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Disabled retirement

Couple faces limited resources due to long-term illness

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May and Tom don't have to worry about when and if a debilitating illness will strike in retirement -- it already has.

Tom was forced into early retirement several years ago after being diagnosed with a degenerative illness.

"I've been medically retired since my 40s," says the 64-year-old, who receives a work pension of about $800 a month.

"I'm a mere shadow of what I once was, but I've had a good life."

May, who turns 65 soon, has continued working in the civil service part time while caring for her husband as his illness has progressed. She doesn't earn much -- less than $25,000 a year -- and they're concerned about how they'll manage to make ends meet once she retires in the next few months.

She has a work pension that will pay her $50 a month. She will also receive CPP, about $462 a month, and OAS, about $540 a month.

Once Tom turns 65 next year, he will qualify for OAS, too, but his CPP disability will be reduced by a little more than half. He currently earns $1,109 a month from disability.

The couple has a mortgage with about $80,000 remaining, but no other debts. So far, they've managed to make ends meet -- but only barely.

"We have nothing to save at the end of the month," he says about their monthly expenses of about $3,600.

But Tom does have a substantial RRSP worth about $368,000 while May has about $8,000 in an RRSP. They've held off drawing on it because they worry about increasing costs for care as they age. Now, they know they likely have to start drawing on it, but they want to make it last as long as possible.

"I'd take care of this stuff by myself, but my mental acuity has just gone down the tube," Tom says.

Karen Diamond, a Winnipeg retirement planner, says they've already demonstrated they can live on a limited income -- a good indicator of a strong financial future.

Not to mention, their work pensions and government stipends should be enough to cover most basic expenses.

"The base incomes of government benefits are currently fully indexed, so that will contribute significantly to their income keeping pace with inflation and they may not need to build that into the stress on their income from their savings," says the certified financial planner with Diamond Retirement Planning.

At 65, Tom and May will benefit from tax credits such as the age and pension amounts, in addition to the federal and provincial disability amounts they've already been claiming along with related deductions. So far, they have had to pay little income tax. Last year, they paid $4,000 and received a refund for $2,600.

The additional tax credits will increase their possible tax-free zone of income, providing the opportunity to withdraw money from their RRSPs without paying much or any tax, Diamond says.

"They should do some detailed tax planning to figure out how much additional RSP funds they can withdraw without paying tax and invest the withdrawals in TFSAs and non-registered investments to provide more flexibility for them to meet emergencies or other occasional lump-sum needs."

Because they'll be withdrawing some money from RRSPs in the not-too-distant future, they also should have a portion of their portfolio in short-term investments -- such as GICs -- or cash.

"At this stage, we would probably recommend that approximately 20 per cent of their portfolios be in guaranteed investments in preparation for taking income," she says. Short-term GICs are likely their best bet in this regard.

At the moment, Tom's RRSP portfolio is heavily invested in segregated funds sold by insurers, and while they do provide some guarantee of value, the extra premium he pays for the guarantees may not be worth the money.

These products still might be suitable for May's and Tom's needs, but Diamond says they likely don't need a lot of exposure to segregated funds because they can probably build a lower-fee, income-generating retirement portfolio of similar funds, only without the insurance guarantee umbrella that protects the principal investment.

"Mutual funds are still the best option for most investors who need to earn more than the one to two per cent being offered by guaranteed investments like GICs," Diamond says. A good strategy would be to combine conservative cash investments such as high-interest savings and GICs with income-producing mutual funds.

Income funds pay a set distribution of 'X' number of cents per fund unit per month.

"The distribution is not dependent on market value and the recipient is not cashing in units to create the income payment, which is important," she says.

The monthly payout is composed of interest, dividends and trust distributions earned by investments in bonds, dividend-paying stocks, preferred shares, REITs (real estate income trusts) and other income-producing securities.

"The upside is the payout to the fund isn't dependent on market value of the investments at any given time." If markets are down, it's less likely they'll need to withdraw capital -- instead of income -- to maintain payments, which would reduce the portfolio's future ability to generate income.

The funds they own now do not have the same flexibility, she adds.

A typical distribution rate for a typical income fund is about a four to six per cent yield on investment per year.

"It's not guaranteed, but somewhat predictable," she says. "If Tom and Mary had about $250,000 of their RSP savings in such a fund, they could be generating nearly $13,000 of annual income from the monthly distribution alone, without dipping into the capital."

They will have to withdraw more money once at age 72 when CRA rules require they convert RRSPs to RIFs (retirement income funds) making set-percentage annual withdrawals from the overall portfolio mandatory. This bolsters the strategy of withdrawing as much money from the RRSPs early, paying little or no tax, instead of waiting until they have less flexibility when their savings are held in a RIF.

And tax efficiency is crucial because they need to make the most of their savings. But it's equally important they build a low-cost, income-generating investment retirement portfolio that balances immediate income needs with long-term growth to keep up with inflation and future costs. Yes, that does entail investing a portion in the stock market, but that can be done conservatively. A mutual fund of blue-chip, dividend-yielding stocks with a solid track record should do nicely, Karen Diamond says.

"Strike a conservative investment plan, which includes some growth potential, and stick to it."

Tom's and May's finances


Tom: $22,908 annual (CPP disability $1,109 a month; work pension $800 a month)

May: $24,800 annual ($1,700 a month, net)


Monthly: $3,600


Mortgage: $80,000 owing, paying $915 a month at 5.25 per cent interest; nine years remaining


May RRSP: $7,775

Tom RRSP: $379,857

Home: $210,000

ñü NET WORTH: $517,632

Republished from the Winnipeg Free Press print edition July 1, 2012 B10

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