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- Reader Case: Grounded in Vancouver and Dreaming of FIRE - June 19, 2020
It’s Friday, and you know what that means. READER CASE TIME!
Today’s case was especially difficult because it deals with something I have very little experience with: disability. I’ve (thankfully) never experienced it personally, nor has anyone in my immediate family. So I’m obviously not an expert at this at all, but at the past Chautauqua I had the privilege to meet several attendees who have struggled with this problem and how they navigated the system. I learned a lot from them, and as a result I have at least a base level knowledge in this, but again, I’m by no means an expert. That being said, let’s see what we can do with this reader’s case study.
At 26, 7 years ago, I was in a horrific MVA. I am Canadian, in live in Ontario. Due to permanent catastrophic injury, I am retired which was not something I ever thought would happen to me this young as it was not by my own choice, retirement via car accident, no fault of mine.
I am in the position now where I don’t know if the lump sum plus my monthly IRB payed out by my insurance company will last me until age 65 as I have no idea what to do with my lump sum settlement.
The IRB will be paid up to age 65, no matter what unless I pass away.
My lawyer suggested – real estate, investing, or a combination of both. While I trust his opinion and guidance I do not overly feel the need to own property. I would rather invest as I need financial security long term. I do not feel the ‘need’ to own and pay a rent payment in taxes, utilities, etc. since I could outright purchase a condo but loose a huge nest egg.
I was advised settlements are based in negotiation with ‘inflation’ taken into consideration. I should be ‘comfortable’ but given I am not a banker, and this was all unexpected, and I am no investment guru no matter how many times I’ve read your guide, I do not know how to make sure I have money for the rest of my life.
I had an option for a structured settlement where I would receive roughly $1200 a month plus my IRB – roughly $2142 total per month but choose the lump sum as you can never go back on the structure if you need liquid cash.
I am scared to put it mildly.
Since reading your site, I feel I am better off doing things myself then depending on a scam artist financial advisor or mutual funds at the bank.
This are my current situation;
I live with my Dad & Step-Mom. After the MVA I came home from the Hospital to live with them as they could help care for me, as I learned everything again, did endless rehab, doctors appointments, surgeries, therapies, basically it was hell times a million. Having to depend on others to help me do simple things I should be able to just be ‘normal’ is indescribable.
Annual Income $11,312.16 IRB (Income Replacement Benefit)
Monthly Spending $1800 (Rent, Food, Insurance, Heat, Hydro)
Own Car Fully Paid
Cheqing Account $1300
Savings Account $1800
$5000 in a TFSA
Cash $400, 000
The Insurance pays all my medical costs as I am CAT. Medications, Housekeeping, Attendant Care, Massage, Physio etc…is all payed for up until age 65. These costs are very high monthly but I do not personally pay out of pocket so I did not feel they should be added in.
I realize my monthly spending exceeds what I receive from my IRB. Which is why I obviously need growth to help me.
I went from living on a comfortable $3200/month working to $942/Month IRB.
I would like to live off of $40,000/year, as I do not wish to live below poverty level again.
40,000 – 11,312.16 IRB = $28, 687.84 is what I need in growth? So, how do I go about doing this?
I sincerely appreciate any advice you can send my way.
I am clueless as to where to begin though yes, I have studied your guide.
OK, wow. First of all, I am so sorry that all this happened to you. I can’t imagine what it must be like to live with an injury like this. You sound like an incredibly strong person and your dad sounds like he sacrificed a lot to get you to where you are today.
But before we get started, right away we can see how much more complicated an analysis like this is going to be. Typically, personal finance boils down to “Track your spending, invest, and don’t shoot yourself in the foot.” But when a disability like this comes into play, there are a lot more moving pieces. The analysis becomes less about lifestyle changes and more about navigating the various support systems put in place to help people in this situation.
And again, I’m not an expert at every program available out there, so we’re going to focus on just one that I do know about: The Registered Disability Savings Program, or RDSP.
How It Works
The RDSP was introduced in 2008 by the late Finance Minister Jim Flaherty, who had a son with a disability, and is designed to help parents save for their disabled kid’s long-term future. Here’s how it works:
- Contributions are not tax-deductible (like a TFSA)
- Investment gains are tax-free (like a TFSA)
- Withdrawals are taxed BUT can be offset using the Disability Tax Credit, or DTC
- Withdrawals will NOT affect any disability benefits
OK so we have a TFSA-like vehicle so far. That’s OK but not that mind-blowing. Here’s the really interesting part of the RDSP. There’s two benefits that come with the RDSP: The Canada Disability Savings Grant and the Canada Disability Savings Bond.
Assuming no other income, the CDSG provides up to 300% matching from the Federal government for money you put into the account like so:
- on the first $500 contribution—$3 grant for every dollar contributed, up to $1,500 a year.
- on the next $1,000 contribution—$2 grant for every dollar contributed, up to $2,000 a year.
So for $1500, you would get a total annual matched benefit of $3500 per year, up to a lifetime maximum of $70k.
The other side of this is the CDSB, and assuming no other income will provide a straight $1000 per year benefit, up to a lifetime max of $20k.
Normally, RDSP’s are opened by the parents of disabled children, but in this case, InjuredAndScared can open one up herself and use some of the money from her insurance settlement to contribute to it.
Let’s Math Shit Up
OK so we’ve got a lot of moving parts here. InjuredAndScared wants to live off of $40k a year. Can she do it? Short answer, no.
Her settlement amount of $400k will support spending of $400k x 4% = $16k. Add that to her IRB of $11,312, and we get a total of $27,312, or $2276 a month. So she can increase her monthly spending by $400 month, but not up to the equivalent of $40k a year.
But let’s see what happens when we add to the RDSP to it.
In order to get the maximum benefit, she needs to contribute $1500 a year into the account. Let’s say she does that every year until we hit our lifetime maximums for both benefits. There’s also a rule in the RDSP that you have to wait 10 years after you get the last federal payment before making any withdrawals, otherwise you have to repay back part of the grant/bond money. So what does that look like at the end of that time period?
At the end of that lockout period in 30 years, and assuming our usual conservative 6% growth, this account will have grown to $400k! In other words, for the small price of about $30k total in contributions, she will generate another $400K (thanks to the government and invest returns)–on top of the $400K her insurance has already paid her.
$1500 a year is, by the way, just $125 a month, so she can easily cover that using the $400 extra a month she can afford to spend.
Now, the RDSP is a somewhat complicated account, so you’re going to want to consult an licensed planner before you open one up. Fortunately, the RDSP comes with free resources to help you with that, including an information helpline you can call. Click here for more information.
One really interesting provision that bears further investigation is the CDSG/CDSB carry-forward rule. If you’ve qualified for the RDSP but haven’t contributed, you can access your unused benefits from previous years. So for InjuredAndScared, she “qualified” for an RDSP the moment she got injured 7 years ago. But because she hasn’t opened on RDSP this entire time, she has 7 years of unused CDSG/CDSB waiting to be claimed. This could potentially shorten the amount of time it takes to access this money by 7 years, so in 23 years instead of 30.
There’s another few suggestions we can spot here. For example, she’s been accumulating TFSA contribution room but not using it. Log into the CRA website, figure out how much money you can shovel into your TFSA, and make that deposit. Right now you’re just needlessly paying taxes.
Also, I highly recommend you do NOT attempt to invest in real estate. One of my old landlords had a back injury while renting out her property, and the physical labor required to maintain the building plus the emotional stress of dealing with uncooperative tenants in the basement seriously aggravated her injury. Stick with index ETFs like we write about in the Investment Workshop.
But again, we’re not experts on everything disability-related, so readers, if you have any suggestions that you can spot, please please please let’s hear it in the comments. Our reader needs all the eyes/ears we can get!
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