In British Columbia, a civil servant we'll call Sarah has a tough dilemma. At 51, she has two adopted kids, ages nine and three, each from distant countries.
The elder child, from eastern Europe, has learning disabilities; the younger, from Africa, is doing well.
Adoption is a way of lending a hand to some of the world's neediest kids, Sarah says. "It may seem odd, but I have found it easier to adopt from abroad than within Canada," she says. "I wanted children of my own. My first, from Europe, has a learning disability that did not appear for several years. The younger child seems fine."
"But the expense and the experience have been worthwhile," she says. "I have spent about $50,000 adopting my children."
Sarah has stopped contributing to her RRSP. She is aware of the choices she has to make between raising her children and financing her own retirement. She has considered selling her house, which has an estimated value of $300,000, and using some of the proceeds to pay off debts of $40,180. "Child care costs are going to push me over the edge," she worries. "How can I organize myself to work less hours in order to be home for my children and pay off my debts?"
Facelift asked Derek Moran of Smarter Financial Planning Ltd. in Kelowna, B.C. to work with Sarah.
"The situation is that Sarah has committed her life to the kids. When the three-year-old reaches 17, Sarah will be 65. She may be forced into retirement at the same time as her youngest is starting university. And that is often expensive. Yet she has a secure gross income of $68,075 a year from her civil service job. That will help with her long-term challenges."
There are ways for Sarah to improve her cash flow immediately, Mr. Moran notes. She can take advantage of tax credits available for adoption. To be eligible for them, the children must be under age 18 in the adoption period. That runs from the day a file opens to the date the child begins to reside with the adopting parent. Sarah's younger child satisfies that test. The elder was adopted before the federal program came into existence in 2005. The amount paid in respect of the adoption during the adoption period becomes a non-refundable tax credit, that is, one that may be used to reduce taxes due, but which cannot be paid out as cash, Mr. Moran notes.
Eligible expenses for the credit include fees paid to an adoption agency; court and legal costs related to the adoption; reasonable and necessary travel and living expenses of the child and adoptive parent(s); document translation fees; mandatory fees paid to a foreign institution; mandatory fees paid in respect of immigration of the child; and other related and reasonable expenses.
Sarah can also deduct up to $7,000 a year for child care expenses for kids under seven, and up to $4,000 a year for her nine year old. Those deductions will provide a hefty tax refund of about $2,366 for 2006, Mr. Moran estimates. If the nine year old is certified as disabled, the $4,000 amount can be expanded to a limit of $10,000. For $25,000 of qualifying adoption expenses for the younger child, adopted when the tax program was in place, she can receive a further $3,813 in tax refunds.
The tax refund that Sarah can receive will enable her to pay down debt in a lump sum, eliminating her high interest credit card debt and much of her adoption loan. She can refile returns for three previous years to claim any sums for which she is eligible, Mr. Moran notes.
Sarah's RRSP, which has a present value of $22,403, is modest for a person of her age, but her job will pay her an indexed pension. For now, her base pension will be $1,303 a month with a bridge available from age 55 to 65 of $391 a month.
If she remains with her current employer until age 55, her pension would pay a base amount of $1,671 a month plus a $473 monthly bridge payable to age 65. This would amount to $25,728, the planner estimates. If she works to age 60 with her employer, she would get $36,684 in pension and bridge payments to age 65.
Sarah has earned 70 per cent of the maximum CPP payout, currently $10,365. That means that at age 65, she will receive $7,255 per year, plus future earned credits. If she elects to take her CPP at age 60, she would give up 0.5 per cent per month for each month prior to her 65th birthday that she chooses to begin her pension. That would bring her CPP down to $5,086 at age 60, the planner calculates.
She will qualify for full Old Age Security, currently $5,903, at age 65. At age 60, Sarah would therefore receive her employment pension and early CPP for a total of $41,770. At age 65, she would begin to receive OAS. Meanwhile the bridge will disappear at age 65, removing $8,148 per year from her total income. Thus, after age 65, her total income would be $39,525 plus RRSP income. This sum would enable her to maintain her customary lifestyle, the planner explains.
For now, income security for her children is vital. She already has group life insurance for 2.5 times her salary or $170,188. In the event of her death, Sarah's sister would become legal guardian and executor of perhaps $500,000 from the value of the house, insurance proceeds, RRSP and other assets. That sum would probably be sufficient to pay for the needs of her children until they reach adulthood. Her nine year old would need additional funds for care. She can add to her liquidity by downsizing to a smaller house, Mr. Moran notes. She is living in 100 per cent of her net worth right now; it would make sense to free up some cash, he explains. In her market, Sarah could get a good townhouse for $180,000 and capture $120,000 of tax free capital gain for child care, RRSP contributions, reduction of debts -- especially credit card debt with double-digit interest rates -- or just breathing room, the planner says.
A trust that would allow executors to make payments for care at their discretion would allow the child to obtain public support, Mr. Moran adds. Sarah has not considered buying private life insurance to supplement her group coverage. A term life insurance policy with a death benefit of $250,000 would cost $36.68 a month or $408 a year for the first 10 years.
"This lady can both raise her children and have a modest retirement income if she keeps on doing what she has been doing," Mr. Moran concludes. "Her goals are feasible as long as she is prepared to work to age 60."
"I feel reassured by this analysis," Sarah says. "But what I will not be able to do is to reduce my work hours to have more time with my children. I don't want to work to age 60, but Derek has shown that I should and, I guess, I will."
Sarah, 51, lives in British Columbia with her two children, ages 3 and 9.
Net monthly income: $3,500.
Assets: House $300,000, RESP $12,278, RRSP $22,403, car $15,000.
Monthly expenses: Property taxes $85, food $700, entertainment $200, clothing $125, child care $900, RESP $170, car gas, maintenance $150, car insurance $43, house insurance $75, group life insurance at work $97, charity $35, miscellaneous $200, loan payments $344, savings $376.
Liabilities: Line of credit $22,523, adoption loan $16,000, credit card $1,657.
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