This retirement plan keeps on giving

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Now that they're financially comfortable, Monica and Victor like nothing better than to help out their three married children.

They've been lucky enough to retire early - he's 59 and she's 60 - they have a nice home with no mortgage in London, Ont., and more than enough pension and other income to meet their needs.

So each time a birthday or Christmas rolls around, they give their children cheques. Then there are the five grandchildren, who get gifts of money to tuck into their registered education savings plans (RESPs). All in all, such spending adds up to $9,000 a year.

As well, Monica and Victor were able to lend one of the children $100,000 to pay off a mortgage.

"We want the money to be gone by the time we are," Monica said in an interview.

"We feel they could put the money to use now to pay down their mortgages and to invest in RESPs for our grandchildren now instead of after we pass away."

Monica wonders whether she and Victor can continue on this path indefinitely, and whether this is the best way to arrange things.

We asked David Martin of Second Opinion Investor Services Inc. in Halifax to look at Monica and Victor's situation. Mr. Martin says the couple have nothing to worry about.

What Our Expert says Monica and Victor "seem to be able to gift $9,000 annually to their kids and grandkids for as long as they choose," Mr. Martin concludes.

"It's a good idea to gift money while you are alive to reduce estate taxes if you have excess cash flow and resources to fund your lifestyle for 30-plus years."

Even without monthly loan payments from their daughter - which is not income but a return of capital - the couple's income is enough to cover their expenses without having to touch their savings or RRSPs, so their investments can continue to grow, Mr. Martin says.

Victor's company pension amounts to $2,776 a month, plus a $500 bridging benefit until he turns 65, at which point he will begin collecting Old Age Security. He will get $636 in Canada Pension Plan payments each month starting in November, 2010.

Monica's CPP is $502 a month; she also draws $782 a month from her $134,000 work pension, which is in an annuity yielding a fixed 4 per cent a year. That gives them a total monthly gross income of about $4,560.

Their daughter pays $1,000 to $2,000 a month toward her interest-free mortgage loan, which is expected to be paid in full in about 6½ years.

The couple's $239,000 in RRSPs are invested entirely in guaranteed investment certificates. Mr. Martin says Monica and Victor can maintain this conservative asset mix because they will not need their investments to grow much more than inflation in order to preserve their buying power.

But Mr. Martin does raise one note of caution. Most people underestimate their expenses, he says, overlooking such things as gas for their vehicles, medications, the cost of replacing a vehicle, vacations and home maintenance expenses, "which can be very costly and dramatically affect their financial situation."

He advises Monica and Victor to track their expenses closely for six months to a year to ensure they aren't overlooking anything, and develop a financial plan that would account for infrequent expenses such as home repairs and car purchases.

Also, he encourages them not to view gifts to their children and grandchildren as fixed expenses. Instead, they should look at them the same way companies do when they are deciding whether they can afford to pay employee bonuses, he says.

Monica and Victor are advised to look at their balance sheet and cash flow statements annually and update their financial plan frequently to make sure they have extra funds to give away.

The couple have to keep in mind that Victor will lose his pension bridging benefit at age 65, but this will be replaced by OAS. Monica's annuity will be depleted in about 20 years if the withdrawal amount is a fixed dollar amount of $9,380 based on a 7-per-cent withdrawal rate and a 4-per-cent annual return.

Another point to note: Most of their savings are in registered plans, which could have negative income tax consequences if they needed emergency funds and had to withdraw lump sums from their RRSPs.

To avoid this scenario, Mr. Martin advises that the couple focus on increasing their non-registered savings and investments to a range of $75,000 to $100,000 from $25,000 today. This money could come from excess cash flow and the loan repayment from their child, he notes.

He advises them to see a professional for help with their estate and will planning.

"They should ensure that their wills address how the loan to their child will be handled if they both die before it has been paid back," he says.

If they are concerned about estate taxes and probate, they might consider buying insurance (after their emergency fund has been increased) to cover the estimated tax bill, he suggests.

Client Situation

Special to The Globe and Mail