Reader Case: Single Mom With a Special Needs Child

What time is it? It’s reader case time!

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Hello – I’ve read your book Quit Like a Millionaire, which provided a lot of very useful information.  I’ve now found your blog and am finding it interesting reading through.  Thank you for sharing all of this information.

I’m wondering if you’d be interested in doing a reader case on saving to help your disabled child become financially independent.

I’m a 48 year old single mom and my son has cerebral palsy.  He’s very bright but has physical limitations, which make me worried about his ability to work or at least work full time and live a good quality of life when he’s older.

I’m working on getting my own financial situation in order as I hope to retire in 7 years.  At that time, I’ll be eligible for a defined benefit pension that will be liveable for me.  I have recently paid off my house but don’t have much in investments yet.  I’m starting to divert what I previously paid in mortgage to build my TFSA.

I have been better at saving for my children though.  I contribute the maximum to my son’s RDSP yearly.  He is 12 and currently has $67k in that.  With the power of time, further investments etc.. I’m confident that will grow and be able to support him from age 50 or 60 onwards.  In fact, by RDSP rules, I don’t think he’ll actually be able to withdraw anything from it before turning 50.

So my question is what can I do now for him to help him become financially independent and support himself/ live independently from say age 30-50 when he can access the RDSP, expecting that he’ll live at home until age 30 but will eventually want his independence.  

Interested in hearing your suggestions.  On my end, I earn about $145k/yr and currently investing into my TFSA about $1800/month (with about 75k left in contribution room).

Thanks and hopeful for good suggestions!

SpecialMom

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First of all, let me tell you that you’re awesome. Being a single mom is already insanely difficult, but you’re doing that with a special needs child? You deserve a goddamned parade! And on top of that, you care so much about his future that you’ve put aside a really impressive nest egg for his financial future. How many 12 years olds have $67k saved? Truly inspiring. Your son is lucky to have you.

So let’s do a little mathing shit up and see how SpecialMom’s hard work up will pay off down the road.

How RDSPs Work

The Registered Disability Savings Plan (RDSP) is a Canadian savings account meant to help people with special needs (and their caregivers) save for their future financial security. The closest American equivalent is the Achieving Better Life Experience (ABLE) account.

We wrote a guide to the RDSP here, but here’s a quick recap.

The primary advantage of an RDSP is that it acts as a container for the government to deposit funds from one of two programs: The Canada Disability Savings Grant and the Canada Disability Savings Bond.

The first one, the Canada Disability Savings Grant (CDSG) is a matching amount given by the government, where the amount you get depends on your income and your annual contribution.

Adjusted Family Net Income (AFNI)	If You Contribute…	You Get…
$0 – $111,733	$1500	$3500
>$111,733	$1000	$1000

Note that these amounts are the annual maximums. You don’t get more if you contribute more.

The second program, the Canada Disability Savings Bond (CDSB) is an amount given to low-income families. It’s only based on the AFNI and not your contributions into the plan.

Adjusted Family Net Income (AFNI)	You Get…
$0 – $36,502	$1000
$36,502 – $55,876	Between $0 and $1000
>$55,876	$0

The definition of Adjusted Family Net Income is quite interesting for this reader, since the beneficiary is a child. While the beneficiary is below the age of 18, the AFNI is calculated based on the caregiver’s family income. But after they turn 19, the “family” in AFNI flips from the parent to the beneficiary itself, who will typically have very little income.

In a follow-up email, SpecialMom indicates she plans to continue contributing to her son’s RDSP, so this means that she’ll be putting in money, but the plan’s AFNI will flip from her income, which is above $111,733, to her child’s, which will likely be close to zero. This means that once her child turns 19, they’ll become eligible for the much higher matching amount of $3500 per $1500 contributed, rather than $1000 for $1000 contributed. Her son will likely gain eligibility for the low-income CDSB amount as well.

The 10 year rule

As generous as the RDSP plan is, there are some rules surrounding withdrawals. The most important is the “10 Year Repayment Rule,” which states that once you make a withdrawal, some of the government contributions the plan has received in the past 10 years has to be paid back.

This means it’s important to be aware of how much the RDSP has received from the government in the past 10 year window. Any money received outside of that 10 year window is yours to keep, but money received inside of it may be clawed back if you start withdrawing.

The Power Of Time

So now that have a basic understanding of how RDSPs work, let’s see how SpecialMom’s situation looks.

Right now, her child is 12 years old and has $67k in the RDSP. In a follow-up email, she’s told me that her income is above $111,733, so that means she gets $1000 from CDSG for contributing $1000, and she’s not eligible for the CDSB at all because her income is too high.

So from now until her child turns 18, this is what her projected balance will be.

Age	Balance	Contribution	CDSG	CDSB	ROI	Total
12	$67,000.00	$1,000.00	$1,000.00	$0.00	$4,020.00	$73,020.00
13	$73,020.00	$1,000.00	$1,000.00	$0.00	$4,381.20	$79,401.20
14	$79,401.20	$1,000.00	$1,000.00	$0.00	$4,764.07	$86,165.27
15	$86,165.27	$1,000.00	$1,000.00	$0.00	$5,169.92	$93,335.19
16	$93,335.19	$1,000.00	$1,000.00	$0.00	$5,600.11	$100,935.30
17	$100,935.30	$1,000.00	$1,000.00	$0.00	$6,056.12	$108,991.42
18	$108,991.42	$1,000.00	$1,000.00	$0.00	$6,539.49	$117,530.90

As we can see here, by the time her child turns 18, he’ll have $117,530.90. That’s pretty impressive for any 18 year old.

However, when her son turns 19, that’s when things really get interesting, because the AFNI switches from her income to his, and that makes him eligible for the more generous matching on the CDSG and likely the low-income CDSB amount too, so this account is going to start growing really fast.

Age	Balance	Contribution	CDSG	CDSB	ROI	Total
19	$117,530.90	$1,500.00	$3,500.00	$1,000.00	$7,051.85	$130,582.76
20	$130,582.76	$1,500.00	$3,500.00	$1,000.00	$7,834.97	$144,417.72
21	$144,417.72	$1,500.00	$3,500.00	$1,000.00	$8,665.06	$159,082.79
22	$159,082.79	$1,500.00	$3,500.00	$1,000.00	$9,544.97	$174,627.75
23	$174,627.75	$1,500.00	$3,500.00	$1,000.00	$10,477.67	$191,105.42
24	$191,105.42	$1,500.00	$3,500.00	$1,000.00	$11,466.33	$208,571.74
25	$208,571.74	$1,500.00	$3,500.00	$1,000.00	$12,514.30	$227,086.05
26	$227,086.05	$1,500.00	$3,500.00	$1,000.00	$13,625.16	$246,711.21

The CDSG has a $70k lifetime limit, and SpecialMom indicated that when her son turns 18, he should have about $28k of matching room left, so that should take $28k / $3500 = 8 years to max it out. At this point, she can stop contributing to the RDSP since the matching stops, but he’ll still be able to get CDSB payments of $1000 a year, up to the maximum of $20k, which should happen when he turns 38, like so.

Age	Balance	Contribution	CDSG	CDSB	ROI	Total
27	$246,711.21	$0.00	$0.00	$1,000.00	$14,802.67	$262,513.88
28	$262,513.88	$0.00	$0.00	$1,000.00	$15,750.83	$279,264.72
29	$279,264.72	$0.00	$0.00	$1,000.00	$16,755.88	$297,020.60
30	$297,020.60	$0.00	$0.00	$1,000.00	$17,821.24	$315,841.83
31	$315,841.83	$0.00	$0.00	$1,000.00	$18,950.51	$335,792.34
32	$335,792.34	$0.00	$0.00	$1,000.00	$20,147.54	$356,939.89
33	$356,939.89	$0.00	$0.00	$1,000.00	$21,416.39	$379,356.28
34	$379,356.28	$0.00	$0.00	$1,000.00	$22,761.38	$403,117.66
35	$403,117.66	$0.00	$0.00	$1,000.00	$24,187.06	$428,304.71
36	$428,304.71	$0.00	$0.00	$1,000.00	$25,698.28	$455,003.00
37	$455,003.00	$0.00	$0.00	$1,000.00	$27,300.18	$483,303.18
38	483303.178	$0.00	$0.00	$1,000.00	$28,998.19	$513,301.37

By this time, the plan will be worth a massive $513k. That’s the power of compounded growth over time.

Of course, there’s that 10 year Repayment rule, which penalizes you if you withdraw anything from the RDSP if you’ve received government funds in the past 10 years. That’s why in the initial email, SpecialMom indicated that you’re not supposed to withdraw before the child (now adult) turns 50.

The penalty is annoying but if he absolutely needs to withdraw the money at age 38 for expenses, it’s not financially crippling, and would amount to $1000 x 10 = $10k. That’s not that big of a hit, considering the total size of the account would still be above $500k, even after paying the penalty.

Whether the son decides to withdraw at this point is up to them, and will depend on factors like their income, their lifestyle, and other things we can’t predict since it’s so far away, but having $500k waiting for you in your 30’s certainly gives you a lot of options.

And of course, if they choose to leave the money in their RDSP to continue compounding until the 10 year repayment rule is in the rearview mirror, it would be worth even more, like so…

Age	Balance	Contribution	CDSG	CDSB	ROI	Total
39	$513,301.37	$0.00	$0.00	$0.00	$30,798.08	$544,099.45
40	$544,099.45	$0.00	$0.00	$0.00	$32,645.97	$576,745.42
41	$576,745.42	$0.00	$0.00	$0.00	$34,604.73	$611,350.14
42	$611,350.14	$0.00	$0.00	$0.00	$36,681.01	$648,031.15
43	$648,031.15	$0.00	$0.00	$0.00	$38,881.87	$686,913.02
44	$686,913.02	$0.00	$0.00	$0.00	$41,214.78	$728,127.80
45	$728,127.80	$0.00	$0.00	$0.00	$43,687.67	$771,815.47
46	$771,815.47	$0.00	$0.00	$0.00	$46,308.93	$818,124.40
47	$818,124.40	$0.00	$0.00	$0.00	$49,087.46	$867,211.86
48	$867,211.86	$0.00	$0.00	$0.00	$52,032.71	$919,244.57

Wow! By the time he is 48, the account would grow to an even more impressive $919,244.57 without any further deposits.

Yeah, I think it’s safe to say that SpecialMom has done a fantastic job setting her child up for financial success.

What About Her?

But we can’t just focus on the son. SpecialMom has sacrificed so much for her son, and she deserves happiness too!

By email, she wrote to me…

Re my finances, as I said my house is now paid off.  My TFSA is nearly $50k with about $60k in room.  I’m diverting what I previously paid in mortgage to that currently.  RRSP is about $35k but I don’t get much space yearly as I have a good defined benefit pension plan.  In 7 years, at 55, I’ll be eligible for 60% of my best 5 years, which should work out to about $84k a year.  Of course, I’d like more saving for myself and am working on it… but the pension should be liveable I think.

So we’re looking at $50k + $35k = $85k in savings for the mom. Now that her house has been paid off (congrats on that, by the way!), she’s able to redirect her $1800 a month mortgage payment towards her TFSA and, after using up her contribution room, a non-registered trading account. If she keeps doing that, here’s where she should be sitting by the time she hits the age where she’ll be eligible for her pension.

Balance	Savings	ROI	Total
$85,000.00	$21,600.00	$5,100.00	$111,700.00
$111,700.00	$21,600.00	$6,702.00	$140,002.00
$140,002.00	$21,600.00	$8,400.12	$170,002.12
$170,002.12	$21,600.00	$10,200.13	$201,802.25
$201,802.25	$21,600.00	$12,108.13	$235,510.38
$235,510.38	$21,600.00	$14,130.62	$271,241.00
$271,241.00	$21,600.00	$16,274.46	$309,115.47

This balance of $309,115.47 x 4% = $12,365 in retirement income, per the 4% rule. Add that onto her $84k pension that she’ll be eligible for and we’re looking at $96,365 in retirement income. That’s more than enough to retire on, especially considering she has a paid off house.

Conclusion

So somehow, this single mom of a special needs son was able to pay off her house, save enough to give her son a giant leg up through the RDSP, and retire herself at 55. I have to correct myself: This lady doesn’t deserve a parade. She deserves two.

One thing I would suggest as homework for her is to review her portfolio allocation for her investments, especially the RDSP. Her TFSA/RRSP can be invested in a more balanced way (i.e. 60% equity, 40% fixed income), but since the RDSP’s investment timeframe is so far into the future, this can be invested very aggressively, like a 90% equity/10% fixed income allocation.

What would you do? Is there anything you would change to SpecialMom’s plan? Let’s hear it in the comments below!

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