Ian is 63 and living with a permanent disability. He wants to make sure his income — largely composed of government benefits and a recent inheritance — will meet his cash flow needs.

He has two key challenges. The first is one that many people who receive government disability pensions often face when they turn 65. It is at this age that disability benefits are typically converted into lesser amounts in retirement pensions.

For example, Ian currently receives the Canada Pension Plan (CPP) disability benefit, which accounts for $1,600 of his monthly $2,600 income. This is an age-restricted program and will automatically convert to a likely reduced Canada Pension Plan benefit when Ian turns 65. An annuity that currently pays about $790 a month will also expire in two years.

In addition, he receives the federal disability tax credit of $200 a month.

The second challenge: His rental expenses are expected to double to $2,000 in the next six to 12 months, increasing his total monthly expenses to at least $3,000 and exceeding his current income.

Ian would also like to know how much he can expect to receive in monthly

Old Age Security (OAS) , and Guaranteed Income Supplement (GIS) payments. He wants to ensure that he is effectively managing his recent inheritance of $143,000 to avoid losing benefits and that he meets his cash flow needs.

To date, he has directed $30,000 of this money into a self-directed

tax-free savings account (TFSA). The remainder of the inheritance is in a high-interest savings account (HISA). He also has $13,000 in additional TFSAs. He plans to keep $20,000 in the HISA as an emergency fund but would like advice on the most efficient way to invest the remaining assets to minimize the effect on government benefits. For example, should he consider setting up a discretionary trust or specified disability savings plan?

In addition to his inheritance, Ian also has $24,000 in a life income fund (LIF). How can he ensure his investments and government benefits will meet his needs?

What the expert says

One critical tool to ensure Ian maximizes all income sources is to leverage his TFSA, said Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver.

But first, it is important to understand his income. Unlike the CPP disability pension, which will revert to his calculated CPP pension benefit at 65, the federal disability tax credit will continue as long as his impairment meets the

Canada Revenue Agency ’s criteria. “Ian may also be eligible for the GIS payment of up to $1,109 per month if his annual income is below the current threshold,” which is $22,512, said Egan. “GIS is calculated yearly and is based on the previous year’s income. The GIS is non-taxable and would be added on top of his Old Age Security payments. Assuming he meets the criteria, the current monthly maximum OAS benefit is about $817, which is indexed to inflation so it will be higher when he commences OAS at age 65 and will help to offset the loss of his annuity.”

Maximizing his TFSA by contributing $73,000 from his inheritance to use up his remaining contribution room will allow Ian to benefit from tax sheltered growth, Egan said. “In addition, any withdrawals are non-taxable. As such, they do not affect eligibility for GIS and OAS payments.”

“Ian has already invested $30,000 in a high-interest savings

exchange-traded fund inside his TFSA, but it is only paying a 1.7 per cent yield.” For this reason, Egan suggested investing $103,000 (the $30,000 plus an additional $73,000 TFSA contribution room he has) in a managed pre-selected portfolio with between a 40 per cent equity/60 per cent fixed income to a 20/80 asset mix to ensure he has some equities for long-term growth and a hedge against inflation.

“Or, if Ian wants to self-manage, understanding he wants to maximize income, he could consider an ETF that invests in Canadian banks and distributes a high monthly yield. Canadian banks tend to raise their dividends and be conservative investments over the long term but the extra yield is generated from covered call option strategies to earn extra income in the ETF,” said Egan. “For example, the current yield of the Hamilton Canadian Financials Yield Maximizer ETF (HMAX) is around 12 per cent. He could then arrange to have the monthly income withdrawn from his TFSA quarterly and this would not affect OAS or GIS benefits.”

According to Egan’s calculations, if Ian consolidates his TFSAs into one account ($116,000) and invests this money in an ETF such as HMAX, assuming at least an average eight per cent long-term yield for 25 years, he could extract $900 monthly if he draws down the capital over 25 years. This would be non-taxable.

Egan recommended earmarking $20,000 remaining from the inheritance for emergencies and investing the rest. “One option is to open a … self-directed account alongside his TFSA and invest in a tax-effective, total return index fund, such as Global X Canadian High Dividend Corporate Class ETF.

The managed LIF Ian has will also add to his monthly income as he has to take out a minimum payment each year but is limited to a maximum amount, said Egan, who suggested Ian take out the minimum to keep his income in check. “The LIF should be invested in a balanced mix for the long term and to hedge against inflation. He can opt to change the current aggressive risk profile when he reaches age 65.”

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Ian does not need to go to the effort of establishing a discretionary trust, given the amount of money involved and fees associated with setting it up and maintaining it, Egan said. Also, a Registered Disability Savings Plan (RDSP) may not be more advantageous than a TFSA for Ian, he added. “Even though there are government grants and tax-sheltered growth in an RDSP, withdrawals are partially taxable, whereas the TFSA offers tax-free growth and tax-free withdrawals, which do not affect OAS and GIS. ”

*His name has been changed to protect his privacy. Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).