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Tim and Tamara.

Christopher Katsarov/The Globe and Mail

Tim and Tamara are professionals in their early 40s earning a combined $258,000 a year plus bonus. They also have income from a condo they are renting out.

Tim works in insurance, Tamara works in the investment industry.

They are looking to accumulate enough savings and investments to allow them to retire comfortably in their early to mid 60s. Their retirement spending goal is $90,000 a year after tax.

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Their main goal, though, is to “ensure our autistic daughter (age 6) will be financially supported for the rest of her adult life,” Tim writes in an e-mail. They have opened a registered disability savings plan (RDSP) for their child and are exploring a special financial arrangement known as a Henson trust. “Any advice on this would be appreciated,” Tim adds.

A Henson trust, also known as a discretionary trust, is structured to protect the assets of a person living with a disability, as well as their right to collect government benefits and entitlements such as the Ontario Disability Support Program.

In the meantime, Tamara and Tim want to do some renovations and are planning to get a dog, “which will eat into our monthly expenses,” Tim writes. They also wonder what might be a suitable investment strategy, and whether there would be any benefit to paying down their home mortgage early.

We asked Stephanie Douglas, partner and portfolio manager at Harris Douglas Asset Management of Toronto, to look at Tim and Tamara’s situation. Ms. Douglas is also a certified financial planner.

What the expert says

Tim and Tamara would like to retire at ages 65 and 60, respectively, with a spending goal of $90,000 a year after tax. This will have risen to $144,000 by 2044, when Tim plans to retire, adjusted for inflation. “While retirement is important to them, they would also like to leave a sizable estate for their daughter who has autism,” Ms. Douglas says.

Near term, they would like to renovate their home at a cost of $150,000, upgrade their rental property for $20,000 and buy a new car worth $30,000. “They also plan to get a dog very soon and so pet care costs were added into the plan,” Ms. Douglas says.

Tim and Tamara have a surplus of $5,375 a month even after accounting for current savings of $2,570 a month. This enables them to save a substantial sum.

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“They should be able to achieve all short-term goals by the end of 2023 if they start saving their surplus income toward these goals now,” the planner says. This assumes Tim continues to receive his annual bonus, which has averaged $30,000.

Tim and Tamara have been making contributions to Tim’s registered pension plan at work (his employer contributes up to 7 per cent of his income) as well as to Tamara’s tax-free savings account and registered retirement savings plan. “Since both Tim and Tamara are in high tax brackets, I suggest any funds geared toward retirement go to their RRSP accounts first, then to their TFSAs and finally to non-registered investment accounts,” Ms. Douglas says.

Their investments are in mainly low-cost equity mutual funds and index funds, plus a small amount in a bond mutual fund in their daughter’s RDSP. A couple of their funds charge more than 2 per cent in fees, but these have performed well over the long term, the planner notes.

She suggests they trim the number of funds they hold in each account to three at most – one for fixed income, one for Canadian equity and another for U.S. equity. “Having only three funds per account will allow for cheaper transaction costs,” the planner says. She suggests that as they near retirement, they keep roughly five years of required spending in fixed income securities so they would not be forced to draw from their equity portfolio in a down market.

As their investments grow, they could consider eventually moving to a discretionary money manager to help manage their accounts, Ms. Douglas says, “preferably one that offers them additional services such as financial planning and that can help with asset allocation.”

Tim and Tamara would like to know whether it is better to invest or pay down their mortgages. If they do decide to make extra mortgage payments, the planner suggests they pay down the principal residence mortgage first because interest on it – unlike the rental – is not tax deductible.

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Investing may be the better alternative, the planner says. “Given their high equity allocation, their low investment fees – as well as the low interest rates on their mortgages – they would likely achieve a higher rate of return over the long term by investing the funds,” Ms. Douglas says. They could maximize their annual RRSP contributions and then use the tax refunds to pay down the mortgage. “This would allow them to save for retirement while also paying down their mortgage.”

In terms of estate planning, they wonder whether they should set up a Henson trust for their daughter. This would allow their daughter to get support payments from the Ontario Disability Support Program even after receiving an inheritance. Because they are planning to leave a significant inheritance, they should consider a Henson trust for their daughter, Ms. Douglas says.

“The trustee will have absolute discretion over the funds, so Tim and Tamara should think carefully about who they choose for this role,” the planner adds.

To avoid potential abuses, some people appoint more than one trustee – for example, a trustee from a law firm or from the estate and trust division of a financial institution, and a family member or two.

Assuming an inflation rate of 2 per cent, if Tim and Tamara continue with their current savings and retirement plan, along with saving their surplus income annually, they would leave an estate of about $6.3-million to their daughter – $5.9-million of which would be their two properties – plus the registered disability savings account. This assumes they achieve a rate of return of 4 per cent on their investable assets.

Client situation

The people: Tim, 40, Tamara, 43, and their daughter

The problem: Can they afford a comfortable retirement while ensuring that they leave enough for their daughter’s future care?

The plan: Consider setting up a Henson trust. Continue to save and invest, taking steps to lower their investment costs.

The payoff: Maintaining their standard of living while knowing their daughter will be taken care of financially.

Monthly net income: $19,480 (includes Tim’s bonus, government benefits and tax refunds).

Assets: House $1.3-million; investment property $700,000; cash $40,000; RDSP $8,000; TFSA $20,000; RESP $10,000; pension $135,000; RRSPs $53,200. Total: $2.27-million

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Monthly distributions: Mortgage $3,285, property tax, property insurance, utilities and repairs $2,280; transportation $250; groceries $1,100; clothing $105; child care $735; vacation $150; entertainment, dining out, drinks, hobbies, personal care $710; pet expenses $50; health care expenses $2,520; life insurance $45; phone, internet, cable $305; his registered pension plan contribution $775; RDSP $85; her RRSP $500; RESP $210; TFSAs $1,000. Total: $14,105. Surplus: $5,375 goes to savings.

Liabilities: Mortgage on house $528,000; mortgage on rental $225,000. Total: $753,000

Some details may be changed to protect the privacy of the persons profiled.

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