With Heavy Debts and a Disabled Child, this Couple Can’t Afford to Quit Jobs just yet

Andrew Allentuck
Though they have not used their financial assets as well as they might, they will be able to retire debt-free in five years with a few adjustments to their assets, says planner.
A couple has a large mortgage and a disabled child – they don’t want to retire until he has been looked after
Use high savings balances pre-pay mortgage to cut amortization from 22 to five years — then retire debt free
David and Lucy, both 62, provide limited financial support and guidance for their 25-year old disabled child. He is their No. 1 concern and they won’t contemplate retiring until they are sure he is looked after, now and in the future.
“We don’t like to dwell on it,” David says. “We will have to provide money for Robert, but from what we know now, his condition, which affects his emotions, is not going to change. He is our only child and he is someone who we cannot abandon. Our quest is financial, but the ultimate goal, beyond our own retirement, is to help him now and when we are gone.”
The Ontario couple has after-tax family income of $7,480 a month, secure jobs in local government and a wish to retire in the next decade.
“Robert has occasional work in the hospitality industry, but his instability makes it hard for him to hold down a job,” David says. “We provide some support but most of his money, about $1,100 per month comes from the Ontario Disability Support Program. About half of that goes to rent and the rest is for other living expenses. We also provide some support and contribute to his Registered Disability Savings Plan. It is all we can do, though we wish we could do more.”
At the financial level, there is a problem of debt. They have a $172,000 mortgage with 22 years to go. That’s not a heavy burden for people in their 40s or 50s, but in the 60s and with retirement beckoning, it is an issue.
It won’t be paid off until 2036 when both are 84. There are other debts that total $11,500. They have a one-third interest in a $195,000 cottage and financial assets of $285,000. The saving grace in their retirement will be job pensions which will total $29,568 per year at 65. They will have full Old Age Security and almost full Canada Pension Plan benefits.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with David and Lucy. As he sees it, they are well-organized and diligent savers. Though they have not used their financial assets as well as they might, they will be able to retire debt-free in five years with a few adjustments to their assets, he says.
Debt Reduction
Of $614,000 in total assets, they have financial assets of $285,000, $209,000 of which are RRSPS. They save $2,218 a month and keep $16,000 in cash in the bank for house repairs scheduled for spring. They can use their TFSAs to slash their debts.
First move – cash out $30,000 each has in a tax-free saving account, $60,000 in total, and apply that to debt reduction. $11,500 can go to eliminating their credit card debts. The balance, $48,500, can go to the mortgage, cutting the amortization from 24 years to 15 years and six months. The diversion of their TFSA balance to debt reduction is hardly fatal, for they can restore it a year after they take it out. Contribution room accrues if unused.
Next, use $833 a month they put into their TFSAs for mortgage payments.  That cuts amortization to about 12 years, perhaps longer if interest rates rise when they renew their loan. Now add the money they had used for credit card and line of credit debt payments, $1,008 a month, to the mortgage payments and the amortization drops to four years. They will be mortgage-free before age 67. The restructuring of their balance sheet will save $58,570 of interest payments. It will also cut the risk that big interest rate boosts over two decades could wreck their plans.
Retirement Finance
The key to the financially secure retirement that David and Lucy can have is not just their expected $29,658 annual job pensions, but also their high savings rate. Work and savings are linked.
If they work another five years to generate RRSP space and can continue to add $1,300 each month to their RRSPs for another five years and if they can continue to get 3% per year return after inflation, then they will have $327,600 in their RRSPs.
If that money is spent over the next 23 years to their age 90, it could produce taxable income indexed to the assumed 3% inflation rate of $19,350 per year.  Added to their CPP pensions, $12,460 for David and $10,582 for Lucy and two OAS pensions which total $13,236, and their employment pensions of $29,658, they will have total pre-tax income of $85,286 to age 90 in 2014 dollars. After tax at an estimated 20% average rate, they will have $5,686 a month to spend.
With monthly savings of $2,218 suspended (though aid to Robert will continue) for calculation purposes and no monthly debt service charges, currently $1,838, their monthly budget, currently $7,480, will shrink to $3,424. Their savings, $4,056 a month, can go to help Robert. That’s as much as $48,672 a year, some of which could be diverted to fund a trust for his care after the parents die.
After their RRSP income expires at age 90, they will still have their employment pensions, CPP, OAS and the ability to monetize their house and/or their fractional interest in a cottage they might sell to its other owners, Mr. Moran notes.
There is actually more that David and Lucy can do to increase their financial security and to help Robert. Like many people with jobs and family responsibilities, they are blissfully unaware of how their financial assets are invested and how those investments are doing.
They might start by reading their periodic financial statements, asking their advisor why they own their mutual funds, then reading the financial press and learning what their investments.
With time and effort, they might be able to migrate away from high cost mutual funds to lower cost exchange traded funds. For now, their job pensions and their savings are life jackets for a secure retirement and for Robert’s care.
“What this case shows is that a high savings rate cures a lot of problems and prevents others from happening,” Mr. Moran says. “Diverting savings to pay down the mortgage will bear fruit in mid-five figure savings of interest expense. That can support Robert as long as he lives.”
After-tax monthly income: $7,480
Home                          $     250,000
Cottage (1/3 interest)           65,000
Cash                                     16,000
TFSAs                                   60,000
RRSPs                                   209,000
Cars (2)                                14,000
TOTAL                       $         614,000
Mortgage 2.89%         $      172,000
Credit card 4.75%                   3,500
Line of credit 5%                     8,000
TOTAL                       $        183,500
Net Worth                   $      430,500
Monthly Expenses
Mortgage                               $  830
Home property taxes                 304
Line of credit                             508
Credit card                                500
Utilities                                     315
Phones, cable, internet              338
Home and car insurance            290
Clothing and grooming              150
Car fuel & maintenance            274
Food & restaurants                   783
Entertainment                            75
Travel                                        210
Cottage expense                         83
TFSA                                        833
RRSP                                     1,300
Life insurance                            130
Aid to child                               218
Gifts & charity                           62
Misc                                          192
Savings (RDSP)                          85
TOTAL                                  $7,480
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