Grandparents delay retirement to care for grandkids

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Many grandparents step in to take on the role of primary caregiver for their grandchildren when their adult children are struggling with addiction. Take Clare* and Tom, who have been the legal guardians of their two grandchildren, now nine and 16 years old, for the past three years.

Until the day it was clear their daughter could no longer care for her children, Clare, now 59, and Tom, 63, were on track for an “easy” retirement. Tom has been retired for the past 10 years and manages the couple’s income property. Clare was planning to retire from her federal government position in October 2023 after she hit her 30-year work anniversary, but hit the pause button.

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“Having the grandkids has been wonderful, but I am worried that we may not have enough money for unexpected expenses,” she said. “We have maxed out annual registered education savings plan (RESP) contributions each year since they were born, so I am not worried about post-secondary expenses. It’s all the other stuff: braces, needing a second car, etc.”

The family lives in northern Ontario and owns a home valued at $300,000 and an investment property valued at approximately $400,000, with a mortgage of $80,000 that should be paid off in seven years. Otherwise, they are debt free.

Clare earns $103,196 per year before tax and her expected pension income will be $43,753 after tax, bridged to age 65. Tom receives $5,803 per year in Canada Pension Plan (CPP) benefits and the couple receives $11,087 in child tax credits and social services payments. They also earn $7,225 from rental income and $700 in dividends. Their monthly expenses are $6,000, plus $1,264 in mortgage payments.

Their investment portfolio includes cash savings ($17,000), a registered retirement savings plan ($321,000), a locked-in retirement account ($37,699), shares in Manulife Financial Corp. ($12,672) and two RESP accounts valued at $81,217 and $38,877, respectively, for each grandchild.

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“Do we continue contributing to our older grandchild’s RESP? It’s already worth $81,000 and we’ve received the maximum grant allowance,” Clare said. “Our grandson is interested in becoming an electrician and has the opportunity to tap into provincial grants and funding geared to encourage students to pursue careers in the skilled trades. As well, both grandchildren are Indigenous and can access additional government education funding programs.”

Prior to their grandchildren coming to live with them, Clare and Tom would spend two months in Arizona each year. The plan was to increase their stay to three months a year when Clare retired.

“Now that we have the kids, we can’t do that. Part of me is saying I might as well keep working, but I want to know if I’m working for myself at this point and not because I have to,” she said. “We want to be able to do things with our grandkids while we are still mobile and can afford it.”

Ideally, Clare would like to stop working soon since both she and her husband have medical conditions that will likely impact their longevity. She’d like to know when she should apply for CPP and Old Age Security benefits.

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The couple will be drafting a will this summer and wonder if they should sell the rental property or pass it on to their grandchildren. They plan to stay in their current home for as long as possible.

“Our situation is not unique. With addictions, many grandparents are raising their grandchildren,” Clare said. “I am grateful that we can care and provide for them and would appreciate some insight as to how to plan accordingly.”

What the expert says

“Clare should consider retirement soon; it is what she wants and they can afford it,” Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, said. “Their pensions, investments and government benefits will provide the income they need in retirement.”

He recommends they work with a certified financial planner to create a retirement plan.

“Being able to visualize their financial assets and future income from all sources in a consolidated plan will give them the confidence and peace of mind that Clare needs to join Tom in retirement,” he said.

The couple wants to generate $7,000 a month in retirement, and Clare’s pension and bridge benefits until she turns 65, when her CPP kicks in, will provide $4,885 a month before tax.

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“Adding in Tom’s current CPP and taking income from their registered investment accounts can bring them to the goal of $7,000 a month after tax,” Einarson said. “The RRSP and LIRA withdrawals will be lessened in the future as they get respective OAS payments, but they can sustain this income goal until they are into their 90s.”

This initial calculation does not account for any child tax credits or social service payments, which should be integrated into their financial plan for a more detailed approach to structuring income.

“Often, people discover that when all sources of income are included in their plan, they may be able to sustain an even higher retirement income than first considered,” Einarson said. “In Clare and Tom’s case, they could consider creating a larger income in the first 10 or 15 years when they are more active with the grandchildren and the healthiest.”

He suggests that once they’ve obtained the maximum grant benefit from their youngest grandchild’s RESP, they should focus on contributing to tax-free savings accounts (TFSAs).

“Once grant money for the RESP has been maxed out, the only benefit to adding to that account would be the tax-sheltered growth, which you will get in the TFSA with even more flexibility,” he said.

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He also said that even if the kids receive additional grants or funding, they should still use the RESPs to get the grant and growth money out of the accounts while they are in school to avoid having those portions clawed away or taxed in their hands.

Einarson believes the couple will likely be better off selling the rental property, investing the funds and directing about two-thirds of the proceeds to TFSAs.

“This makes things easier for estate equalization, is more tax efficient from an income and capital gains perspective, and the return on the rental property as an asset could be improved, allowing them to leave a lot more money to their grandchildren,” he said.

* Names have been changed to protect privacy.

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