When retirement plans change

Even the most careful retirement planning is sometimes no match for real life.

Take George and Teresa, a married couple, both nearing 60. They’d planned to retire when George, who has a defined-benefit pension, turns 60 in three years.

Teresa’s 85-year-old mother, Gwen, lives on her own in Burnaby, B.C., but medical issues threaten her continued independence. Teresa is an only child and sole caregiver to her mother. Her 25-year-old son, Joey, returned home after university and lives in the basement.

The problem

George and Teresa have paid off the mortgage on the modest house they bought in Vancouver when they married. That house is now worth a small fortune.

Gwen’s health has put George and Teresa’s retirement plan in jeopardy because of additional costs the couple has been paying for her and their boomerang son.

At the moment, Gwen needs help with household tasks like bathing, dressing and meal preparation. The province covers minimal home support, and Teresa has been paying for additional private services that cost $600 per month. A few months ago, George and Teresa paid for Gwen to stay in a long-term care facility for two weeks while they went on vacation. Her stay cost more than their vacation.

Gwen’s doctor suggests long-term care, but it costs several thousand dollars per month.

Aside from George’s pension, their portfolio is almost entirely in registered products, and is 70% equities because they wanted to achieve respectable growth for their remaining investments. They keep $5,000 in a savings account for emergency expenses.

Joey moved home after completing his Master’s in sociology. Unable to find work, he currently makes minimum wage at a call centre.

He also got hooked on online gambling, so he’s carrying a $33,000 credit-card debt in addition to his monthly car payments. He pays no rent.

The solution

Due to their additional costs, George and Teresa will have to delay retirement. They can lower their wait time if they follow these suggestions from Rhonda Sherwood, a wealth advisor with Scotia McLeod.

Financial vehicles: Sherwood suggests they open a Tax-Free Savings Account (TFSA) for their more liquid investments. “They need to redirect some contributions to the TFSA to help with Gwen’s costs, and to fund any shortfall in their early retirement years.”

Teresa has been withdrawing funds from her RRSP to cover the additional costs of her mother’s care. Embarrassed, she didn’t tell her financial advisor, but also didn’t realize withdrawals are taxed at the marginal tax rate, or that her withholding tax would not be enough to cover the hit.

“If Teresa wants to keep withdrawing from her RRSP, she needs to ask her financial institution to withhold more tax. However, it doesn’t make sense to keep contributing $6,000 a year only to pull it out again and be taxed,” says Sherwood.

Joey: “He should be paying rent, even a small amount. He could also pay in-kind by helping with Gwen’s care needs. Either way, his time with his parents must have an end date: if they plan to retire in three years, he needs to be out of the house by then.”

Sherwood also suggests Joey move in with Gwen when George and Teresa vacation to save the respite care costs.

Gwen: Teresa needs to look into long-term-care facilities for Gwen. Gwen lives on her Canadian Pension Plan, Old Age Security and an annuity created from her husband’s death benefit. Selling her home would provide more than enough for Gwen to have her pick of facilities.

“Start the process while Gwen can be part of the decision,” says Sherwood. “Another medical incident could force the issue at a high-stress time.” Teresa also needs to ensure Gwen completes a will and a personal care and continuing power of attorney that names Teresa as substitute decision-maker if Gwen is incapacitated.

Teresa also should be made joint on the bank account so she can take over bill payments or start using the power of attorney.

The houses: If Gwen is adamant about remaining at home, and George and Teresa can’t sustain the additional costs after retirement, one option is a reverse mortgage on Gwen’s home. These loans don’t require periodic repayments; instead, a lump sum is due after the securing real estate is disposed of or sold.

“However, if she is only going to be there a short time, the costs may not outweigh the benefits,” warns Sherwood. Instead, they should use a less-risky home-equity line of credit.

When Joey moves out, assuming Gwen does not move in, George and Teresa could consider downsizing. “It could also give Joey a nudge in the right direction.”

Lisa MacColl is an Ontario-based financial writer