Each client has their own unique ideas for their retirement plans — and for some, this may include choosing to adopt and expand their family later in life.
Adopting a child is an emotionally rewarding experience, but there are also financial considerations. Depending on when your client chooses to adopt, it could not only alter their finances, but have an impact on their retirement savings as well.
Dr. Moran, a family physician in Ontario, became inspired to adopt 2 children from South Africa as her 4 children neared independence. “Being the second oldest of 10 children, I was always ready to welcome more. When our 2 oldest children went away to University, and the other 2 were in grade 11 and 12, I was seriously concerned about an empty nest,” Dr. Moran says.
Dr. Moran and her family are part of a growing trend of clients who are choosing to adopt later in life. They’re well-versed in the expenses of raising a child, but throw impending retirement into the mix, and they’re in uncharted territory — striking a balance between supporting their adoptive children and continuing to invest in their own retirement.
It’s a balance that advisors can help these clients achieve. With a new set of expenses on the horizon, putting the brakes on their retirement savings plan isn’t the solution. Finding ways to help clients continue investing in their retirement while providing for their younger family will be critical to their financial well-being.
RE-THINK THEIR PROTECTION PLAN
Clients who adopt later in life will require different advice compared to clients who no longer have dependent children. The reality is that health becomes more unpredictable with age. Clients who adopt a child later could reach their 70s before that child is independent, and the probability of serious health issues increases. Plus, they’ll need coverage for their young adopted children.
- Supplemental health insurance: clients who are in retirement, or never had group plans to begin with, can buy personal health insurance to cover major medical expenses. For clients entering retirement with young adopted children, this would help cover their own personal medical expenses, and it can help cover major costs like orthodontics and glasses for their dependents — helping to protect their retirement savings.
- Long term care insurance (LTCI): LTCI can protect against rising health-care costs over time. For a couple in their 50s, there’s a 50% chance one of them will live to be 95, and a 92% chance that one will require long-term care.1 Health-care costs can reduce a client’s net worth dramatically, and with a dependent child, insurance can help buffer savings and fund homecare.
- Juvenile critical illness insurance (CII): adoptive parents may or may not know their child’s full family history. CII protects the family from the potential for high health-care costs in the case of an illness or disability. Return of premium options may be available on some products, which can help fund future education or a down payment on a home.
- Life insurance: Clients may want to increase their coverage or add beneficiaries so that, in the case that they pass away, the death benefit can help cover ongoing daily living expenses or future large expenses like education or a new home. They may also need to name a trustee who will hold this money in trust until the beneficiaries are old enough.
BALANCE AGGRESSIVE SAVING WITH EXPENSES
Typically, as clients move into their pre-retirement years there’s a shift toward accelerated retirement saving. Spending decreases as children leave home and some clients choose to downsize, freeing up money to increase savings and/or pay down debt. For clients who choose to expand their family later in life, the situation is different.
For clients looking to expand their family, it’s important to take advantage of all the savings tools available and make the most of what’s available. “We’re self-employed doctors without a health plan or a pension fund. Over the years, we’ve put money in RRSPs, and have great insurance plans. We’re comfortable with our income and have the ability to work smarter rather than harder,” says Dr. Moran.
- RRSPs: Maximizing the tax advantages of registered retirement savings plans (RRSPs) or spousal RRSPs can help clients save for retirement and free up money to supplement adoption costs today.
- RESPs: The cost of education is expected to rise over time, and depending on the age of their adopted child, clients will have a shortened window to save. According to the Canadian Centre for Policy Alternatives, the cost of education in Ontario has nearly quadrupled over the past 2 decades. And it’s projected to rise 13% by 2018.2 A registered education savings plan (RESP) is a smart way to invest in your child’s education. The Canadian government will match 20% of annual contributions up to $500 per year, per child, to a lifetime maximum of $7,200 per child. There are rules that need to be followed to maximize the grant, so talk to clients early on to make the most of this opportunity.
- TFSA: Clients can invest in tax-free savings accounts (TFSAs) to provide fast access to money in an emergency, and to supplement their retirement savings.
- Guaranteed interest products can help clients create memories today, providing short-term funds for family vacations, hobbies and extra-curricular activities.
ADDITIONAL CONSIDERATIONS: LIVING EXPENSES AND THE DAILY BUDGET
Your clients may want to delay downsizing their home. But as mobility decreases with age, it’s important to consider putting aside savings to make the family home more accessible, or to hire professionals to maintain the property so they can stay in the home longer.
Controlling day-to-day expenses and budgeting will become more important with a child. Clients need to be diligent in creating a budget and sticking to it, especially as their savings are stretched across competing priorities.
The Fraser Institute estimates that the cost of raising a child in Canada is $10,000 to $15,000 per year for a middle class family. In addition, the cost of adopting is estimated at $20,000 to $30,000 for domestic adoptions, and up to $60,000 for foreign adoptions.3
“We went to information sessions and were informed of the costs of social work, home assessments, adoption fees and legal fees,” says Dr. Moran. “At the time in 2008, it took 2 years for the entire process, and we were advised that it would cost just over $20,000. Because the Ontario government didn’t allow us to adopt both children at the same time, we had to travel to Africa twice … so the total cost was just under $40,000.”
While families can claim adoption expenses on their personal income tax filing, they still need to develop a savings plan, and make use of short-term savings vehicles that provide a balance between liquidity and growth.
REVIEW THE ESTATE PLAN
Careful estate planning will ensure clients’ wishes for their legacy are fulfilled, and protect their adult children from the burden of dealing with both the estate and guardianship decisions on their own.
It’s important for these clients to consider the increased risk of health problems associated with age, and in the worst case scenario, the unexpected death of both parents. While grown children have already entered adulthood, assigning a guardian for younger adopted children will ensure they’re taken care of until they’re independent. It also accounts for the older siblings, who may not be in a position to act as caretaker to their younger sibling. Clients will also want to consider how they may wish to divide their estate between all of their children, and ensure that if one of their children is declared the guardian, that there will be enough to take care of the minor, adopted children, as well.
Typically, as clients age their life insurance needs lessen. But purchasing life insurance for their younger child is a great option for older clients. It provides lifetime protection for the child, and is a great way to provide potential access to cash value at key financial milestones in their life, like education, buying a home and starting a family.
Clients’ specific goals will vary, but adoptive parents like Dr. Moran want what’s best for their children. “We are not a blended family — we are one. All of our children are equal. We will not retire rich or have vast amounts of money for our children to inherit, but that was never our plan. We have been blessed, and our family motto has always been: to those who have been given much, much is expected.”
Dr. Moran and her husband are active in the community, and continue to financially support 2 orphanages in Africa and provide volunteer aid.
“We feel that our lives are more than fulfilled with the addition of these 2 little ones — we are young and energetic and look forward to all that the future holds.”
Finding solutions to help clients expand their family in their later years while keeping a focus on retirement creates a unique financial challenge. With the right financial plan and the help of a trusted advisor, clients can set their adopted child up for success and prepare themselves for retirement at the same time.
1 2008 Canadian Critical Illness (CANCI) Tables.
2 Maclean’s, September 9, 2014