses and other costs to support Bill’s parents. It can also be used to accelerate their mortgage payments and reducing interest costs.
While Bill can realistically expect to receive half of the proceeds of his father’s home as an inheritance, I caution clients against incorporating expected inheritances into their own financial projections. If Bill’s parents need to be moved into a long-term care facility, the home may need to be sold to support the cost of that facility. If Bill does receive the inheritance, it will be a bonus, but he shouldn’t bank on it.
Their lives are complex as are their financial planning challenges; however, Bill and Amy do have the income and the assets to navigate the coming years. Reducing tax, restructuring their investment assets and protecting their all-important income will help them achieve all of their objectives.