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Melody and Bill hope to retire in two years, but their plans have been complicated by Bill's illness. (Michelle Siu for The Globe and Mail/Michelle Siu for The Globe and Mail)
Melody and Bill hope to retire in two years, but their plans have been complicated by Bill's illness. (Michelle Siu for The Globe and Mail/Michelle Siu for The Globe and Mail)

Financial Facelift

An ailing husband, a mission to provide Add to ...

When he heard he had a life-changing illness, Bill could think of nothing but his wife, Melody. If he died, would she have enough to get by? Would she have to sell their home?

Bill enjoys his work and spends long hours at the office, despite his 70 years. He will have to slow down now that his medical treatment is eating up one week each month, which has curbed his earning potential.

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Melody, who is 63, works part-time from home. Together, they gross about $117,000. They have been planning to retire together in two or three years.

When they retire, Bill figures they will need at least $3,000 a month after tax to cover their expenses. In the meantime, he intends to contribute another $22,000 next year to Melody’s spousal registered retirement savings plan. He is also paying off a $10,000 student loan for his youngest son, who lives rent-free in the basement apartment of the couple’s Kitchener-Waterloo, Ont., home. The son, who is “well employed,” is saving money to buy a home of his own.

“My job is very exciting,” Bill writes in an e-mail. “The hours are long but it’s secure and satisfying because of my contribution to the bottom line.” With the illness, though, “I may be compelled to retire and I need Melody to be financially secure.”

We asked Marc Henein, an investment adviser and financial planner with ScotiaMcLeod in Toronto, to look at Bill and Melody’s situation.

What the expert says

When they retire, Bill and Melody’s registered accounts will be worth nearly $500,000, including new contributions and compound growth, Mr. Henein says. To sustain their current lifestyle, Bill and Melody will need to generate a return on investment of 5 per cent a year, the planner calculates. He assumes an inflation rate of 3 per cent a year.

Although neither has a work pension, the Canada Pension Plan and Old Age Security will give Bill and Melody about $1,300 a month. Once their son moves out, they can rent the basement apartment for $900 a month. That means they need $1,800 a month from their savings – an achievable goal, Mr. Henein says. This total of $4,000 would leave them with after-tax income of about $3,348 a month.

In 2015, their first year of retirement, the couple’s income will be broken down as follows: rental income $11,801, government benefits $15,066, Bill’s RRIF withdrawals $9,269, and withdrawals from their TFSAs of $19,572, giving them a total cash flow of $55,708 or about $49,828 after tax, Mr. Henein calculates. As the TFSAs are depleted, more money can be withdrawn from Bill’s RRIF. When Melody turns 71, she will convert her RRSP to a RRIF and begin withdrawing money from it the following year. She would run out of savings at age 88, although she would still have her home.

The couple’s emergency savings were not included in the calculations. As well, Bill has $200,000 worth of life insurance, “which would increase the pool of investments that Melody can derive income from,” ensuring she would have enough money for the rest of her life, the planner says.

As for their investments, Mr. Henein suggests they lower their exposure to the stock market; as it stands, Bill has 60 per cent in equities and Melody has 70 per cent. When they retire, they should shift their holdings to at least 60 per cent fixed income and 40 per cent equities.

“All securities they purchase should pay income in the form of dividends and interest,” he adds. “Keeping capital intact and living off the income the portfolio will generate is key to the sustainability of their financial plan.”

To set Bill’s mind at ease, Mr. Henein ran another set of numbers looking at how Melody would fare financially if Bill passed away sooner than expected. If Melody stopped working today and drew government benefits, rented her apartment and withdrew the balance of her monthly needs from their existing savings, she would still have enough money to last for the rest of her life because Bill’s $200,000 of life insurance would be added to the investment pool.

CLIENT SITUATION

The people

Bill, 70, and Melody, 63

The problem

How to make sure Melody has enough money to live on for the rest of her life – without selling her home – if Bill succumbs to his illness in the next few years.

The plan

Save as much as possible over the next couple of years, rent out the basement apartment, rejig the portfolio to lower investment risk.

The payoffs

Peace of mind and financial security.

Monthly net income

$8,480

Assets

RRSPs $439,000; TFSAs $25,000; emergency fund $65,000; residence $450,000. Total: $979,000.

Monthly disbursements

Property tax $360; home insurance $124; utilities $385; maintenance, garden $50; auto expenses (two cars) $950; groceries $600; clothing, dry cleaning $200; loan payment $355; line of credit $354; charitable $150; personal, hobbies $260; dining out $100; dentists, prescriptions $200; life insurance $165; telecom, cable, Internet $315; RRSP $1,446. Total: $6,014

Liabilities

Line of credit $5,000; son’s student loan $10,000. Total: $15,000



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