James and Evelyn.Rafal Gerszak/The Globe and Mail
A year or so ago, Evelyn and James were looking forward to their impending retirement. Then Evelyn fell ill.
James’s first impulse was to quit his job to spend more time with his wife. But he also wants to ensure they can afford the best possible care.
“My wife was recently diagnosed with a form of dementia, which will, in the long term, require full-time care,” James writes in an e-mail. Costs for dementia care in an assisted-living home range from $6,000 to $10,000 a month. “It is highly uncertain as to when this level of care will be needed and for how long.” Survival rates, it seems, are “highly variable, and in some cases people can survive 20-plus years after the diagnosis.”
James, who will soon turn 62, earns $168,000 a year plus a bonus of about $50,000 working in sales. Evelyn is 59 and no longer working. She gets a defined benefit pension of $17,640 a year, including bridge benefit, falling to $10,600 at the age of 65. They have two sons, both in their early 30s.
“I had thought of retiring now to enjoy the time of relative lucidity, but I’m very concerned I will not have adequate resources to afford her care when it will be required,” James writes.
They are not without means. They have a house and an investment condo, rented to relatives at cost, as well as registered retirement savings plans and James’s substantial defined contribution pension plan, to which both he and his employer contribute.
“So the question is, should I continue to work and build the financial assets to provide care in the future?” James asks.
We asked Ian Black, a fee-only financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at James and Evelyn’s situation. Mr. Black holds the registered financial planner (RFP) designation.
What the expert says
First, Mr. Black explores the most “financially difficult” situation, where James retires on his 62nd birthday this spring to spend time with Evelyn. This forecast assumes Evelyn lives another 20 years beyond the current year, that home-care costs are $24,000 a year for the six years she remains at home, and that residential care costs are $120,000 a year for 13 years. It also has James paying off their line of credit now.
“This assumes James and Evelyn can make do without paid home-care support for two years,” Mr. Black says. Their sons, who live nearby, help with their mother’s care.
“Under this scenario, all financial assets are exhausted by James’s age 70 except for his defined contribution pension plan,” Mr. Black says. He assumes James’s DC pension is converted to a locked-in retirement account, or LIRA, which has minimum and maximum withdrawals limits.
“The maximum withdrawal at age 62 is 7.04 per cent of the plan value [$797,000],” Mr. Black says. So while James has substantial savings in his DC plan, "they cannot be accessed due to the withdrawal constraints.”
A better alternative, financially, is for James to work another three years until his 65th birthday. He would earn $213,000 a year, including bonus, plus $60,000 for the year in which he retires. Evelyn’s home care would start immediately and last for eight years, rather than six.
The planner assumes James sells the family house after Evelyn goes into full-time care, invests the proceeds and moves into the rental condo. That would free up a substantial sum. With the extra income generated, “the LIRA withdrawals could be reduced to the minimum amount annually, thereby extending the plan for a longer period,” Mr. Black writes.
The course James chooses will likely fall somewhere in between the two alternatives, the planner says. “Practically, it’s likely that a scenario between retiring soon and at age 65 is achievable,” Mr. Black says. “Having to sell the house at some point in the future is an unfortunate reality.”
The planner has some suggestions to potentially improve the couple’s finances.
Evelyn should apply for the Canada Pension Plan disability pension, he says. The pension has a base amount of $496 a month plus an additional amount based on a person’s CPP contributions. “In 2019, the average monthly CPP disability amount was $980, with the maximum amount being $1,362.” This would continue to her at the age of 65, at which time she would begin collecting CPP retirement benefits instead.
(In preparing his forecast, Mr. Black did not include a CPP disability benefit.)
As for James, he should sell some of his $300,000 in shares of his employer, which he holds in various accounts. “A diversified, low-cost mix of bond and stock exchange-traded funds would assist in mitigating investment risk,” Mr. Black says.
On the estate planning front, Evelyn and James should ensure that their estate planning documents – wills, powers of attorney and other necessary papers – are up to date while Evelyn still has mental capacity, the planner adds.
“Also, ensure proper beneficiary designations are on all pension, RRSP and tax-free savings accounts,” he says. “Look to make non-registered accounts and bank accounts joint for estate planning purposes.”
Client situation
The people: James, 61, and Evelyn, 59
The problem: Should James quit work now to spend more time with Evelyn, or should he continue to work and build financial resources?
The plan: Consider working to the age of 65 and selling the house when Evelyn goes into residential care. Evelyn applies for CPP disability pension. James sells some of his employer’s stock to lower investment risk.
The payoff: The comfort James will derive from knowing he can afford the best care for Evelyn.
Monthly net income: $9,500 (after all deductions, including pension plan contributions).
Assets: Cash $13,100; non-registered investment $249,000; his employee share purchase plan $44,100; his RRSPs $169,205; her RRSPs $192,085; his DC pension plan $797,305; estimated present value of her DB pension $262,995; residence $1,357,000; investment condo $469,100. Total: $3.55-million
Monthly outlays: Property tax $400; home insurance $110; utilities $290; maintenance, security, garden $410; transportation $320; grocery store $800; clothing $250; gifts, charity $400; vacation, travel $800; other discretionary $1,000; dining, drinks, entertainment $500; pets $200; sports, hobbies $200; doctors, dentists, drugstore $200; health, dental insurance $350; life insurance $200; disability insurance $345; phones, TV, internet $385; RRSP contributions $1,000. Total: $8,160
Liabilities: Home equity lines of credit $151,625.
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Some details may be changed to protect the privacy of the persons profiled.
