Financial Checkup: Ensuring travel is key for couple

The couple have three children, all of whom have finished their education and have good jobs. The eldest is married and expecting her first child; the other two are living with partners. Each child lives in a different city – Vancouver, Calgary and Toronto – so Brian and Sally expect to make fairly frequent trips to visit them.

Brian and Sally own a mortgage-free house worth $700,000. Brian has $300,000 in non-registered accounts, thanks to an inheritance from his father, and each spouse has $28,000 in a tax-free savings account (TFSA). Brian’s mother and both of Sally’s parents are still alive and in good health in their late 70s.

Brian makes $110,000 a year as a bank manager and could take a pension equal to 55% of the average of his annual salary for his last five years on the job at age 60, with continuing medical and dental benefits. Sally makes $80,000 a year as teacher, a career she returned to 10 years ago. Her pension at age 60 also would be 55% of the average annual salary earned in her last five years at work at age 60.

Now that the children are through school and the house is paid off, Brian and Sally are spending about $70,000 a year before taxes; they expect that to jump to $75,000 this year due to the costs of visiting their daughter in Vancouver once her baby is born.

The couple estimate the cost of living in Italy for a year will be $170,000 in today’s dollars, including excursions in Europe, and $6,000 a year for maintaining their house in Winnipeg. This does not include medical travel insurance, for which they need a quote. (Both are non-smokers in good health.) They think it would cost about $15,000 for the month’s vacation in Italy and another $10,000-$15,000 for travel to visit each of their children every year.

The couple want to know if they can afford to do this and continue to live on $70,000 a year in today’s dollars to age 95 before their travel expenses.

The recommendations: Berton and Willis both say the situation will be tight for Brian and Sally, but their goals – the annual trips to Italy and the visits to their children, as well as after-tax spending of $70,000 in today’s dollars – are achievable, assuming a 5% average annual return after fees, 3% inflation, and full Canada Pension Plan (CPP) benefits for Brian and 75% for Sally.

This does not, however, include paying the premium on long-term care (LTC) insurance, should they decide to take out an LTC policy. That would cost $4,000-$5,500 a year and would have to come out of the $70,000 in everyday spending. Travel insurance also would have to come out of either the $70,000 spending money or be included in their current travel budgets.

Both advisors are assuming about $70,000 in annual savings during the next five years. This includes establishing RRSPs and contributing about $10,000 each annually, and annual deposits of $5,500 each into their TFSAs.

That said, Willis has reservations about whether the couple will have that much RRSP room. In his experience, the Canada Revenue Agency doesn’t allow significant RRSP room for individuals with defined-benefit (DB) pension plans because that would be unfair to other Canadians without DB plans.

Willis also would advise Brian and Sally to check if their DB plans are fully funded. If they are underfunded, there’s a risk of reduced benefits down the road.

Berton suggests Brian establish a spousal RRSP for Sally and make his contributions. Evening out their assets isn’t necessary, given pension income-splitting, but the spousal RRSP makes the income-splitting calculations easier when filing income tax returns, he explains.

Berton adds that Sally should apply for the CPP child-rearing provision, which could increase her CPP benefit. The provision applies only to periods in which one of the spouses was eligible for the Canada child tax benefit and if the earnings of the spouse applying were lower because he or she stopped working or worked fewer hours to be the primary caretaker of a dependent child.

Willis’s projections assume that Brian and Sally will downsize their house in the near future, netting $200,000 to add to their non-registered assets. This is the only way that he could come up with a plan that will allow them to meet their goals. He’s assuming the house will appreciate by only 3% a year, but they can get a 5% return on their financial assets.

However, Berton doesn’t think the couple will need to sell their house if they can stick to their planned spending. He also considers the house a good investment, as he’s assuming it will appreciate by 5% a year and these gains are not taxed. He notes that the couple can sell the house later if they feel the need.

The question of LTC insurance needs to be discussed further. Brian and Sally don’t necessarily need LTC, as they can always sell their house. However, holding onto it could be a good idea: if only one spouse goes into a nursing home, the other spouse will probably want to stay in the house, so combined costs will rise.

“The other issue,” says Willis, “is not wanting, potentially, to be a burden on their children.” This is a possibility if extended stays in a nursing home eat up the equity in the house.

Willis got a quote for LTC of $2,000 a month each for $4,500 a month in home or institutional care. The quote Berton got was around $2,000 for Brian but $3,400 for Sally. (Women tend to live longer and thus need care for longer periods.) The benefits from these policies are $100 a day for either home or nursing-home care.

Berton says travel insurance is tricky when planning to be away for a year. One issue is making sure their Canadian health insurance remains in place. Normally, you must reside in a province for 183 days within any 12-month period, but individuals planning to be away longer can apply for an extension. In Manitoba, individuals are advised to contact the provincial Ministry of Health if they plan to be away for more than 90 days.

But Brian and Sally also will need travel medical insurance while they’re away. Berton found a policy for one-year travel medical coverage with a $1,000 deductible, costing $2,445 to cover both of them. Such a plan would cover most events outside the U.S. but is subject to caps, depending on the type of claim. Applicants must be wary of pre-existing conditions they have that are likely to be excluded from coverage under the terms of the contract, which is 17 pages long. Berton cautions that he has seen many complaints registered in the press lately about travellers whose coverage has been negated by the pre-existing condition clauses.

Berton also found a cheaper policy that costs $1,695, but is for only 11 months – and only if it is taken out when Brian and Sally are 59. This suggests that they might move their trip forward by a year and reduce it to 11 months.

Another option that both advisors suggest is that Brian and Sally consider reducing their European “year” to six months. Doing so would both ease their financial situation and make it easier to obtain travel insurance.

There isn’t much the couple can do to save taxes outside of maximizing their RRSP and TFSA contributions. However, Berton also recommends corporate-class mutual funds for their non-registered assets, because any distributions would be taxed as either dividends or capital gains. If Brian and Sally establish RRSPs, they should also put fixed-income into those to shelter the interest income, which is taxed at a higher rate than dividends.

Brian and Sally should have up-to-date wills and both medical and property powers of attorney. Willis notes that probate fees aren’t applied to joint bank and non-registered accounts.

Berton adds that probate fees are not applied to segregated funds with named beneficiaries, so he suggests that seg funds without exorbitant fees could be considered. He adds that seg funds also offer creditor and, if Brian and Sally are naming their children as beneficiaries, marital-breakdown protection.

Both advisors suggest an asset mix of 60% equities/40% fixed-income, assuming a moderate risk tolerance. Both suggest using managed products – probably mutual funds – with a diversity of investment styles. However, Willis would combine those with exchange-traded funds.

Both advisors also suggest a broad diversification – by geography, sector and investment style – for the equities. Berton favours 50% Canadian equities and the rest divided between U.S. and international, including some emerging market. Wills recommends equal weightings for Canadian, U.S. and international equities.

Willis suggests the fixed-income be 50% corporate bonds and 50% government bonds. Berton notes that many bond funds have emerging market bonds and dividend-paying preferred shares. He would also include real estate investment trusts.

Willis would charge $2,500 to develop a plan like this; Berton, $1,200 – although his fee would probably be waived if he manages the money.

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