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Financial Facelifts

Care of Child Complicates Retirement Plans

By Andrew Allentuck

Originally published June 14, 2003 in The Globe and Mail

Civil servants Frank and Inez Butler (not their real names) have a good life in Regina.

Their combined $154,000-a-year income has paid for a $175,000, 2,400- square-foot, five bedroom, three - bathroom house.

They have pensions and registered savings plans worth just over $1 million and three daughters at home ages 18, 14 and 11 with in-trust accounts and registered education savings plans to support their educations. But one daughter, Amy 14, has a disability and needs special instructions.

Programs for Amy are available in Edmonton, so the family is considering a move that could entail sale of their house in Regina or, perhaps, keeping the Regina house and buying a condo for their oldest daughter's use when she enrolls at the University of Alberta this fall. Eventually, Amy and her parents could use the condo if she enrolls in post secondary courses in Edmonton.

"Our plans for our retirement and our children's education are substantially dependent on how our mutual funds perform," Inez says. "We have a house with no mortgage, but if we move out of Regina, we'll be faced with either a huge bill for a comparable house in a larger city or with the need to downsize our home. So we see that our well- made plans are really rather fragile," Inez says.

At their respective ages of 56 and 50, Frank and Inez recognize that their Regina house is a bargain compared with what it would cost to have the same home in Toronto where, they estimate, it would cost over $1 million or more. The low cost of housing in Regina has freed up money and provided liquidity they might not have in a city with more costly housing.

A permanent move to Edmonton could require selling their Regina house and even other assets they expect to use for retirement.

What Our Expert Says

Facelift asked certified financial planner Paul Edmond, president of Edmond Financial Group in Winnipeg, to speak with the Butlers in order to work out the costs and benefits of their choices of where to live and how a move might affect their plans for retirement.

If the Butlers buy a modest house or a mid-market condo in Edmonton, it will cost $150,000 or more, Mr. Edmond estimates. That cost could easily be carried on a 10 - year, 6.2-per-cent mortgage or a five-year, 5.2-per-cent mortgage, he says. A 25-per-cent down payment of $37,500 could be easily paid from their $36,000 of Canada Savings Bonds with the remainder being paid out of cash. They would be giving up about 3-per-cent interest on the bonds, $1,080 a year, which is half of the $2,250 they would have to pay in interest were they to borrow the down payment on a 6-per-cent line of credit at a bank.

The education of their three remaining children (a fourth is 23 and working independently) is a concern for the family. Two of the children are expected to go to on to post secondary studies that will have an estimated cost of $5,000 a year per child or, five years (a four-year degree plus one year of graduate school), a total of $50,000 in 2003 dollars. The family's educational funds currently have $25,000 of assets. This will cover the 18-year-olds university expenses.

The other child, now 11, will need another $25,000 or $40,145 in seven years assuming that university fees rise at 7 per-cent a year. This will require the Butlers to increase RESP contributions to at least $375 a month from $216 a month until the 11-year-old begins studies, Mr. Edmond says.

Frank and Inez would like to retire by 2008 when Frank will be 61 and Inez will be 55. Their annual expenses of $73,000 in 2008 dollars will be covered by income from the couple's present pension and RRSP assets, the planner says.

The Butlers can receive early payouts from the Canada Pension Plan. Frank will receive an estimated $8,313 in 2008 when he is 61. Inez's CPP pension is integrated with her employment pension income that Mr. Edmond estimated will be $14,921 in 2008. By 2012, when Frank is 65, he will receive $6,800 in OAS and by 2018, when Inez is 65, she will be receiving CPP of $5,321 and OAS of %7,886, the planner estimates. These payments are indexed and will provide a continuing buffer for their expenses, Mr. Edmond says.

The Butlers have prepared for retirement and for the education of their children, but should either or both parents die while their children are still dependent, the family could have a serious financial problem, the planner says.

Currently, Frank has $50,000 in a term policy and Inez has $100,000 in a separate term policy. In the event of the death of either parent, the family would need a total of $190,000 more cash over the next five years, Mr. Edmond says.

Including sums foot the final Illness, special care and burial, the family's total additional insurance need is $300,000, Mr. Edmond says.

Currently, Inez is paying $49 a month for term insurance. By adding $20 a month of premiums, the family can have $300,00 of 10-year term coverage for her life. Frank, who is paying $30 a month, could obtain additional coverage for an extra $40 a month, Mr. Edmond estimates. Each parent would then have $300,000 coverage. The additional insurance could also cover tax liabilities at the death of the last parent of as much as $750,000, the planner says.

The family's longest-term financial need is the education and support of Amy. An absolute discretionary trust, also known as a Henson trust, puts assets in the control of trustees and thus allows Amy to receive full benefits for her disability. The trust would go into operation after the death of the parents and could be financed with a joint and last-to-die insurance policy that pays $750,000.

That policy would cost $10,000 a year for 13 years, Mr. Edmond says. The premiums are payable out of after-tax income, but the proceeds would be paid to the trust with no tax due. The Butlers spend relatively little of their after-tax income and could find funds for these premiums, he adds.

"These are complicated plans, but the Butlers must protect the financial security of their children," Mr. Edmond says. "Insurance premiums will be a small price to pay for the security of the coverage."

"Mr. Edmond's recommendations will help us to plan for our future," Frank says. "He has given us some direction; we're going to investigate his recommendations."

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of the writer's knowledge as of June 14, 2003. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.