Couple can afford to help parents

The couple have $158,000 in jointly held, non-registered assets, as well as $240,000 in Robert’s RRSP, $120,000 in Clarice’s RRSP, $32,500 each in tax-free savings accounts (TFSAs) and $71,000 in a family registered education savings plan (RESP).

The couple also have a joint, first-to-die (JFD) life insurance policy of $500,000, which will be fully paid up in 20 years with annual premiums of $14,000. Robert and Clarice would like to purchase critical illness (CI) insurance that would pay $100,000 and long-term care (LTC) insurance with benefits of $6,000 a month.

Robert and Clarice spend about $112,000 after taxes, mortgage payments, life insurance premiums and maximum RRSP, TFSA and RESP contributions. That usually leaves the couple with $21,000 of additional savings.

The couple plan to retire at age 62 and want to be able to spend $60,000 a year in today’s dollars to age 90. Robert and Clarice also want to create a home gym costing $10,000 and spend an average of $10,000 in today’s dollars a year on travel for 13 years.

The potential problem is that Clarice’s parents, Sarah and David, aged 68 and living nearby, may need some financial support. Clarice sees a deterioration in their health every time she sees them.

Sarah works at the local grocery store and David works at Home Depot, earning a combined $50,000, but plan to retire in another year. This older couple have a joint non-registered account with $76,000, as well as a $7,000 emergency fund and RRSP assets of $90,000 and $225,000, respectively. Each spouse also has $14,000 in a TFSA. Their mortgage-free house is worth about $515,000.

Sarah and David have a JFD life insurance policy for $250,000 that is fully paid up. The older couple would like to get LTC insurance that would pay $5,000 a month.

Both Sarah and David collect Canada Pension Plan and old-age security benefits and are taking whatever income is generated on their non-registered money plus TFSA withdrawals to cover their $37,500 in annual expenses, including $10,000 for travel.

the recommendations: Berton and White both say that both couples will be fine, although Sarah and David will have to reduce or eliminate their travel budget and might even have to downsize their house to afford LTC insurance with the desired level of benefits.

Berton obtained a quote for LTC insurance providing $3,000 a month for home care and $6,000 a month for institutional care that would cost about $14,730 in premiums a year. White’s quote, for benefits of $4,000 a month for either home or institutional care, is a combined premium of $17,000.

Berton’s projections for Sarah and David, which use a 1% real return – 4% nominal return and 3% inflation – indicate that they should be able to keep their house.

However, White assumes a 0.5% negative real return – 2.5% nominal return with 3% inflation. This means that Sarah and David will run out of financial assets before age 90 unless they get $200,000 in net proceeds from downsizing their house and buy an annuity that pays $900 a month for life.

Although Sarah and David should be all right, Clarice and Robert could provide some help. Even with premiums for the several insurance policies, the younger couple still won’t be spending all of their income while working. And by the time they retire, they should have more than enough assets to achieve their goals.

Berton’s projections show an estate – excluding the value of the home – of $1.6 million in today’s dollars for Clarice and Robert at age 90; White’s projections leave an estate of $1.1 million for the younger couple at that age.

Berton uses a real return of 2% – a 5% nominal return and 3% inflation – and 1% annual wage increases for both Robert and Clarice. White’s projections assume a 2.5% real return – 5.5% nominal, with 3% inflation – and 2% annual wage increases.

White’s quote for $100,000 in CI to age 75, including a return-of- premium rider if no claims are made, has premiums of about $1,600 for Robert and $1,400 for Clarice. The quote for an LTC policy with a monthly benefit of $6,000 for home or institutional care has combined premiums of $7,760 to be paid for 25 years.

Berton suggests a CI policy for the younger couple that can converted to LTC. To get LTC benefits of $6,000 a month for either home or institutional care, the CI policy must be for $150,000. The premium for the CI component to age 75 is $1,800 a year for Robert and $2,100 for Clarice. But the policy is convertible to LTC at age 65, at which point a combined premium of $15,200 a year would be required for 20 years.

Both Berton and White feel that this DI coverage is crucial because if Clarice can’t work and doesn’t have DI benefits, the couple almost certainly will have to trim their retirement goals, particularly if the younger couple end up having to provide some financial support for Sarah and David.

Berton’s quote for DI to age 65 for Clarice, with a tax-free monthly benefit of $2,700, is an annual premium of $1,987. White’s quote for a benefit of $2,750 a month is $2,250 annually.

Clarice and Robert still will be able to save money during their working years, even after the insurance premiums. White and Berton suggest that the couple use these savings to pay down their mortgage as fast as possible, then invest what’s left.

There’s isn’t much Sarah and David can do to save taxes at their age except to invest their non-registered assets in corporate-class mutual funds that provide distributions in the form of tax-preferred dividends or capital gains to unitholders.

However, Clarice and Robert have other options. Rennie, who is the lead on investments at the Rennie White Group, points out that if Robert pays all the household expenses, Clarice can invest her earnings and pay lower taxes on the income. Robert also could lend Clarice a sum of, say, $100,000 that she would invest. Because she is Robert’s spouse, this transaction would be considered a “prescribed loan” and Clarice would pay the prescribed loan interest rate of 1%. (Berton agrees that these are good ideas.)

Clarice and Robert can be aggressive on their investments at their age, Rennie says. He suggests 90% equities in their non-registered accounts and 70% in their registered accounts.

Rennie recommends the equities be broadly diversified by both geography and sector, using individual, dividend-paying stocks with international exposure, as well as mutual funds for niche areas such as Asia and Europe. For the fixed-income component, he suggests bond ladders going out five years for both government and investment-grade corporate bonds, plus some investment-grade, floating-rate bonds.

For David, Rennie suggests 60% equities, primarily dividend-paying stocks; for Sarah, 70% in global and Canadian equity balanced funds. In both cases, the fixed-income is a combination of government and corporate fixed-rate bonds, some floating-rate bonds and GICs.

Berton suggests 60% equities and 40% fixed-income for both Clarice and Robert. Berton favours managed wrap accounts invested in balanced mandates that are broadly diversified by geography and sector and whose portfolio managers take care of tax optimization and rebalancing. Once the couple retire, Berton would also discuss the option of “pensionizing” some of their RRSP assets by converting up to 30% to a registered retirement income fund (RRIF) annuity.

For Sarah and David, Berton suggests a 60% fixed-income, 40% equities allocation. Depending upon the older couple’s concern about market risk, Berton also might employ a “cash wedge” for the RRIF, ensuring that sufficient capital is held in low-risk holdings to make the RRIF payments.

“Financial Checkup” is an ongoing series that discusses financial planning options. In this issue, Investment Executive consulted with Michael Berton, senior financial planner with Assante Financial Management Ltd. in Vancouver; and Derek Rennie and Neela White, portfolio managers with the Rennie White Group, a unit of MacDougall MacDougall & MacTier Inc. (3Macs) in Toronto.

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