Martha wonders whether she can afford to give her two children a cash gift now rather than as part of her estate as an inheritance. She is age 66.
“I am comfortable financially but by no means well off,” she writes in an e-mail. She owns a townhouse in an Ontario city valued at $525,000.
She is considering selling and renting over the next couple of years, or may move in with one of her children.
They are both in their early 30s, and are striving to save for a down payment on a first home. The elder “is open to buying a home with an in-law suite, so that might be an option for me,” Martha adds.
She has a defined benefit pension that pays $32,000 a year. She earns $20,000 a year working part time and is collecting Canada Pension Plan and Old Age Security benefits, for total pretax income of about $70,000 a year.
While she would like to help her children financially, she’s concerned about leaving herself short. “I grew up in poverty and know how tough that is,” she adds.
Should she wait until she sells her home to give the children some money? she asks. “Should I use my line of credit?”
Her other goals are simple, Martha adds: to buy a new car and “maybe take a trip of a lifetime to see the Northern Lights.”
We asked Jason Heath, a certified financial planner and managing director of Objective Financial Partners in Markham, Ont., to look at Martha’s situation.
What the expert says
Martha is planning to sell her townhouse at some point and rent, Mr. Heath says. If her elder child buys a house with a granny suite, she might move in there. “If she moved into an in-law suite with her daughter’s family, her townhouse proceeds could provide a lot of extra funds for helping her kids and grandkids, let alone for more ambitious travel in retirement.”
She wants to give $15,000 to each of her two children and wonders whether she should take this from her registered retirement savings plan or borrow on a line of credit. “If she plans to move in to an in-law suite with her daughter in a couple of years, I would be more inclined to consider taking some money from her line of credit, but drawing down her cash savings first,” Mr. Heath says. There would be no point paying more than 5-per-cent interest on the line of credit while her cash savings earns 2 per cent or less.
“The reason to consider the line of credit would be if she planned to pay it off shortly from the townhouse proceeds,” the planner says. “That said, the RRSP withdrawal would be small enough, and the incremental tax low enough, that I think an RRSP withdrawal would be reasonable whether she planned to sell her home or not in the next few years. She may not be comfortable taking on debt, even temporarily.”
In preparing his retirement projections, the planner assumed her employment income of $20,000 a year continues for three more years and that she gifts $15,000 to each of her children in the next year. She is also assumed to pay $40,000 for a new vehicle, net of trade-in value, in four years and then another vehicle 10 years later, adjusted for inflation.
As well, he assumed an extra $5,000 a year in spending for travel for the next five years on top of her target spending of $55,000 a year for living expenses. He further assumed 2-per-cent annual inflation, 3-per-cent growth for her townhouse value and a 4-per-cent return on her RRSP investments, a mix of mutual funds and guaranteed investment certificates.
“Based on the assumptions, I project that Martha would exhaust her investments by age 81 if she stayed in her home,” Mr. Heath says. It could be earlier or later, depending on her investment returns and how her spending evolves, “but the point is, she is likely to need some home equity to fund her expenses.” That seems acceptable to her given that she plans to sell her townhouse at some point. “It could even be imminent if one of her children buys a home with an in-law suite in the next few years.”
If Martha wanted to stay in her townhouse, she could potentially borrow against the home equity in her 80s and 90s using a line of credit or a reverse mortgage, Mr. Heath says. She is projected to have used about half her home equity by age 95 if she stays put, he adds. Another option could be a downsize of about 50 per cent at age 80. This would also replenish her investments to supplement her pensions and sustain her lifestyle spending to age 95. “If she sold and moved into a retirement rental community, this could also be a potential financial and lifestyle choice over the next 15 years or so.” So, Martha has options.
If she buys a new car, she would likely need an RRSP withdrawal to fund an outright purchase if she does not sell her townhouse, the planner says. She could consider making the withdrawal all in one year or potentially over two or more years to try to stay below the OAS clawback limit (about $82,000 of income for 2022). She could even use her line of credit, depending on interest rates at the time, and pay it off over a few years with incremental RRSP/RRIF withdrawals.
Martha appears to have about $1,250 a month in unallocated spending, so she may want to track her spending for a while. “But to be honest, I’m most concerned that someone can afford their total monthly spending, as opposed to the nitty-gritty of what they are spending that money on,” Mr. Heath says.
In summary, Martha seems well positioned for retirement. “Depending on what she does and when with her townhouse, she could have a sizable surplus.” The planner encourages Martha to do the travelling she wants over the next few years. “She can afford it and more importantly, you never know how many healthy years you have in retirement.” As a 66-year-old woman, Martha has a 50-per-cent chance of living to age 91. “But not everyone lives that long, and travel can become prohibitive with age.”
As for helping her children financially, Martha seems well-positioned to do so, Mr. Heath says. “She should put herself first, of course, but the help she provides can happen over time and in stages, in part so she can watch her loved ones benefit from her hard work and savings at a time when they may need it more than when they ultimately receive an inheritance.”
The people: Martha, 66, and her two children, 31 and 35
The problem: Can she afford to give them a $15,000 gift each without jeopardizing her financial security?
The plan: Martha can give her children a gift of cash whether or not she moves into a granny flat with her elder daughter. When she sells her townhouse, the sale proceeds will boost her investment portfolio so her savings will last longer.
The payoff: The pleasure she’ll get helping her children when they may need it most.
Monthly net income: $4,600
Assets: Bank accounts $20,000; RRSP $360,000; residence $525,000; estimated present value of DB pension $500,000. Total: $1.4-million
Monthly outlays: Condo fees $575; property tax $300; home insurance $50; electricity $140; heating $200; garden $30; transportation $530; groceries $400; clothing $150; gifts, charity $250; travel $0; dining, drinks, entertainment $170; personal care $60; pets $120; sports, hobbies $100; health care $70; communications $200. Total: $3,345 Surplus of $1,255 goes to unallocated spending.
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