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Family with modest income, disabled teen needs plan for multiple financial goals

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Carry and Drew have a lot of things they would like to accomplish in the next decade and a half. The problem is they only have so much money to go around.

"We need to be able to budget our money so we can save to fix our house, travel and have a nest egg," says Carry, who earns about $35,000 a year as a health-care worker.

"And we still have two teenage boys at home."

One of their children has a disability, so Drew and Carry, both in their 50s, would like to be able to save for his future, too.

"We have never claimed disability programs or credits, and wonder if this would be an option for us," Carry says.

On the plus side, the couple has very little debt, owing about $12,000 on a mortgage on a home valued at about $156,000.

But they also don't have much savings.

Aside from Drew's work pension, about $34,000, they have no retirement assets.

They do have $10,000 in a savings account, but Drew -- who works in trades earning about $43,000 annually -- likes having the money for emergencies.

Yet other needs and wants loom -- such as fixing up an aging house.

"It is in dire need of upgrades," she says, adding they want to spend about $15,000 on renovations.

And they also want to take a big family vacation -- something they've never done.

Then there's retirement.

"I'd likely retire at 65 -- Drew would do the same."

But the closer they get to retirement age, the more they wonder how realistic that goal is, let alone all the other ones, Carry says.

"It doesn't look very positive. It seems we're spending more than we're bringing in."

Financial planner Rodney Lowry, with RBC Financial Planning in Winnipeg, says Drew and Carry should take a closer look at their numbers because they don't add up to the reality they say they're experiencing.

"Their take-home income equates to about $4,869 per month, yet their budget indicates they only spend about $2,500 per month, which leaves over $2,300 per month unaccounted for."

This is both good and bad news. On the surface, they have enough free cash flow for their goals. That's the good news. The bad news is all that money is going somewhere, and they feel they don't have enough of it, so it may be they have overlooked a lot of expenses.

Step one is tracking their costs more closely to get a better handle on spending.

If they do have this much free cash flow, then they have plenty of options.

Budget surpluses aside, however, Lowry says another financial consideration is putting their emergency savings to better use.

"While many planners advocate you have at least three months set aside for emergencies, many people today have an available credit line that they keep a zero balance on for emergencies," he says.

Instead of keeping this sum for rainy days, they could apply it to their mortgage, for example, which would cut the amortization from almost seven years to 17 months, and free up $182 a month for other goals.

Another choice is using the $10,000 to open a Registered Disability Savings Plan (RDSP) for their son.

"To be eligible, their son's impairment must be confirmed by a medical practitioner and accepted by the Canada Revenue Agency by completing form T2201."

If he is eligible, the available grants are substantial. Contributions to the plan can receive a matching Canada Disability Savings Grant -- as much as $70,000.

The government will pay a grant of 300 per cent of the first $500 in contributions and 200 per cent of the next $1,000 for families with net incomes below $87,123. When net family income exceeds $87,123, the grant matches only 100 per cent of a maximum of $1,000 in annual contributions.

"In Drew's and Carry's situation, with net income below $87,123, they could qualify for the maximum of $3,500 grant," Lowry says. "So a contribution of $1,500, when added to the maximum $3,500 in grant, can net a total balance of $5,000 in the plan each year."

The Canada Disability Savings Bond is also available for low-income families and individuals. While they have too much income to qualify -- they'd need to earn less than $25,356 -- their son would likely qualify for the $1,000 annual bond (to a lifetime maximum of $20,000) once he turns 18.

All told, over the next decade, if they contributed the maximum to their son's account every year, they would receive $35,000 in grants to go along with their $15,000 in contributions.

In addition, once their son turns 18 next year, he could apply for the bond. So in 10 years, their son would have as much $59,000 in his RDSP -- not including growth.

"At a six per cent annual rate of return, the value of the plan in 10 years would be over $77,000," Lowry says. "Even if they stopped contributing to the plan after 10 years and the son still qualified for the annual bond each year until it stops at age 49, the value of the plan could grow to over $340,000."

In addition, they can also apply for disability amount transferred from a dependent. If their son qualifies for the disability tax credit, this can be applied to the parents' income taxes, providing one of them with a $7,697 federal credit and a $6,180 provincial credit for about $2,081 in tax savings every year. These credits can also be applied retroactively up to 10 years.

They may be eligible for other credits too, such as the Manitoba disability supplement, so Drew and Carry may be looking at sizable tax savings, providing them with much-needed additional cash flow for other goals, such as retirement.

Lowry says given their low incomes, contributing to their RRSPs may not be the best retirement savings strategy for them. Instead, contributing to a TFSA may be a better option.

Although Drew's pension will be an important piece of the puzzle, they will largely rely on CPP income -- about $1,500 gross a month combined -- early in retirement. Under the new OAS rules, Drew will have to wait five months after turning 65 to receive the benefit while Carry would have to wait the entire full two years until age 67.

Having a TFSA would provide them with important tax-free income that may allow them to qualify for low-income retirement benefits such as the guaranteed income supplement. Another source of tax-free retirement income could come from the equity in their home, because at some point they may need to downsize and use some of the remaining proceeds to help fund retirement expenses. RRSP income, in contrast, is fully taxable, and the tax deferral savings on contributions today versus withdrawals in retirement will likely be very small, or even non-existent.

Of course, the biggest unknown for their financial future is the $28,000 in missing annual cash flow.

Lowry says the couple has to bear down on their budgeting to account for this cash because if they can rein in spending, they would have enough of a surplus to achieve all their goals.

"They would be able to pay the mortgage of $12,960 off this year, contribute $1,500 each year toward an RDSP for their son, complete the renovation, go on a vacation spending maybe $10,000 and still have over $10,000 left over to save toward retirement every year," Lowry says.

"And that's without touching their emergency savings."

 

Republished from the Winnipeg Free Press print edition March 15, 2014 B11

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