Our adult children can’t support themselves. How can we help?

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How can we ensure our two adult children, who, due to health challenges, are not able to support themselves financially, will be able to have enough money to live comfortably after we’re gone?

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This is the overriding question Russel,* 56, and his wife Janice, 52, are trying to answer. After selling their health practice this year, the Alberta-based couple now has more than $8 million in their jointly owned professional corporation. This is in addition to about $1.2 million in registered retirement savings plans (RRSPs) and $1.1 million in individual pension plans (IPPs), invested 70 per cent in stocks and equity-based exchange-traded funds (ETFs) and 30 per cent in fixed income.

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Ideally, they would like to be able to financially supplement their children, now 21 and 25, so that they each have about $5,000 after-tax income each month, or $60,000 annually. “We think our older child, who will graduate university in the next couple of years, should be able to earn about $25 per hour, and our younger child, with appropriate training, could earn minimum wage,” said Russel.

The couple work with a financial adviser to manage their investments, but haven’t been able to gain a clear understanding of how they can achieve this goal. Since selling the practice, Janice has effectively retired, and Russel works part-time, earning $120,000 a year before tax. All of their investments are held in their professional corporation and, in addition to their RRSPs and IPPs, include about $2.2 million in Canadian dividend-paying stocks, which generate $15,000 a month before tax in dividend income ($180,000 a year, equally split for income tax purposes); $2.1 million in cash (33 per cent) and cashable money market guaranteed investment certificates (GICs); and about $4 million in stocks, ETFs, and fixed-income investments.

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They also have about $246,000 in tax free savings accounts (TFSAs) invested in stocks and equity-based ETFs (80 per cent) and fixed income (20 per cent) and about $133,000 in a registered education savings plan (RESP). The couple’s youngest child meets the eligibility requirements for a registered disability savings plan (RDSP), while their oldest child does not, and the couple maximize contributions each year. It is currently valued at $125,000 with a maximum allowable lifetime value of $200,000. The couple is also looking into Alberta’s Assured Income for the Severely Handicapped program for their youngest child.

“At this point, my wife does not plan to return to work but I plan to work until age 70. Is this necessary?” asked Russel. “Is it possible for me to retire at 60 and still make sure we can help our children? What will the shortfall be and can our investments cover it?”

Russel also has a $2 million term life insurance policy that matures in 2025 and costs $430 a month. He was quoted a new rate of $3,000 a month for a 10-year policy because of his own health conditions. “Do I need it? Our advisor recommended a corporate whole-life insurance policy, but I’m not sure about the benefits or if it’s necessary?”

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In addition to their investments, Russel and Janice own a home valued at $800,000. Their monthly expenses are about $17,000, a cash flow need they anticipate will continue going forward. They would also like advice on when they should claim Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.

“We are scared our children will not be able to support themselves financially after we’re gone. Are we going to be able to help them?” Do we have enough money to meet our goals?

What the expert says

Russel and Janice are in a strong financial position and, based on the numbers, Russel should be able to join Janice in retirement in four years when he turns 60, said Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver.

“Assuming an annual real investment return of five per cent after inflation, their investment capital could generate about $485,000 a year if Russel retires at 60. After tax, this would easily meet their current living expense estimate of $17,000,” he said.

However, to ensure they have enough money to both retire and then partially support their two children financially after they die, Egan recommends they work with a retirement planner.

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“They need to consult a fee-only planner who will be able to run some comprehensive long-term projections incorporating income from personal and corporately held investments respectively while integrating the anticipated pension benefit from their IPP in four years. The IPP currently has about $1.1 million and should grow more based on the current asset mix,” he said.

“Russel continuing to work, earning $120,000 per year, will allow them to re-invest all earnings in their RRSPs and TFSAs at least for the next four years. They may have to consult a tax accountant to work alongside the planner to ensure assumptions and corporate taxation are accurate for the type of income they earn in the corporation.”

Once projections are prepared mapping their lives out to 95, Egan said they will need to review and assess what assets would be projected to still be there for their two children to provide them each with $60,000 annually.

Egan recommends an overall strategic asset mix of 60 per cent equity and 40 per cent fixed-income. “The TFSAs should be 100 per cent equity. The corporate money should be invested fully in order to generate regular monthly income to pay quarterly dividends from the company. As their GICs mature, they can move the proceeds into an aggregate bond ETF, which would generate monthly interest distributions. Cash should be invested in a money market ETF or high-interest savings account to earn interest while a long-term strategic mix is being decided upon. They can transition to this asset mix over the next four years.”

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A comprehensive retirement plan will help the couple decide whether or not they need life insurance coverage. If they do, Egan suggests a corporately owned policy – a 10-year policy at most – might be the more cost-effective way to go. “The plan’s financial projections will help strategize when to start CPP and OAS, the IPP pension and the most tax effective way to draw money out of their corporation and from their personal assets.”

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

* Names have been changed to protect privacy.

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