How this 89-year-old woman can afford to move into a care home and still put money aside for her children

Situation: Late in life, a woman is concerned her assets and pensions won’t be enough to cover care-home costs

Solution: Sell condo and lock in ten years worth of annual payments with a term-certain annuity

A woman we’ll call Teresa lives in Ontario. At the age of 89, she is considering moving from her $450,000 condo into a care home that will cost her $6,000 per month. She wants to know if she can afford it.

“I am not sure that my current finances will cover living costs in the care facility,” Teresa explains. “I hope that in an assisted-living facility, I will have more social interactions and receive good care. My goal is to live out my days comfortably and leave as much money as I can for my three children.”

Teresa’s problem is to make the most of her capital, not spending it all, but saving some for her adult children and their families. It is a question of generating returns with conservative investing and guarding assets with prudent controls.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Teresa.

Present finances

The issue is care at $72,000 per year. It will be a problem to generate that much income. At present, her assets total $837,218. She has investment income of $1,789 per month, pension income of $317 per month, Canada Pension Plan benefits of $925 per month and Old Age Security of $601 per month. It adds up to $3,632 monthly. Were she to sell her condo for, say, $425,000 after costs, then at 6 per cent per year less 3 per cent for inflation it would generate $1,062 per month in 2019 dollars forever. Monthly pension income plus investment income, $4,694 before tax, would be $1,306 short of the $6,000 a month she would need for the care facility. If the move into the care facility is going to work, some financial engineering will be needed. The problem is to balance cash flow from investments and pensions with her life expectancy.

Teresa could consider income from an annuity from an insurance company. Combining the proceeds of the condo sale and most of her financial assets, she could put down $700,000 upfront and get about $6,000 monthly pre-tax income. Some of that would be return of capital and not taxed. Added to her pension, OAS and CPP income, it would cover her care costs. But she would be locked in, and could never get the money she spent back if she wants to try some other plan or if her health takes a turn for the worse. It’s a lousy deal, Moran says.

Paying for a care home

There are other ways for Teresa to finance her move to a care facility. Assuming that she sells her present condo and nets $425,000, then with the addition of financial assets, she would have $812,218 to invest. We’ll assume no significant capital gains taxes charged on the non-registered assets.

Instead of buying an annuity from an insurance company, which would require her to sign a contract and commit a huge amount of capital up front, Teresa could create the same payout structure on her own or with the help of an advisor. There are online calculators that can help with this process, by determining the level of income that can be withdrawn on a fixed schedule from a given amount of invested assets.

In Teresa’s case, if the $812,218 in assets were invested to grow at 3 per cent per year in 2019 dollars and be paid out over the following ten years, it would generate $92,443 per year, much of which, namely the return of capital, would not be taxed. Pension income would add $22,116 per year. Her total income would be $114,560 before tax or about $7,160 per month after credits and 25 per cent average tax. She could save about $1,000 per month after paying for care at her expected $6,000 monthly rate.

Because her capital would always be under her control and liquid under a do-it-yourself annuity, she would have the flexibility to adjust to different circumstances. That could include delaying the time at which she enters the care home and speeding up or slowing down the frequency of payouts.

Teresa also needs to consider the possibility that she could live longer than 100. If so, and if she had spent all her capital, she would be reduced to living on her pensions. Of course, she could save some of the annuitized payouts, as suggested, and build up a $12,000 annual savings account. After five years, that would be $60,000 plus interest and after ten years, $120,000 or more. Inflation could raise the cost of care, but $6,000 of her surplus deposited in her TFSA would extend her time or level of care as required or as she wishes. Returns on the other $6,000 if invested would be taxable.

Saving for her children

A friend competent in making investment decisions has guided Teresa’s portfolio. She has made good asset picks, used low-cost exchange traded funds, diversified into health care, financial services, technology and utilities, and has not charged for her work. There are no inappropriate stocks and no junk bonds. It’s a low-stress model for a cautious, mature investor, Moran notes.

The remaining problem is finding a way to preserve capital for her children while raising her income to the level needed for the care home. Conventional term insurance at her age would be unaffordable and probably unavailable. However, with the term-certain annuity calculation and a plan to save, say, $12,000 per year, there would probably be money left over for the children.

“Teresa is an example of a senior with sufficient means, good advice and a good financial plan,” Moran says. “I think she need only think about when she wants to move to a care facility. That decision will set the payout time through the term-certain annuity calculation. She can be secure in the understanding that her pensions and cash flow would last as long as she wishes, Moran says.”

Retirement stars: 4 **** out of 5

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Published at Thu, 21 Mar 2019 14:11:07 +0000