Winnipeg Free Press - PRINT EDITION

Giving till it hurts

Helping out family affecting couple's financial future

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Hillary and Edmund are like a lot of grandparents. They're happy to help out financially when they can.

But the couple, both in their late 60s, has been making a lot of financial sacrifices over the last few years to help their kids and grandkids.

And they wonder how much more they can give.

"Nowadays, a lot of kids are getting by with their parents helping them out," said Hillary, who continues to work part time, taking home about $1,100 a month.

Hillary and Edmund have certainly done their part. They've helped one child purchase property in the U.S, lending them about $65,000 on a line of credit.

While they expect to be paid back next year at about this time, the interest charges are costing them $700 a month.

The couple owes about $68,000 in total on the line of credit because they gave another daughter about $25,000 for a down payment on a home. They've been chipping away at that debt ever since and expect to be debt-free by the end of 2014, when Hillary plans to retire.

The couple is helping out in other ways, too. They're contributing to RESPs for their grandchildren, about $75 a month. They're also contributing to their three kids' RRSPs, about $128 a month.

However, their own retirement savings are by no means substantial. Aside from OAS and CPP and modest work pensions of $1,500 a month for Edmund and $100 a month for Hillary, their only other source of retirement income is about $53,000 Hillary has in two registered accounts.

The majority of their wealth is in their home, worth about $450,000, and they've been thinking about downsizing soon. Only instead of using those proceeds to help pad their finances going forward, they were thinking about spreading the wealth around.

"We would like to buy a small house for about $250,000," Hillary said. "And we'd then give our children about $50,000 each."

At least that's what they'd like to do, but given the struggles they've had over the last few years making ends meet -- so much so Hillary has had to work part time -- they now wonder if that's the right thing to do.

"We've worked hard for this and maybe it's about time we took care of ourselves," Hillary said.

Certified financial planner Shane Verity with the Blando Group ScotiaMcLeod in Winnipeg said while Hillary and Edmund have their family's best interests at heart, it's plainly obvious it's coming at the expense of their own financial future.

"As a result of their generosity, Hillary and Edmund have found themselves overextended, forcing Hillary to return to work part time and drawing down her modest RIF (retirement income fund) and LIF (life income fund) rapidly," he said. "This kind of generosity is not sustainable for them."

Once Hillary's retirement savings are exhausted, they will only have their home as their main source of wealth, and going into debt to cover unexpected costs is a very real threat to their financial well-being.

For the next year or so, however, the couple can manage, Verity said.

Their fixed income after taxes is about $3,250 a month. This includes only their work pensions, CPP and OAS.

Their current fixed monthly expenses, excluding money they give to their children and grandchildren, are about $3,340. Without her part-time income, they will be paying out much more than they take in and quickly eroding their savings to keep pace.

"If you remove the $700 monthly mortgage payment and RRSP contributions for their children of $128 a month, their fixed expenses drop to $2,512 a month," Verity said. So once the $65,000 owing is paid back next year, their situation will be much better.

"While their current expenses are larger than their current income, there is a light at the end of the tunnel."

Verity said it makes little sense for the couple to contribute to their children's RRSPs, even if it's a small monthly amount.

"Hillary and Edmund are on a fixed income and must maintain a lifestyle throughout retirement on their pensions and modest amount of savings," he said. "Their children have many years of work and earning power to store away savings for the future."

Verity said many grandparents contribute to their grandchildren's RESPs and the couple can continue doing so, but their children are old enough to take care of themselves. Edmund and Hillary are too, and they need to start doing a better job managing their finances or risk running into problems later in retirement.

While they should consider downsizing, they shouldn't divide the majority of the proceeds into gifts for their children.

"By gifting away the most of their savings now, they are assuming that they will not require any additional savings to fund their retirement in the future," Verity said. "What if they needed to fund a major repair on their home? Without any additional resources, they would have no choice but to assume debt to pay for this type of unexpected cost."

Furthermore, they'll need the additional savings when one of them passes away because the survivor will be living on less. The remaining spouse will get a CPP survivor benefit but there is no surviving benefit for OAS. They also need to examine the survivor benefit for Edmund's pension.

"If, for example, Edmund's pension is 66 per cent payable to his surviving spouse, then Hillary would find herself with approximately $1,100 a month less in gross income," Verity said, adding splitting that income to save taxes would no longer be available.

As a result, she would pay about the same in tax as she and Edmund pay combined.

In the meantime, Hillary also needs to restructure what savings she does have.

"I would suggest that she move into a more conservative portfolio for her RIF and LIF," Verity said. "The current portfolio is an aggressive growth mix with a high allocation to equities."

Because she has a short time horizon, she can't risk losing money in the stock market. An income-oriented portfolio would be much more suitable, Verity said.

As well, Hillary and Edmund do not need to invest in a TFSA because they do not have enough assets to reap much advantage from this tax-free vehicle, at least for now.

"In the future, however, upon selling their home, TFSAs should be topped up immediately," Verity said.

Verity said taking care of their future and not their children's should be their priority.

While their generosity is admirable, Hillary and Edmund are ignoring the potential hazards to their own well-being.

"They need to analyze these kinds of worst-case scenarios to make sure they have enough to retire on regardless of what happens, and the proceeds from the home would definitely help in making up these kinds of shortfalls," Verity said.

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition December 14, 2013 B13

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