An impossible choice - MoneySense

An impossible choice

Samson and Laura have given to others their whole lives—they even donate $10,000 a year to charity. Now their investments have gone bad and they have to make a heartbreaking decision: should they put the kids through university, or support the mother they love?

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Family means everything to Samson and Laura Vaez. And four years ago, it looked like they had it all. They were happily married, owned a lovely home in Winnipeg, and they had three wonderful school-age boys—Sam, Aaron and Jacob. Grandma lived nearby too. Both Samson and Laura had solid jobs: he worked as a dispatcher and manager at a small taxi company, and she worked part-time teaching night school. They were wise with their money, and over the years, the couple managed to save more than $200,000 in their RRSPs. They even paid off most of the mortgage on their $450,000 home. They felt secure and happy, and they had plenty left over to help those less fortunate then themselves, so every year they donated about $10,000 to several church-related charities.

But over the last three years, everything has changed. Samson, now 49, and Laura, 47, are finding their generous nature is tearing their comfortable life apart. In 2006, after attending some financial workshops, they made what they now realize was a terrible financial mistake, agreeing to put their life savings—more than $200,000—into four limited partnerships that invest in commercial and residential property. All of the partnerships ran into trouble and are now frozen. One is in bankruptcy, and another is being investigated for fraud by the provincial securities commission. “These investments may be worthless,” says Samson. “I knew they would be fairly illiquid—but we never imagined that we wouldn’t be able to sell them at all. How do you plan for that?”

Then, when they were at their most financially vulnerable, the Vaezes (whose names and other details we’ve changed to protect their privacy) were suddenly faced with a terrible decision. Like many other members of the sandwich generation, they were being squeezed hard by the simultaneous demands of looking after both their parents and their kids.

In addition to the regular costs of paying the mortgage and buying the groceries, the Vaezes have to take special care of their oldest son, Jacob, 16, who has suffered from an immune disease most of his life. Lately the cost of his weekly therapy treatments had been getting higher and higher. On top of that, the couple is supporting Samson’s 74-year-old mother, Jan, who lives nearby on just $9,000 a year in Canada Pension Plan and Old Age Security payments. The Vaezes pitch in with $3,000 a year to help her make ends meet, and that money also indirectly helps Samson’s older brother Michael, 51, who lives with his mother in the old family home and helps to take care of her.

“We want to keep her in her own home as long as possible,” says Samson. “My brother works for a cleaning company and doesn’t make much money. My other two brothers are either in bankruptcy or in debt up to their eyeballs so they can’t help. We feel we have to do what’s right.”

Providing support for so many family members, plus donating $10,000 a year to charity, was already stretching them thin, but the final straw came earlier this year, when Samson’s mother slipped and fell on the stairs. She sustained serious hip and knee injuries that made it impossible for her to get to the second floor of her home, so Samson and Laura had to suddenly spend more than $6,000 to put a new bathroom on the ground floor. “Wherever we turn there’s another expense facing us,” says Laura. “And these are expenses that will be with us a long time.”

Now Samson and Laura face a heartbreaking decision. They love their three kids dearly and want to set them up for a long, successful and happy life. That means getting them the best education they can afford, and Laura is worried that the $22,000 they have saved up in their RESPs won’t be nearly enough. Jacob, their eldest, is already in a special co-op program training to become a hair stylist. Sam, who’s 12, has his heart set on studying medicine, and Aaron, 14, wants to study aeronautical engineering. Such degrees require special programs, and will mean supporting the boys at out-of-town universities. Laura figures the total cost for schooling all three kids could be as high as $150,000.

How the money is spent

Yearly disposable income
Samson’s income $85,000
Laura’s income $18,000
Minus: taxes and other deductions –$30,000
Net disposable income
$73,000
Yearly Expenses
Debt repayment:
Segregated fund loan
$2,400
Line of credit (interest only) $6,000
Total debt repayment
$8,400
Shelter
Mortgage on home $7,200
Property taxes $2,400
Home insurance $1,596
Hydro/gas/water $5,232
Cell phone/internet/TV $3,360
Home maintenance $1,000
Total shelter
$20,788
Transportation
Car insurance $960
Gas $960
Maintenance $1,000
Total transportation
$2,920
Personal
Groceries $12,000
Clothes, haircuts, etc. $1,000
Furniture $500
Vacation $5,000
Sports activity fees $1,500
Electronics $500
Charity $10,000
Gifts $1,500
Restaurants $1,000
Gardening supplies $500
Life insurance $480
Jacob’s therapy $3,420
Support for grandma Jan $3,000
Miscellaneous $3,000
Total personal
$43,400
Total expenses
$75,508

Annual income available for investment
(total income minus total expenses)
–$2,508

 

The Vaezes might possibly be able to pull that off, but if they decide to pour all of their resources into helping their kids, they won’t have a penny left to support Samson’s mother. Her fall made it clear that eventually she’ll have to go into a nursing home, and they’ve heard the cost can be considerable. “Right now, we’re paying $3,000 a year to keep mom in the home she co-owns with my brother-in-law Michael,” says Laura. “But that amount could skyrocket. And because she owns her home with my brother, we can’t just sell it. My brother wouldn’t be able to afford another home on his own. His lifestyle would really suffer.”

They can’t do it all, and they know it. “We’re frustrated because we are sandwiched between two generations—our kids and our parents,” says Samson. “Both need our help but there’s only a limited amount of money to go around.”

Samson knows very well what it’s like to live in a household where there’s never enough money to go around. His dad left home when he was just 13 years old, and his mom raised him and his three siblings on her own. Her only income came from welfare and a little extra money she earned for being a foster parent. “She got the house in the divorce but never got any child support from dad,” says Samson. “She never complained though, and we made ends meet.”

Samson met Laura when he was 23 and working as a taxi driver. She was 21 and studying accounting at a local Winnipeg college. (Laura had already been married once before, very briefly, and divorced at age 20.) She fell in love with Samson the day she met him. “He was so generous and giving,” she recalls. “We hit if off right away.”

Their early years were joyful, exciting years, but they had their share of misfortune too. At age 29, Samson had a nasty car accident. A pick-up truck rammed him from behind, and his car was totalled. It left him unable to drive for long periods of time, so the cab company he was working for moved him to a desk job at head office—a job he still holds today.

The couple lived together for 10 years, then married when Laura was 30, in 1993. They immediately had three sons in a row. “During those early years, we saved quite a bit of money in RRSPs,” says Laura, who had worked full-time at an accounting job until her kids were born. “But once the kids came along, I stayed home to care for them and later, home-school them, working part-time only in the past four years to bring in some extra money.”

Samson and Laura bought their current home in 1995 and diligently paid down the mortgage—just $50,000 is still owing today. They found money for RRSPs too, and built up their $200,000 in savings quickly. They invested their money aggressively because Samson had a great pension at work that they could fall back on if they needed to. “He’ll receive 70% of his net pay if he works right up until he’s 62,” says Laura, “so we never hesitated to take some risks with our RRSP money.”

For a while things were good, and the worries were few. Until four years ago, that is, when they made that disastrous decision to invest in the limited partnership agreements. The worst part is they didn’t just invest the $200,000 they already had, they also borrowed $125,000 on their line of credit, putting a total of $325,000 into four partnerships. They also took out a $50,000 loan that they invested in a segregated fund that won’t pay out for 10 years. (The other $50,000 on their line of credit has gone towards personal expenses.) Apart from the RRSP money invested in limited partnerships, Samson also has $7,000 invested in a couple of dividend-paying stocks that he wants to hold on to.

The biggest worry the Vaezes have now is their growing debt level. The total amount owing on the line of credit and the segregated funds loan is a massive $225,000—not including the $50,000 owing on the mortgage—and the amount they’re in the hole for isn’t shrinking each year, it’s growing. “It’s scary,” says Samson. “We have no excess cash at all. We’re living on the edge.”

The Vaezes say all of their dreams are now on the line. At one time they thought they’d be able to retire when Samson reached 55 and maybe spend part of each year in Arizona. But now it doesn’t look like Samson will even be able to retire when he’s 62—the year he’d be eligible to collect his company pension. “I know it won’t be easy because the next decade is going to be very expensive for us,” says Samson. “We just hope we don’t have to sacrifice our own retirement to do what’s right for our family.”

Where they stand

Assets
Home $450,000
Samson’s bank RRSP $7,000
Samson’s RRSPs
(limited partnerships)
$200,000
RESP $22,000
Vehicle (2002 Honda) $4,000
Total assets $683,000
Liabilities
Mortgage on home (2.75%) $50,000
Line of credit $175,000
Loan to buy segregated fund $5,000
Total liabilities $275,000
Net Worth
(total assets minus total liabilities)
$408,000

 

What the experts say
Samson and Laura Vaez have strong family values. But they have given and given for most of their adult lives without caring enough for their own future. “The Vaezes really have to do a lot of soul-searching,” says Barbara Garbens, a fee-for-service planner in Toronto. “They have to ask themselves some hard questions—what is it that they want to sacrifice to continue doing what they’re doing? I’m afraid that if they continue along this path, at 60 they will end up sick and with very little money.”

Al Feth, a fee-for-service planner in Waterloo, Ont., agrees. “It’s quite a bad case,” says Feth. “These are salt-of-the-earth people. They need to step back and make a list of priorities. They can’t afford not to.”

First, the Vaezes need to plan their finances as though their life savings are gone. “In a bankruptcy, unsecured creditors usually get next to nothing,” says Garbens. “And in the case of securities fraud, there may be some money but it could take years to get any of it back.” The next 10 years will be critical. Here’s what the experts say they should do.

RESPs or charity?
Sometimes you need to make a decision that’s more about values than dollars and cents. That’s the case for the Vaezes’ hand-wringing decision between paying for their kids’ post-secondary education, and giving to charity.

Our experts say the couple has two choices. The first is to drastically reduce the amount they give to charity. Garbens, for one, would like to see them reduce the amount they give from 10% of their income to 3%, or $3,000. “Giving more is jeopardizing their family’s future,” says Garbens. “Do they want the kids to have a good start in life or not? If they do, then that money has to come from somewhere.”

However, Feth disagrees. He says that if they feel strongly about their annual $10,000 donation to charity, then they should let the kids pay for their own post-secondary education. “An education is a good investment,” says Feth. “But part-time student jobs, scholarships and loans can help the kids pay for university. It will work out fine.”

Refinance their mortgage
The Vaezes should roll the $175,000 from their line of credit (that doesn’t include the $50,000 segregated fund loan) onto their mortgage and refinance. That will boost the amount owing on their mortgage from $50,000 to $225,000, at about 4%. By doing this, their monthly mortgage payment (on a 20-year amortization schedule) will go up to $1,363 a month. That’s a bit higher than what they’re paying now, but by age 65, they will only have a modest $60,000 left on the principal.

Apply for GIS
If Samson’s mother is 73 and she’s only getting $9,000 a year, then she hasn’t applied for the guaranteed income supplement (GIS). The Vaezes should do so right away. It would add $544 a month to her income. “That would give Jan an extra $6,000 a year, alleviating much of her financial burden,” says Feth. “The $3,000 a year that the Vaezes save by not having to pay Mom should go towards their debt.”

Sell grandma’s house
If Samson’s mother needs to go into a public nursing home or retirement facility, they should sell her house and use the 50% equity she has in the house to pay for it. “It’s not the Vaezes’ job to subsidize Samson’s brother’s living arrangement,” says Feth. While the government ensures you can always get nursing home care if you need it at a reasonable price, if you want private care or even a private room in a public home, it’ll cost Jan from $2,000 to $7,000 a month, depending on the facility.

Laura should get a full-time job
In two or three years, when their eldest son Jacob is more independent, Laura should go back to work full time. Laura’s earnings should go towards paying down their debt quicker so that they can retire earlier—maybe when Samson is 62. “Laura will get a healthy RRSP tax deduction and the extra retirement savings, coupled with Samson’s company pension, will go a long way towards giving them the comfortable retirement they crave.”