When family duty alters retirement plans

The expert

Rhonda Sherwood, CFP, FMA, Wealth Advisor, Scotia McLeod

Client profile

George and Teresa had 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 a series of medical crises 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 the additional costs the couple have 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-termcare facility for two weeks while they went on vacation. Her stay cost more than their vacation.

7

Degree of difficulty

7/10. Caring for an elderly family member is stressful. It will take tact and empathy to help George and Teresa revisit their retirement plan. This process requires an advisor to help them refocus emphasis on their goals as a couple; otherwise, they’ll continue to help their relatives at their own expense.

Gwen’s doctor suggests long-term care, but it costs several thousand dollars per month. Gwen still handles her own finances, but recently forgot to pay her property taxes and utility bills.

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. Their advisor told them about TFSAs, but they preferred the familiarity of RRSPs. 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 in his field, 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.

Reverse mortgages

Reverse mortgages can provide homeowners with a way to access funds if their houses are paid for. However, clients need to understand these risks:

• Interest rates tend to be higher than regular mortgages. Interest also compounds on the loan amount, and adds to the mortgage liability. If interest rates rise, the amount owing could skyrocket;
• A mandatory home appraisal, application fee and closing fees may apply;
• The reverse-mortgage holder must be listed on the title. Other debts secured by the property, such as home improvement loans, will be secondary to the reverse mortgage; and
• Paying off the reverse-mortgage debt early can incur penalties.

The solution

Due to their additional costs, George and Teresa will have to delay retirement. They can lower the wait time if they follow these steps.

Financial vehicles: Sherwood suggests they open a 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. Adjusting the balance to 60% equities, 40% bond funds will maintain growth and give more liquidity to the portfolio.”

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 CPP, OAS 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, use a less-risky home-equity line of credit. They could also obtain a low-interest loan to pay their property taxes, an option available to BC residents over age 55 with at least 25% equity in their homes.

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.”

Client Acceptance

6.5/10

George and Teresa are redirecting half their RRSP contributions to a TFSA. With George’s full pension at age 60, they will have more than enough to live on.

Teresa is reluctant to broach long-term care with Gwen, but did convince her to do a will and power of attorney. Teresa is now joint account holder and has taken over her mom’s banking and bill payments.

Joey moved in with Gwen, but she sent him packing after two weeks. He is back in his parents’ basement and after budgeting and using free gambling addiction resources, has started to pay rent. Plus, he cuts the lawn.

Lisa MacColl is an Ontario-based financial writer.