Will Janice have to return to work?

Tom is a middle manager at a local manufacturing company who earns $75,000 a year. He has no benefits or pension, but, with the help of $100,000 he inherited from his parents five years ago, has managed to make full RRSP contributions and, in the past four years, has put $5,000 into each of his and Janice’s tax-free savings accounts (TFSAs) as well as pay for his $500,000, term-65 life insurance policy.

Tom has $400,000 in his RRSP and Janice has $150,000 in hers. Both spouses have $20,000 in their TFSAs. Tom also has $30,000 in the non-registered account in which he had put his inheritance.

Janice had worked as a receptionist in a doctor’s office from age 24 to 53, except for 12 years when any of their three children was younger than six years old. Most of the time, the receptionist job was part-time; Janice was making $27,000 a year when she stopped working.

The question now is whether Janice needs to take a $30,000 part-time job as a receptionist in a doctor’s office to ensure the couple will have adequate retirement savings. Janice would prefer not to _ or, at least, wait a year while she recovers from the stress of taking care of her mother.

Tom and Janice own a $500,000 home in Halifax, which has a $150,000 mortgage scheduled to be paid off in 15 years. The couple have a line of credit (LOC) on their house to use for major repairs and any other unexpected expenses; the balance on this LOC sits at zero.

The couple’s three children all have completed university and are financially independent. Tom and Janice are not worried about leaving their children any money.

Tom and Janice want to be able to spend $50,000 in today’s dollars, up to and during retirement.

THE RECOMMENDATIONS: Both advisors say Tom and Janice can meet their goals without Janice returning to work, even if their investment returns are quite low.

Cameron assumes a 2% average annual return after fees, with in?ation of 3% a year; her projections still indicate the couple can reasonably expect to spend $50,000 a year in today’s dollars to age 75 and $40,000 a year to age 100 without having to sell their house.

Rawding assumes a 4% average return and 2% inflation, which would allow Tom and Janice to buy disability insurance for Tom, enhanced medical insurance for both spouses and some critical illness (CI) insurance for Janice _ and still maintain a $50,000-a-year lifestyle to age 100. Rawding adds that CI for Tom and long-term care (LTC) insurance for both spouses would be good to have, but they can’t afford those policies unless Janice returns to work. Those insurance premiums are not affordable in Cameron’s projections unless the couple cut back on some of their other expenditures.

The advisors take different approaches to Janice’s inheritance.

Cameron recommends investing it all and continuing to pay off the mortgage regularly so long as interest rates remain low. Mortgage payments are always met, so this is a good way to help the couple keep their spending down. Cameron notes that if Janice returns to work, the couple could pay off the mortgage by age 65 and retire debt-free.

If they insist on repaying the mortgage now, Cameron would warn Janice that she needs to be careful in doing this. Inheritances are not included in the division of assets in the event of divorce under Nova Scotia’s Matrimonial Property Act, so if Janice pays off the mortgage without a legal document that specifies this is a loan, the money will no longer be considered part of her inheritance.

Rawding recommends paying off the mortgage now and setting up an automatic savings plan in which to put the money that’s no longer being spent on the mort- gage. This will eliminate the financial risk if Tom loses his job due to illness, disability or a layoff during an economic downturn, he says: “That’s a vulnerability they can avoid by paying off the mortgage now.” He agrees with Cameron about the need for a legal document specifying that the $150,000 is a loan to Tom.

Both advisors suggest that Tom set up a spousal RRSP for Janice and put his annual contributions into it rather than his own RRSP. The reason is to narrow the gap between the assets in their respective RRSPs so that Tom doesn’t receive a lot more income than Janice and run the risk of being in a higher tax bracket and having his old-age security (OAS) clawed back should the legislation allowing income-splitting of pension income be changed.

Cameron and Rawding recommend that Tom maximize his RRSP and TFSA contributions and that Janice maximize her TFSA contribution using her inheritance.

The advisors suggest Tom start making RRSP/RRIF withdrawals at 65. Cameron would have Janice start then as well, but Rawding advises Janice to start her withdrawals now, taking out as much as she can from her own RRSP to keep her taxable income under $29,590, which is the top end of the lowest tax bracket in Nova Scotia.

Rawding argues that Tom and Janice should move money into their TFSAs and non-registered accounts as quickly as possible for two reasons:

1. There is a significant possibility that tax rates will increase in the coming years, given the size of the provincial and federal deficits and debt loads.

2. Topping up these accounts gives the couple flexibility in dealing with the unexpected events that will almost certainly occur, by reducing the potential of taking a big tax hit and any clawback of OAS.

Both advisors would discuss the various trusts _ spousal, testamentary and insurance _ that the couple can use to ensure their children will inherit their assets should one of the spouses die and the other remarries. Money in such trusts is taxed separately from the beneficiaries’ own income and also is protected from creditors.

In Cameron’s experience, it’s almost guaranteed that Tom would remarry and that Janice wouldn’t. So, Cameron would recommend Janice leave her assets to her hus- band in a spousal trust, with the children as the ultimate beneficiaries. The alternative is for Janice to buy life insurance (with the children as beneficiaries) and leave her assets to Tom.

Rawding agrees but thinks the couple should cover the possibility that Janice will remarry with a spousal trust in Tom’s will. Rawding also suggests that Tom consider an insurance trust for his life insurance policy so it is taxed separately from Janice’s income.

Both advisors advise that a provision should be made for grandchildren to inherit the assets in the trust (s) should any of the couple’s children predecease them.

Rawding suggests the couple plan for incapacity by having a lawyer draft an enduring power of attorney, appointing someone to look after the couple’s money, property and financial affairs if they are not mentally capable to do so. They also should have a personal directive that sets out how personal-care decisions, including health-care decisions, are to be made if they are incapacitated.

Rawding recommends disability insurance for Tom and medical insurance, which includes drug coverage, for both Janice and Tom. The next priority is for Janice to have CI insurance. Rawding points out that if Janice becomes ill, it is likely that Tom would not be able to get much, if any, paid time off to take care of her.

The third priority is CI coverage for Tom; the fourth is LTC insurance. Rawding calls LTC a “wild card,” as he thinks the Nova Scotia government will revert to the resident charge policy it had before Jan. 1, 2005, under which patients had to exhaust their investment assets before they received governmental assistance to pay for institutional care. Having enough to pay for an LTC policy for both spouses is the biggest argument for Janice to return to work.

According to the quotes Rawding has received, disability insurance for Tom that provides tax-free benefits of about $4,100 a month would cost about $350 a month; enhanced medical, including all drugs, nursing, vision and travel insurance for both spouses would cost $185 a month; and CI of $50,000 for Janice would cost $80 a month. These prices are based on both Tom and Janice being non- smokers in good health.

Rawding dislikes debt, so he suggests the couple use their TFSAs rather than the LOC as an emergency fund, keeping about six month’s expenses _ or $30,000 _ in liquid investments and investing the rest in higher-yielding investments. Cameron thinks the couple should be flexible, using the LOC if the interest charged is less than the TFSAs’ return.

Cameron warns that money taken out of a TFSA in a given year can be added back into the contribution room only at the beginning of the following year. She has had a number of clients who had recontributed too early and were hit with interest and penalties.

Rawding recommends a 50/50 fixed-income/equities asset mix, with the equities divided equally among Canadian, U. S. and inter- national investments. For the non-registered money, he suggests using corporate-class mutual funds, for which taxes are deferred until the investment is sold and, at that point, taxed as capital gains.

Cameron recommends that at least 50% of the couple’s assets be in low-risk investments _ possibly as much as 80%, depending on their risk tolerance _ with the rest in dividend-paying equities. As Cameron doesn’t invest money for clients, she’d leave the details of the investments to whomever is managing them _ although Cameron would keep an eye on the investments. Normally, she meets with clients and their finan- cial advisors at least once a year.

Rawding is compensated through commissions and fees on products sold, which generally works out to around 1% of assets, although there would be a lower fee for assets of more than $1 million. This pays for the development, implementation and ongoing review of the financial plan.

Cameron charges $225 an hour. To develop a plan of this kind, the cost would probably be around $2,000. Usually, she meets clients once a year for an hour – longer if there is a material change in the client’s financial position.

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