This Ontario couple wants a pension plan that supports their disabled son

Expert says task is doable, but if they wait until age 65, things change drastically

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In Ontario, a couple we’ll call Oliver and Julia, both in their 60s, raised two children, now in their early thirties. One, whom we will call Fred, is independent and the other, Sid, is disabled and needs constant care. Oliver brings home $5,000 a month from his job administering charities. Julia, already retired, has a net income of $1,100 per month from her work pension and $460 per month from the Canada Pension Plan, bringing their total after-tax income to $6,560 per month. Their question: Will their work pensions, OAS, CPP and investment income allow them to maintain their current lifestyle when they are fully retired? And what can they do to support Sid when they’re gone? Planning for the coming decades is a challenge.

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

Retirement goals

Looking ahead, they fear their condo, bought last year for $395,000 with a $312,000 mortgage, could become an albatross if interest rates rise significantly from their 2.39 level. % when their loan is renewed in 5.5 years. For now, they pay $1,131 per month, or about 17% of their net income.

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Oliver would like to retire in 2024 when he turns 62 or, if they have to wait, 65. At age 62 they will still make $616 a month for two cars (a third is already paid for in full) but at age 65 the cars will be fully paid for and they will no longer need to put $200 a month into their RRSPs. But they would like to have $500 a month to travel. In total, 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, $600,000 cottage, cars worth $33,500, RRSPs worth $195,900, permanent life insurance with current cash value of $26,000 minus the condo mortgage of $312,000 and $26,000 of car loans. That makes a net worth of $912,400.

If Oliver retired at age 62, his pension would generate $4,370 per month, including a monthly bridge of $370 until age 65, while Julia’s retirement income would add $1,560.

Their RRSPs of a current value of $195,900 with additions of $2,400 per year are expected to grow to a value of $212,848 in 2022 dollars in two years assuming a 3% rate of return after inflation. This amount would support additions of $9,950 in annual taxable income to age 95, assuming the same growth rate after inflation. Pension and RRSP income would then total $81,110 per year or $6,759 per month. After an average tax of 13%, they would have $5,880 a month to spend, barely enough to support current expenses without margin of error.

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

Their RRSPs of $195,900 with four more years of growth and $2,400 in annual contributions will grow to $230,829, then provide $11,434 per year for the next 30 years until age 95, when all income and capital will be depleted. This would bring the total annual income to $114,802. After qualifying income splitting and 15% average tax, they would have $8,130 a month to spend. This exceeds current expenses and will provide additional money for travel or to support Sid, their disabled child.

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Permanent alimony

In Ontario, it is possible to organize a so-called Henson Trust for permanently dependent people. The system gives absolute discretion over management and disbursements to trustees. The capital belongs to the trust, not to the beneficiary, who can then claim public assistance. These trusts must be created by an attorney experienced in wills and estates. They can provide support to beneficiaries even after the parents have left.

So why didn’t Oliver and Julia set up a Registered Disability Savings Plan for Sid? “We had cash flow concerns and didn’t want to commit money when we needed it,” says Oliver.

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This fear of needing money but not having it also explains why the couple did not use tax-free savings plans. Indeed, the money paid into a TFSA is available at any time without any withdrawal penalty.

RDSPs and TFSAs are among the most advantageous federal grants. It’s time to catch up with the TFSA and create and fund a modest RDSP. RDSPs are eligible for additional government contributions up to the beneficiary’s age 59 with top-ups called Canada Disability Savings Grants similar to the Canada Education Savings Grant available. CDSGs range up to $3,500 per year with totals capped at $70,000 with a 49-year age limit for grants and a 10-year carryover for unused entitlements. Oliver and Julia would do well to investigate the use of RDSPs as a means to fund a Henson trust, suggests Einarson.

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Hiring a lawyer to create a Henson trust, finding suitable trustees, and positioning the trust in the context of the family’s larger financial concerns will take time and possibly money. It will be worth it. Indeed, it could have been done years ago. However, it’s time to plan.

A long view

In five years, when both parents turn 65, they will have excess cash that they can use to fund an RDSP for Sid. He will be around 14 years old for his RDSP to attract government contributions. It would be a good way to use her parents’ growing income as they reach 65, Einarson suggests.

With income in excess of their immediate needs, Oliver and Julia can set up tax-free savings plans. In the absence of employment income to shelter in RRSPs, TFSAs offer the best long-term investment shelter available.

3 Retirement Stars *** out of 5

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