When 45-year-old Angelo Garaci began thinking about retirement, he knew that as a self-employed contractor, he would not be able to rely on a company pension or government benefits to pay for any future health-care costs.
Mr. Garaci points to the recently released Drummond report, (in which limiting health-care spending increases and reducing the number of seniors who qualify for the Ontario Drug Benefit plan are only a couple of the recommended service cuts) as yet another indication of the increasing burden on the individual to cover his or her own needs post-retirement.
“There’s also a deluge of seniors who are overtaxing an already overburdened health-care system,” he says. “With the future of OHIP [the public health insurance plan in Ontario] looking precarious, my wife and I know that we’ll have to pay for our own health care after we retire.”
They wanted to be prepared. Mr. Garaci and his wife own a split-donor life insurance policy, but worry it is not enough. So they did what an increasing number of Americans are doing. They opened a separate account for long-term savings specifically for the health-care costs of their golden years. The United States government has been trying to encourage Americans to open health savings accounts, aimed at helping bridge the gap between insurance coverage and an individual’s health-care requirements. As soon as the Tax Free Savings Account became an option in Canada, Mr. Garaci recognized it as an efficient vehicle through which he could squirrel money away.
“As soon as they were available in Canada, I opened the TFSA account specifically to save for health care,” he says. “I was worried about what the costs could be for prescription drugs, home care or if one of us has to stay in a long-term care facility.”
Angus Crawford, a Toronto-based financial planner who specializes in health care and retirement, says he has increasingly been advising clients to follow similar steps to that of Mr. Garaci, and that using TFSAs specifically as a health savings account is among the best use of the tax-sheltered accounts.
“Individual medical plans are very limited now in scope, and funding health costs of the future can be extreme. Drug plans in Canada are okay, but they certainly don’t help offset the costs of medical claims five or 10 years down the road, things that almost certainly will not be covered by OHIP,” he says. “Since we know government spending on health care is just going to get worse, it’s wise for people to figure out how to put money away themselves. I see the TFSA as the only vehicle through which you can put money away on a tax-free basis.”
Mr. Crawford, a partner at Crawford Financial Group, tells his clients that by using a TFSA, they can put away pre-tax dollars, which then grow tax-free; the savings can be used to pay deductibles or make small drug claims as needed in the future.
Though RRSPs have traditionally been a common vehicle through which Canadians have saved for retirement, Mr. Crawford says the extent of their usefulness depends on individual circumstances. What tax bracket a person is in will affect how much sense an RRSP makes.
“Sometimes people think they can use their RRSPs for health care, but I advise against this because when you take that money out, it’s taxed,” Mr. Crawford says, adding, “Which could knock you into a higher tax bracket. For someone in the 25-per-cent tax bracket, putting money into an RRSP that will be taxed as soon as it is removed may not be wise. For someone in the 40-per-cent tax bracket, RRSP contributions likely make more sense.”
Insurance is another aspect of health-care planning for retirement, though the amount and type needed depends on each person’s circumstances.
While Mr. Crawford acknowledges insurance is difficult to avoid altogether, he says he tries to help clients manage their finances in such a way that their reliance on it is at a minimum.
On the other hand, Jim Chronopoulos, a certified financial planner with Investment Planning Counsel in Toronto, recommends it. As desirable as amassing savings is, Mr. Chronopoulos says not everyone’s financial circumstances allow for it. And, though he acknowledges it isn’t cheap, he believes insurance is necessary.“You save if and what you can, and if you have no savings, you need insurance,” he says.
While many may not think beyond life insurance, other types of insurance may be helpful. “Death is very final, but a lot of the things that can strike after retirement won’t kill you. But they can still leave with you with a lot trouble,” Mr. Chronopoulos says.
“Having to pay for five to 10 years in long-term care can have a major effect on assets, and you can run out of savings.” He suggests, for example, people consider some types of critical illness insurance that can be converted to cover long-term care costs.
Bob Malvern, an independent Toronto-based financial planner, says that when it comes to planning for post-retirement health costs, communication is just as important as understanding the financial tools.
“I often find when I sit down with a couple that they aren’t necessarily on the same page in terms of their goals, the level of risk they’re willing to accept and they also have different genetic histories,” he says. “These are all factors, and when people are afraid to address them, it can make saving for retirement much harder. Even something like estate planning requires communication between generations.”
Mr. Garaci says his Italian heritage is at least partly responsible for his inclination to serve the needs of his family before his own. He and his wife have RESPs for each of their two daughters, who are 13 and 8 years old. Rather than investing in RRSPs for themselves, Mr. Garaci says real estate made more sense as long-term investments for himself and his wife. He also uses a second TFSA as a trading account, from which he invests in stocks and makes other market trades.
“I work in the residential construction business, so I can do all the work myself,” he says. “We have two properties, one here and we also have a cottage in Wasaga Beach. The idea is that between drawing on our savings and cashing in on our real estate investments, we should be able to support ourselves in retirement.”
Special to The Globe and Mail
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