Are You Caught Between Your Children's and Your Parents' Financial Needs?

Sandra and Michael, age 47 and 49, are proud of the lifestyle they've achieved. They and their three teenaged sons live in a comfortable home and they spend most of the summer at the family vacation home on the lake.

They are both fortunate to earn good salaries - Sandra is vice-president of human resources for a large manufacturing company and Michael runs his own engineering consulting business. However, they are carrying significant debt. They remortgaged their home to buy the cottage, and have not paid down very much of the principal as they have been directing any excess cash to their children's Registered Education Savings Plans (RESPs) and their own Registered Retirement Savings Plans (RRSPs).

More recently, they ran up a large amount on their personal line of credit when Sandra's mother experienced a stroke and needed daily care at home. She's made a good recovery, but will need some support for the foreseeable future.

The family medical crisis has prompted Sandra and Michael to take another look at their plan. They had hoped to be paying down more of their mortgage principal by this stage in their life, not adding to their debts. And with less than 20 years before they want to retire, they're concerned about being able to reach their retirement lifestyle goals.

A plan for progress
Their CIBC Financial Advisor recommends an approach that can help any family develop a manageable plan for their financial future. It involves making informed tradeoffs in the short term in order to achieve all goals in the long term.

Identify goals and set priorities
With the help of their advisor, Sandra and Michael identify their three most important goals: paying off debt, saving for retirement and preparing to help their parents with future costs. She suggests taking a balanced approach that will see them make progress on all three goals at once.

Take advantage of free money
Their RESP contributions have enabled Sandra and Michael to benefit from the Canada Education Savings Grants (CESGs) available to help them build their sons' RESPs. They've also enjoyed the tax benefits associated with RRSP contributions. With their children entering university soon, their advisor reminds them not to overlook potential tax-planning opportunities from transferable credits like the Tuition and Education Tax Credit. She also points out that if Michael hires his sons to work for him in the summers in his consulting business, he can pay them a salary - an effective way to split income and reduce the overall family tax bill.

Take a family approach to planning
For Sandra, her mother's stroke was a real wake-up call. She suddenly realized that she knew almost nothing about her parents' financial affairs, or even if they had wills and powers of attorney. It also made her realize that it was high time she and Michael did the same. They'd often talked about making their wills, but had never gotten around to setting up a meeting with their lawyer, and the need for a power of attorney had never even crossed their minds.

Don't overlook the need for protection
Families that are already feeling stretched financially often ignore products that offer significant protection at a very reasonable cost. For example, Sandra and Michael might benefit from protection that would continue to make their mortgage or credit card payments if disability prevented one of them from working and pay off their mortgage or credit card debt if one of them were to pass away. Their advisor also suggests that they set up an emergency fund, with easy access to cash in case of emergency. If they'd had such a fund when Sandra's mother needed medical care, they could have used some or all of it instead of using their line of credit.

Getting on track
To tackle their primary goals - paying down debt - Sandra and Michael revisit their budget with their advisor. They set up automatic transfers from their banking account to their line of credit that will see it paid back in full within two years. As soon as the line of credit is paid off, they can either direct those monthly payments to their mortgage or to their RRSP. With the latter strategy, they can then use the tax savings generated by the RRSP contribution to pay down their mortgage principal.

They also decide to set up TFSAs for each of them immediately. These accounts can serve as an emergency fund, so they won't need to rely on their line of credit if they have a sudden need for cash in the future. And if they have no emergencies, their TFSAs can be a perfect complement to their RRSPs for retirement income planning.

Staying on track
A regular review with their CIBC Financial Advisor will help ensure that their plan is on track and their strategy continues to be appropriate as their circumstances change. The table below summarizes the key strategies that Sandra and Michael are using to save for their own future financial security while giving their children a good start in adult life and ensuring the well-being of their aging parents.

Sandra and Michael want to:

Their CIBC Financial Advisor suggests:

They benefit from:

Help finance children's education

Continue maximum contributions to RESPs

CESG, tax-deferred compounding

Save for retirement

Automatic contributions to RRSP and later meeting to revisit asset allocation

Tax deduction, tax-deferred compounding, long-term growth

Pay down mortgage and other debts

Using tax benefit from RRSP contributions to pay down mortgage principal

Switching personal (unsecured) line of credit to home equity line of credit and setting up recurring transfers from chequing to pay down

Immediate reduction of mortgage principal, which reduces total interest costs and could help them be mortgage-free years ahead of their amortization schedule

A lower interest rate, as the line of credit is secured

Ensure the well-being of aging parents

Will, powers of attorney

TFSA emergency fund

Help ensure parents' estate-planning objectives are clear and can be achieved

Tax-free growth and tax-free withdrawals, with funds accessible at any time

Protect their family and their lifestyle in case of the unexpected

Creditor insurance

The peace of mind that comes from knowing their mortgage payments can continue to be made in case either of them should become disabled and unable to work or pay off their mortgage should either of them pass away