For Jack Foxman and his wife, Mary (not their real names), family life in a small Ontario city ought to be affordable on a combined gross income of $87,000 a year. But their sons, Max, 9, and Oliver, 12, have special and very costly medical needs that are only partially covered by provincial programs. Jack, a marketing specialist, is 40. Mary, a teacher with tenure, is 44. Their asset base is modest. They have $120,000 equity in a house with an estimated market value of $250,000, two cars worth a total of $16,000, $6,100 in registered education savings plans and $4,400 in registered retirement savings plans. A provincially-paid special-needs worker takes one son for outings for four hours a week. The children’s remaining care is financed by Jack and Mary. They have no supplemental medical or hospital insurance. “I recently turned 40 and I haven’t thought seriously about my family’s financial state,” Jack explains. “I really have the desire to make things change for the better.”

What our expert says

Facelift asked Michael Cherney, a Toronto-based certified financial planner, to speak with Jack and Mary in order to determine ways they can build their wealth and provide for Oliver’s post-secondary education.

“This is a family that has the resources, in spite of its children’s problems, to solve their financial problems,” Mr. Cherney explains. “We have found money in their budget for retirement planning and for special services for the kids.”

The bottom line of the planner’s analysis is that, in spite of the substantial costs of caring for their children, Jack and Mary should be able to retire on $58,000 a year in 2004 dollars. That sum, he notes, is 66 per cent of current family income and within the conventional rule that retirement income be at least 60 per cent of pre-retirement income.

Making retirement work requires financial engineering, the planner says. Assuming that Jack lives to 85 and that Mary lives to age 95 and that Mary’s need for income declines by 20 per cent after Jack passes away, a retirement fund above what the Canada Pension Plan and Old Age Security provide can be built, Mr. Cherney says.

The base for the retirement fund will be an RRSP contribution of $250 a month, he says. Jack and Mary make no RRSP contributions, but they can find the money for RRSPs in the $525 a month they now save.

By 2011, when Oliver begins university, current contributions of $211 a month to his RESP can be added to RRSP contributions, Mr. Cherney explains.

Then, in 2018, with the couple’s $130,000 mortgage paid off, the $940 a month that currently goes to pay it down can be shifted to the RRSP, he adds. By 2029, when Jack is ready to retire, their RRSPs will be worth $684,660, assuming a 6-per-cent annual growth of invested assets.

When Jack is 65 and Mary is 69, assuming that Mary does part-time teaching from her intended retirement date at age 60 until she reaches 65, the couple will be able to add $41,080 of annual RRIF income from their RRSPs to Mary’s $33,438 annual teaching pension together with combined OAS payments of two times $11,620 that each will receive and combined CPP payouts of $28,894 for a total annual income of $126,652. That seems like a lot, but it is just what their target retirement income of $58,000 will be if inflation runs at an annual rate of 3 per cent for the next quarter century. Structured this way, there will be no trigger of the OAS clawback, which should begin at $125,187 a person in 2029, Mr. Cherney says.

Finding money to build up RRSP and RESP balances is key to making the plan work, Mr. Cherney says. It can come out of the couple’s monthly $525 surplus. However, it would be helpful to pay off Jack’s $5,000 line of credit, though interest costs are now down to a modest $15 a month, Mr. Cherney says.

The plan assures that Max and Oliver will always have the care they need. Assuring that care requires that Jack and Mary buy more life insurance than the $10,000 death benefit provided by Mary’s school board contract. Term insurance with a premium level for the next 20 years is inexpensive, Mr. Cherney notes. Each parent should have a coverage of 10 times annual salary or roughly $600,000 for Jack at a premium of $681 a year. Mary can have $300,000 coverage for $353 a year, he says.

Both parents should have disability insurance. Mr. Cherney estimates that Jack can get $3,000-a-month coverage for $95 a month while Mary, who is older, should be able to obtain that from her school board for $120 a month in payroll deductions.

Max and Oliver will have special needs all their lives. If both parents were to die or if either child proves unable to care for himself in later life, it would be useful to have a Henson Trust available to ensure that assets held by the child would not disqualify him from receiving government benefits.

The Henson Trust concept shifts ownership of assets to a trust and puts payment of income to the child at the absolute discretion of trustees, Mr. Cherney notes. This structure makes it clear that the beneficiary, the dependent child, will not be seen to have a vested interest in the trust so allows him to pass means tests.

“Jack and I don’t have a lot of money,” Mary says. “We can work toward retirement goals gradually, but first we have to take care of the kids. What Mr. Cherney has done gives us an objective view of our situation. It will help us.”