In Toronto, Claude Forestier (not his real name) is making the best of a tough situation. As a 38-year-old Air Canada pilot, he knows his future is far from secure as the airline cuts costs.And as parents of three children, ages six, four, and two, he and his wife, Chantal, 39, have to plan long-term care for a handicapped daughter.
Annual gross income
$100,000 Claude; $9,000 Chantal.
Monthly net income
$6,167 Claude; $750 Chantal.
House, $300,000; cars, 2001 Dodge van $30,000, 1989 Honda $3,000; RRSPs, Claude $70,000 in value funds, Chantal $30,000 in value funds; chequing account, $2,500.
Monthly household expenses
Mortgage payments, $1,500; House taxes, $380; Insurance for cars and house, $250; gas, oil, auto repairs, $200; child care, $200; utilities, $480; charity and gifts, $268; food, $500; clothing, $300; entertainment, $150; kids’ outside school activities, $100; gym, $50; medical and drug, $200; life insurance, $45; RESPs, $200; company pension, $200; professional dues, $250; travel, $200; miscellaneous, $100. Total: $5,573.
Mortgage, $175,000 at 5.45 per cent.
Air Canada pilot Claude Forestier, 38, and accountant Carol Forestier, 39, are parents of three preschoolers, one of whom is handicapped.“I hardly know what to ask about my future,” Claude says. “I used to think that my six-figure salary would just be a starting point for building wealth. Now it seems that income security for the family is what matters most.”
What our expert says
Facelift asked Toronto-based financial planner Michael Cherney to speak with Claude and Chantal about their situation. Currently, he notes, the situation is grim.
“Claude’s partially indexed pension plan is underfunded and there is no assurance that he will keep his job,” the planner says.
Claude earns $100,000 a year while Chantal, an accountant, works part time for $9,000 a year when Claude can relieve her from caring for their handicapped daughter, Agnes, age six.
To build up an asset base to allow them to retire when Claude reaches age 65 in 27 years, Mr. Cherney assumes that the couple can live on $55,000 a year before tax in 2003 dollars. He also assumes that they will need another $10,000 in 2003 dollars each year for Agnes’ care.
To provide the total of $65,000 they will require in 2003 dollars, they will need to have an asset base of $1.8-million at the start of their retirement, the planner says.
Old Age Security payments should rise at an assumed annual indexation rate of 3 per cent to $12,084 in 2030 dollars for each parent and Canada Pension Plan annual payments should rise to $21,360 for Claude and $5,340 for Chantal or an amount similar to Claude’s if she returns to full-time work. Those sums would bring the couple’s annual income to $144,400 as retirement begins in 2030.
That’s the equivalent of $65,000 in 2003 dollars with a surplus to carry forward to future years when pension income falls short of that target, Mr. Cherney says.
Claude and Chantal’s current registered retirement savings plan balance of $120,000 would grow to $579,000 by 2030 at an annual rate of 6 per cent. After Claude and Chantal die at an assumed age of 90, the residue of their funds could be transferred to their children with the presumption that most would go to Agnes who would then be 58.
Additional retirement income is assured if Claude can invest $1,000 a month in his RRSP at an assumed growth rate of 7 per cent a year. Half of Claude’s contributions should go to a spousal plan for Chantal, the planner suggests. That would reduce chances of future Old Age Security clawbacks.
Investing $12,000 a year, which is already possible with the family’s monthly savings that exceed $1,000, will be easier if Chantal returns to full-time work at what she estimates would be a starting salary of $60,000 a year.
With that substantial contribution and the RRSP room that her work could provide, the Forestiers can either retire before age 65 or provide more money for Agnes’ care. Structuring that care while preserving her eligibility for future public benefits for the disabled requires legal work. A so-called Henson trust can preserve government benefits for disabled persons even though they have some private funding for their needs. They can receive benefits regardless of income flowing out of the trust.
The key, Mr. Cherney notes, is to direct that payments of income and capital from the trust be entirely at the discretion of the trustees. Thus the special needs beneficiary will not be deemed to have control of the trust, he says.
The appointment of a trustee for the Henson structure is critical, Mr. Cherney notes. A professional trustee, such as a trust company, can manage a trust, but that tends to be a costly solution. The best solution would be appointment of trustees with financial acumen who do not stand to benefit from the trust but who are friends of the family or kin and who, hopefully, will serve without pay.
The Forestiers’ two other children are young and have as much as 16 years of financial dependence on their parents before finishing high school. Were Claude and Chantal to die prematurely, their present insurance coverage of $200,000 in Air Canada group life and an additional $500,000 in term insurance would not be adequate, Mr. Cherney says. They should buy additional term insurance to provide each with $1-million coverage.
Claude and Chantal have already established registered education savings plans for David, two, and Paul, four. They are already contributing $100 per child per month and qualifying for an additional $240 a year of the Canada Education Savings Grant.
After Chantal returns to full-time work, additional contributions can be made. The children will then qualify for the full $400 a year maximum CESG. Claude expects that the contributions and returns on them will provide for half the expected $120,000 cost of four years of university education in Canada in 2003 dollars.
“I understand this analysis, but part of me does not want to face the reality that in this economy and with this airline, my employment is not a sure thing,” Claude says.
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