Randall, 59, collects long-term disability insurance of $78,000 a year and his wife Polina, 50, earns $120,000 a year as a manager.Sammy Kogan/The Globe and Mail
Randall is 59 and collects long-term disability insurance of $78,000 a year. His wife Polina is 50 and earns $120,000 a year as a manager.
They have a house in Toronto valued at $1.6-million with a $300,000 mortgage that they took out to create an apartment in their home for their only child, who is 26 and also disabled. She gets $1,400 a month in provincial disability income.
Randall is concerned because his disability payments are part of a company-paid insurance plan that will end when he no longer qualifies as disabled, is no longer employed or reaches retirement age.
“My worry is that they will stop before I reach 65 and I will need to start withdrawing money from my investments,” he writes in an e-mail.
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But their greatest concern is providing for their disabled daughter, who will require continuing financial support. “We need to leave enough money for her to be secure in the future when I am gone,” Randall writes. They hope to achieve that with whole life insurance, trusts and the equity in their house.
In addition to the family home, Polina owns a condo valued at $1.1-million that she rents out for $1,900 a month net after deducting property tax, utilities and maintenance. She is open to selling if the tenant agrees to move.
“My unknowns are how much and when to withdraw funds from the various accounts,” Randall writes. Their retirement spending goal is $96,000 a year after tax, which includes more travel abroad.
We asked Chris Tringham, a portfolio manager at Park Place Securities in Kingston to look at Randall and Polina’s situation. Mr. Tringham holds the chartered financial analyst and certified financial planner designations.
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What the expert says
Randall and Polina have built up a net worth of $4.6-million but face a challenging situation, Mr. Tringham says. Randall has been off work for five years and has been receiving long-term disability insurance payments. “He is unsure how much longer these payments will continue.”
Polina would like to stop working soon to travel and spend time with her family.
Randall currently pays $8,000 a year into a whole life insurance policy with their daughter as beneficiary. The estimated cash value at this time is $350,000.
Randall has set up a discretionary Henson Trust in his will with his sister as trustee. A Henson Trust offers significant tax advantages for disabled Canadians who collect Ontario disability support payments, the planner says. “The income generated in the trust is not included when calculating the disabled individual’s personal income, so this can ensure that the ODSP payments are not cut off because of elevated income.”
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Randall has also opened a registered disability savings plan, or RDSP, for his daughter and makes annual contributions. The RDSP is a form of federal government-sponsored investment account, or trust, that allows disabled Canadians to save for future expenses, Mr. Tringham says. The couple’s daughter would begin receiving payments from this account when she turns 60.
“A combination of insurance, trusts and proceeds of the home sale will provide their daughter with the income she needs after Randall and Polina pass away,” he says. “The couple will be able to spend down their registered accounts during their retirement.”
In preparing his forecast, the planner made a number of assumptions:
- Randall live to be 91 and Polina 93;
- Randall starts drawing Canada Pension Plan and Old Age Security benefits at age 65 and Polina at age 70;
- A long-term portfolio return of 6 per cent a year. Their portfolio is about 60-per-cent stocks and stock funds, including non-conventional assets, and 40-per-cent fixed income. “This return assumes fixed income returns of 4 per cent and stocks of 7 per cent,” Mr. Tringham says. “The resultant 6 per cent is close to what they have experienced in the long-term;”
- An average annual inflation rate of 2.1 per cent and real estate appreciation of zero per cent; and
- Polina stops working in 2027.
Their retirement spending goal is $8,000 a month, including more travel abroad.
“In our most conservative scenario we assume that Randall’s disability payments stop at the end of this year,” Mr. Tringham says. In 2027, Randall would first convert his locked-in retirement account, or LIRA, to a life income fund, or LIF, because of this account’s investment limitations and costs, he says.
They would each begin drawing from their RRSP accounts, converting a portion of the RRSPs to registered retirement income funds, or RRIFs, to make monthly withdrawals easier to manage.
Randall would withdraw $59,000 from his RRSP and $17,500 from his LIF. Polina would withdraw $84,000 from her RRSP and $18,000 from her LIRA or LIF. This would give them a combined gross withdrawal of $178,500 for the year and a net cash flow after tax of about $152,000.
Of this, $36,000 would go to mortgage payments for another 10 years. They would pay the premiums on the whole life insurance policy for another five years, at which time the policy would be paid up.
Randall and Polina have asked whether it would make sense to buy an annuity with some of their savings. “I am generally not a fan of these products unless the client has a very long life expectancy or they are ultra-conservative with their risk tolerance,” Mr. Tringham says.
“Annuities do not leave anything to the beneficiaries when the owner passes away.”
Because she is in good health and has other assets to draw from, Polina plans to defer CPP benefits to age 70.
Polina owns a mortgage-free condo valued at $1.1-million, which is rented out and generating $1,900 a month in net income. Rent of $22,800 a year on a $1.1-million condo is a 2.2-per-cent yield, the planner notes.
“If Polina sells the condo next year and invests the proceeds in a conservative portfolio growing at 4 per cent per year, their finances would sustain their spending until he is 91 and she is 93,” Mr. Tringham says. “Without selling the property, they are likely to deplete their investment assets by the time Randall is 81.”
A further consideration is the concentration risk in owning two properties that make up more than 50 per cent of their combined net worth. “The housing market has been slow recently and there is no guarantee of a rebound or strong returns in the future,” the planner says.
“Historically, over a 100-year time period, real estate has generated a return in line with inflation or slightly higher,” he says. “The elevated returns of the past 20 years are rare and cannot be relied upon for the future.”
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Client situation
(Income, expense, asset and liabilities are provided by the applicants.)
The people: Randall, 59, Polina, 50, and their daughter, 26.
The problem: Ensuring their disabled daughter is provided for after they die.
The plan: The insurance policy, trust funds and value of their house will be enough to provide for their daughter. If Polina sells her condo, their savings and investments will be enough to meet their retirement spending goal.
The payoff: Peace of mind.
Monthly after-tax income in 2027: $12,665.
Assets: His LIRA $520,000; his RRSP $610,000; his TFSA $14,000; her LIRA $180,000; her RRSP $815,000; her TFSA $140,000; residence $1,600,000; rental condo $1,100,000. Total: $4,979,000.
Monthly outlays: Mortgage $4,000; property tax $1,000; sewer, water, garbage $85; home insurance $250; electricity $100; heating $50; security $15; maintenance, garden $120; transportation $395; groceries $700; clothing $75; gifts, charity $450; vacation, travel $1,250; dining, drinks, entertainment $550; personal care $50; club memberships $85; golf $150; pets $125; sports, hobbies $200; subscriptions $150; health care $175; health, dental insurance $250; life insurance $675; disability insurance $275; communications $225. Total: $11,400.
Liabilities: Mortgage $300,000 at 3.29 per cent.
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