Expecting An Inheritance? You Might Not Be Getting One

Investor’s Group, a financial services company in Canada, recently released the results of a survey regarding people’s expectations when it comes to receiving an inheritance or leaving one to others. 

53% of Canadians expect to receive an inheritance and apparently most except to get a bit of a windfall.  Of those who believed they knew how much they would receive, 57% expected their inheritance to exceed $100,000.   

These expectations are not in line with what people who have already received an inheritance reported getting.  Of those who were willing to reveal the amount they had inherited, only 18% reported receiving over $100,000 while 26% revealed receiving less than $5,000.  It seems that some of the beneficiaries-in-waiting out there might be in for an unpleasant surprise!

Different age groups had different expectations about receiving an inheritance.  While 80% of those aged 18-29 anticipated receiving an inheritance, respondents aged 30-44 were more modest in their expectations with 62% expecting to receive one.  Baby boomers weren’t so optimistic – 48% of Canadians aged 45-64 thought they’d inherit money. 

What people expect to receive is not necessarily in line with what people expect to leave behind.  45% of Canadians aged 60 and over are concerned that their savings will be depleted during their retirement and that they will not have any money to leave behind.  25% are not willing to make any personal sacrifices in order to leave others an inheritance.

Despite these expectations, many people report never discussing the terms of their parents wills with them.  Of Canadians whose parents currently have wills, 39% say they’ve never discussed the contents.  61% of those whose parents have died leaving a will said that they had not been previously aware of the contents.   

Some Estate Planning Mistakes to Avoid

Having a will is one thing – however, having a will that is done right is something different.  As a recent article in the Globe and Mail points out, it can be difficult to fix your will once you’ve died.  Some frequent estate planning mistakes that are made include the following:

  1. Not communicating with professional advisors – it’s one thing to have a lawyer do your will.  However, if you don’t fill in your investment or financial advisor regarding the contents of the will, it’s possible that you may undertake financial planning steps that undermine the estate plan. 
  2. Unduly obsessing over the probate fee – in Ontario, there is an estate administration tax which must be paid if an executor obtains probate.  While it’s never fun paying taxes, this one is relatively small (generally about 1.4% the value of the estate).  There are estate planning steps that can be taken to reduce (and sometimes completely avoid paying) the tax, however they can carry negative consequences.  It’s important to make sure that any steps taken to minimize the probate fee are worth the potential risks.
  3. Giving inadequate consideration to the choice of executor – even the administration of a simple estate can be time consuming and stressful.  Things only get worse if the wrong person (or people) has been named as executor.  Family dynamics are often to blame when an estate administration turns sour – particularly when the named executors are family members (often siblings) with a contentious relationship. 
  4. Not reviewing estate planning documents – circumstances change and over time an estate plan can become out of date.  It’s important to review a will to ensure that the distribution scheme still makes sense.  Some things to consider include whether there have been any births, deaths, marriages, or divorces since the will was made; whether there are any special family circumstances (such as common law relationships, step-relatives, or adoptions which should be taken into account); and whether the assets owned at the time the will was made continue to be owned. 

Now that September is here, it’s a good time to review your will and make sure you’re happy with what’s in it…and if you don’t have a will, it’s a good time to see a lawyer and have one made.

Will CPP Changes Affect When You Retire?

As some might be aware, changes to the Canada Pension Plan (“CPP”) were introduced earlier this year.  Those changes might have an impact on the decision some people make as to when to retire. 

One of the biggest changes that have been implemented is that an individual’s monthly CPP payment will be reduced by a larger percentage if he starts receiving payments before the age of 65.  Before the changes, CPP payments were reduced by 0.5% for every month before age 65 that they were received (meaning, if someone started receiving CPP at age 60, payments would be reduced by 30%). 

However, with the changes, the reduction will be greater.  By 2016, it will be 0.6% for each month an individual receives CPP before reaching 65 (meaning, if someone starts receiving CPP at 60, payments would be reduced by 36%). 

In addition, the increase in payments received for taking CPP after the age of 65 will be higher.  Prior to the changes, an individual’s payments would increase by 0.5% for each month after 65 (up to age 70) that the individual delayed receiving payments.  However, with the changes the increase will rise to 0.7% per month by 2013. 

This presents the dilemma of when is it best to start taking CPP.  As discussed in a recent article in the Globe & Mail, if an individual retires before the age of 65 and needs the money, then there is no point delaying in the hopes of receiving higher payments later. 

For those with more flexibility in determining when to start receiving payments, the decision is more nuanced – market considerations can play an important role.  Some decide to take the payments early hoping that interest earned by investing the money will compensate for the reduced level of payments. 

Of course, there are also other considerations – such as what sources of retirement income an individual (and his or her spouse) has as well as an individual’s tax situation.  It is important to remember that retirement planning involves more than just CPP!    

It's a Woman's Prerogative to Enjoy Retirement

For the women out there hoping to retire, I’ve got good news and bad news.  First the bad news – women are, on average, less prepared for retirement than are men. 

During their working years, women tend to make less than men, which translates into lower savings for retirement.  In addition, the fact that women have a longer average lifespan than men means that retirement is more costly for women and they need to save more. 

Now for the good news I promised – according to a recent study by Harris Decima (commissioned by Bank of Montreal) once women make it to retirement, they seem to enjoy it far more than men.  

Women do encounter struggles in retirement that are not equally felt by men – in addition to the problems I’ve already mentioned, given divorce or widow-hood, women are more frequently left on their own in retirement. Still, once retired, women are more likely than men to describe their retirement as being “very successful”. Additionally, studies have shown that women tend to become happier as they become older. 

Another benefit that women enjoy once they’ve reached retirement is that, compared to men, women evidence an increased willingness to seek professional advice about their financial situation. While men tend to take a “go it alone” approach when it comes to post-retirement financial planning, women are more likely to seek the advice of a financial planner.

Expecting an Inheritance? Not So Fast...

The idle rich kids out there who are just killing time until they receive an inheritance may be in for a surprise.  A recent study by US Trust (which is part of Bank of America) found that, amongst the wealthy, leaving money to the next generation isn’t all that big a priority. 

The study measured the attitudes towards wealth of 457 Americans with at least $3 million in liquid assets.  The vast majority of respondents (84%) attributed their wealth to their own hard work. 

However, just because they had achieved significant wealth didn’t mean they were anxious to share it with their children. When asked about their financial goals for using wealth, less than half listed leaving an inheritance as a priority (in contrast, almost two-thirds identified “travel” as a goal).   

For those planning on including their children in their will, only one-third believed that their children would be prepared to handle the inheritance they received.  Respondents also didn’t have a lot of faith their children would get along after their death – only 36% believed that their children would be able to work together to manage the family wealth.

Parents were reluctant to share details about their wealth with their children. Only one-third had fully disclosed details of the family wealth to their kids. The reasons for the non-disclosure varied.  A primary concern was how the wealth would affect the children’s behaviour – specifically, that they would become lazy, squander their inheritance, develop addictions, or marry a gold digger. 

When questioned about at what age their children would be mature enough to manage family money, the responses varied.  However, 45% believed it would be sometime after the child had reached 35. 

Perhaps growing up with too much money but not receiving a big enough inheritance will be an increasing problem in the future…

Welcome Home - the Extended Family Makes a Comeback

For those who believe in the adage “you can’t go home again”, you might not need to worry – home might come to you.  The Wall Street Journal reports that the multi-generational family household is making a comeback. 

The WSJ cites a study by the Pew Research Center in Washington, DC that found that a record number of Americans (49 million to be exact) are living in a home with at least two adult generations or a grandparent and another generation.  This amounts to about 16.1% of the population and represents an increase of 17% since 2000. 

The rise in multi-generational homes represents a distinct trend reversal. After World War II and through to the 1980s, the popularity of the extended family household declined – from about 25% in 1940 to 12% in 1980.  However, since 1980 the rates have crept back up. 

One reason for the most recent upswing has been the economic downturn.  An increase in retirees experiencing shortfalls in their savings has made moving in with relatives a financial necessity.  Another reason is demographics – the population is aging and the need for elder care is becoming more common.  For dual income families, having grandparents in the house can carry obvious benefits when it comes to child care or paying a mortgage.

However, setting up an extended household has its complications – especially as far as finances are concerned.  This is particularly the case when the family members decide to purchase or renovate a property together.  Careful consideration should be given to how the purchase/renovations will be funded, how title to the property will be held, and how this might affect the estate plans of those involved.

Most Canadians Plan to Work After Retirement

Question: if you continue working during retirement then have you actually retired? Whatever the answer, most Canadians plan to do so.  According to a recent study conducted by Harris/Decima on behalf of Scotiabank, nearly 70% of Canadians intend to work after retirement.

On Tuesday, I was interviewed by Havard Gould, for a segment on the Scotiabank study which appeared on CBC’s the National.  The piece also featured Don MacFarlane who, after having enjoyed a successful career in pharmaceuticals, retired and now spends his time working at Rona.  It’s not that he needs the money, he just enjoys keeping active. 

And he’s not alone – of those surveyed who plan to keep working, 72% cited the desire to remain mentally active and 57% cited a desire to stay socially connected as reasons for staying in the work force.  Still, while working because you want to sounds nice, there are also obvious financial benefits: 38% of those surveyed cited financial necessity as the reason they’d continue working. 

Saving for retirement is an obvious concern.  75% surveyed reported having been saving for about 15 years and, of those people, more than half had saved less than $20,000 in the past five years.

So, how much do you need saved before retiring? Well, there’s no magic number – it will depend in large part on an individual’s specific circumstances and the lifestyle they wish to lead.  However, Jonathan Chevreau, whose column, the Wealthy Boomer, appears in the Financial Post, recently looked a four different scenarios and estimated what a married couple would need to save in each in order to retire.  The message? No matter your lifestyle, it’s time to get saving – Chevreau figures that even a couple who plans to live a frugal, bare bones existence should have about $300,000 put away.    

Should Debt Be Repaid? "Not In This Lifetime," Say Some

In November, I blogged about the worries many Canadians have about reaching retirement and whether their savings will be sufficient to carry them through.  A recent study indicates that our American friends are experiencing some retirement concerns of their own. 

CESI Debt Solutions, a US-based not-for-profit organization providing debt management and credit counseling services, did a survey on retirement and credit card debt.  Some of the results are quite alarming

Of those surveyed, almost 60% reported having saved less than $50,000 for retirement – and 30% reported having saved nothing.  Nevertheless, respondents seemed quite happy to retire relatively early.  Of the current retirees polled, almost 75% had retired by the age of 60, while 100% had retired by the age of 70.  This is interesting, because 56% reported being in debt even before they retired (and 96% didn’t let the fact they were in debt delay their retirement). 

Post-retirement debt also seems to be an issue – almost 30% have accumulated credit card debt since retiring.  However, being in debt isn’t a worry for everyone.  When asked how they intended to repay the outstanding debt, almost 40% said they weren’t worried about paying it back during their lifetimes. This sentiment wasn’t limited to retirees. Of the non-retired respondents, 27% of those who reported being in debt said they weren’t worried about paying it back while alive. 

According to USA Today, it isn’t at all uncommon for seniors who are in debt not to tell anyone about it.  Part of it is generational – talking about money is frowned upon more by older generations than by younger ones.  However, part of it is due to embarrassment and being afraid of becoming a burden to family members. 

Often, the first time family members learn about the debt is when the retiree dies…and rather than the estate going to the intended beneficiaries, it goes to the debt collector!    

Women Are More Confident About Finances Than You May Think

Last week I attended the launch party for the forthcoming white paper, the Financial Lives of Girls and Women.  The study was prepared by Barbara Stewart, a chartered financial analyst specializing in financial counseling and portfolio management at Cumberland Private Wealth Management Inc.

The impetus for the study was Barbara’s observation that despite media coverage that women lacked confidence in making financial decisions and felt disempowered by the financial advice they received, her own experience in her day-to-day dealings with her female clients was quite different.  As a result, she wanted to challenge some of the definitions usually given to “confidence” and research whether what women said about their finances was different than what they actually did about their finances. 

To do this, Barbara commissioned global survey firm Angus Reid to poll 1,000 women across Canada to measure the differences between what women say regarding their finances and their actual behaviour.  She also conducted focus groups and one-on-one interviews to obtain anecdotal input.   

The findings of the study include the following:

  • Women aren’t afraid of making financial decisions - 63% reported being confident in financial or investment matters;
  • Women aren’t all that interested in financial news – 53% surveyed didn’t consume financial news even once a quarter;
  • When women do seek financial news, they turn to the printed word – 48% reported getting it from the newspaper (almost one-third more than from television); and
  • Women assume most of the responsibility for family finances – 52% indicated that they were responsible for day-to-day banking, while only 8% indicated their partner was responsible.

Despite the fact that the women surveyed tended to be confident in dealing with finances, they didn’t always act like it.  The study also found that women often use self-deprecating language when describing their ability to manage their finances – even though lack of ability apparently isn’t an issue.   

Art Investing...With the Help of a Friendly Canadian Bank

Art investing, generally the provenance of cities like London, Paris, and Hong Kong, is becoming increasingly popular amongst wealthy Canadians.  As a result, a number of Canadian financial institutions are starting programs to encourage their wealthy clients to collect art. 

Art is not a traditional investment and can be a very risky one.  It can be very difficult to predict future values of art, particularly contemporary works, and historical data is not necessarily useful.  Additionally, for older pieces, there is always the concern of forgery.

The Bank of Montreal has recently launched the BMO Harris Private Banking Art Series which is designed to teach the bank’s high net work clients (who have at least $1 million in cash/investments) about the finer points of art collecting.  The series has been so successful in Toronto that the bank is planning to expand to other cities, such as Montreal, Calgary, and Vancouver. 

So far the sessions have attracted an average of 50 to 60 clients and topics have included auctions, corporate art collections, advice on collecting, and the administration of private collections. 

The Bank of Montreal isn’t the only one offering services of this nature.  The Bank of Nova Scotia offers advisory services to its clients and the Scotiabank Group Fine Art Collection offers consulting services covering topics such as negotiating purchases and dealing with insurance issues.  For its part, Royal Bank of Canada has its own art curator who is available to discuss collecting strategies with clients at various art events. 

Presumably, the banks will benefit if their clients ask to borrow money to finance their newly developed collection obsession!

While the various banks might be encouraging others to collect, they’re not doing a bad job of it themselves.  The Bank of Montreal’s collection includes 6,600 works by Canadian artists and its gallery on the 68th floor of First Canadian Place in Toronto is open to the public by appointment.  TD Bank’s contemporary Canadian collection includes about 6,000 works and its Toronto Dominion Gallery of Inuit Art is open to the public at no cost.  Royal Bank of Canada Art Collection and Scotiabank Fine Art Collection are also impressive, consisting of 4,000 pieces and 1,800 pieces, respectively.

"Freedom 55"? More Like "Workin' 9 to 5"...

Saving enough for retirement is a big worry for many Canadians.  I’ve previously blogged about planning for “decumulation” and the uncertainty many face with difficult-to-predict retirement income.  However, a recent article in the Globe and Mail points out that, for many, worrying about spending during retirement may be a little premature – a bigger concern should be being able to retire in the first place.

The article cites the November 2010 edition of the Consumerology Report (published by the Canadian advertising agency, Bensimon-Byrne), which tracks consumer opinions on retirement.  The report found that while people looked forward to retirement, most expected they would have to work longer to reach retirement than they wanted.  It also found that most people did not believe that they would have enough savings to support themselves during retirement and would instead need to rely on government pensions such as the CPP or OAS. 

Some of the report’s other findings include the following:

  • Only one-third polled expect to retire by the time they are 65, while one-fifth anticipate working past 70  
  • Two-thirds of those currently working expect to continue working, at least to some degree, during retirement
  • More than a half of Canadians have little or no confidence that they’ve saved enough for retirement and almost half believe they will outlive their savings
  • Half of working Canadians expect to need support from their families during retirement while half also believe the government should have done more to help them prepare financially

And now for the good news - working Canadians have a largely favourable view of what retirement will hold once they finally get there.  They see it as a chance to start afresh and remain active – including in the bedroom.  More than half said they expect to have more sex when they reach retirement; although, they may be in for a disappointment – of the current retirees polled, most said they didn’t have more.   

As Income Trust Tax Changes Draw Near, Earth's Rotation Continues Uninterrupted

October 31, 2006, was a dark day for Canadian investors.  That was when our federal Finance Minister, Jim Flaherty, surprised everyone with the news that the government was introducing policy changes aimed at eliminating the tax benefits associated with income trusts and that those changes would be implemented January 1, 2011.  

The news promptly caused the business trust sector to tank.  In a two day period, the $200 billion sector lost $35.6 billion (a 16% decline).  

Prior to the tax changes being announced, income trusts were wildly popular in Canada.  First introduced in the mid-1980s, they are an ownership vehicle for businesses or assets that sell units to investors (who are the beneficiaries of the trust). The assets pay a return to the trust, which is then paid out to investors as either cash distributions or a return of capital. 

The tax benefits came because the trusts were able to “flow through” income to investors so that tax was not paid at the entity (i.e. asset/business) level, only by the unit holders.  This differs from a corporate structure where taxes are paid by the corporation and then again by the shareholders receiving dividends.  The other tax benefit came from the fact that income trusts could pay out as a return of capital, which is received by the unit holders on a tax deferred basis.   

With the proposed tax changes, most of the income trusts decided to convert back to a corporate structure.  This prompted fears that the payouts to investors would dry up. 

As it turns out, despite the catastrophic predictions, things have not been as bad as originally feared.  Of the 226 income trusts in existence in 2006, 60 have already converted to a corporate structure and 65 have announced they will be doing so.  Only 4 have stated they intend to remain as trusts. 

While many investors have seen a reduction in payouts (the average being 33%), approximately half the trusts plan to maintain dividends at the same level once the conversion to corporation has been completed. 

TFSAs - A Missed Opportunity for Most Canadians?

I was recently reading the Wealthy Boomer, Jon Chevreau’s blog in the Financial Post, and was surprised to learn that most Canadians still do not have a tax-free savings account (“TFSA”). 

A TFSA is a flexible savings vehicle which allows Canadians to earn investment income tax free.  Account holders can contribute up to $5000 per year to their TFSAs.  The interest earned is tax-free and there are no tax consequences to withdrawing funds.  However, contributions to the accounts are not tax deductible.  This is in contrast to RRSPs, where withdrawals are taxed but contributions are deductible.

Unused contribution room can be carried forward and the full amount of withdrawals can be repaid in future years. Re-contributing in the year of withdrawal is ill advised because the account holder runs the risk of over contributing, which can result in penalty tax. 

Funds can be transferred to a spouse or common law partner for the purpose of contributing to a TFSA and the assets of the account can be transferred to a spouse or common law partner on death.  For more information on designating beneficiaries on TFSAs read my blog on the topic here

Despite the many benefits of having a TFSA, not everyone seems convinced.  Chevreau cites a report by Angus Reid, commissioned by ING Direct, which found that 53% of Canadians don’t have an account. While a 1/3 of us have contributed, more than half of those who have not don’t intend to open an account in 2010 or 2011 – and 13% of us aren’t even aware that TFSAs exist.  All of which is unfortunate because the accounts are an excellent way of saving for retirement (or anything else for that matter) and carry with them distinct estate planning benefits. 

You've Received Your Inheritance...So Now What?

Receiving a large inheritance can carry with it exciting possibilities.  But suddenly “coming into money” can be daunting and even a little scary – particularly in situations where the amount is great enough to fundamentally change the beneficiary’s financial circumstances. 

Manulife Investments predicts that over the next couple of decades, Canadians will inherit $1 trillion.  In 2010 alone, Manulife estimates that Canadians will inherit $70 billion – and with no inheritance tax in this country, that money will be the beneficiaries’ to keep. 

For those who are inheriting money and are not sure what to do with it, the Globe and Mail’s recent article, “Overcoming the Stress of Investing an Inheritance”, provides useful advice.  The suggestions offered include:

  1. Put the money in a dedicated account to reduce the urge to just spend it – there’s nothing wrong with a “splurge” like a vacation, or some home improvements – but be careful not to inadvertently “fritter away” the money;

  2. Use the money to reduce debts (especially those that carry higher rates of interest than is likely to be earned by investing the inheritance);

  3. Where appropriate, consider making a contribution to RRSPs or TFSAs – while the long term benefits of doing so are obvious, the tax benefits to contributing (particularly to RRSPs) can provide (near) instant gratification; and

  4. If the money is going to be invested, consider hiring an investment adviser and/or a financial planner – and make sure to research the options available, as different advisers will have different fee structures.

For an idea of the options available, these two case studies provide real life examples of how two beneficiaries are using their inheritance. 

Happy Thanksgiving!

A Retiree Needs Money to Live, You Know!

On Wednesday, the New York Times published a special section on retirement.  The section is full of interesting articles (and, for my Yankee readers, there’s a good one on planning strategies for dealing with the estate tax uncertainty). 

An article I found particularly interesting was “Looking Ahead to the Spend-Down Years”, which explores the ways of enabling people to make better decisions about “decumulation” (the process of accumulating assets during working years and then drawing them down during retirement).

A shift in the certainty of retirement income has occurred over the past few decades – there has been a move from the defined-benefit plans (e.g. employer-funded pensions, where the amount the recipient will receive is certain), so popular twenty years ago, to the defined contribution plans (such as 401(k)s and RRSPs, where the value of account on retirement is unpredictable) so popular today.

Compounding this uncertainty is an increase in life expectancy - people can expect to spend more years in retirement than could generations past.  With this increased life expectancy they can also expect to incur higher medical and care expenses. 

All of this means seeking ways for retirees to create income from their accumulated savings - and ensure that the income combined with those accumulated savings will be enough sustain them for the rest of their lives. 

One of the issues raised in the article is the “annuity puzzle” – the conundrum that while annuities would appear to be the logical and safe way of ensuring a predictable income stream, they are not very popular with retirees.  One theory for this is that the trepidation associated with making a large, one-time payout of capital to purchase an annuity overrides the sense of security that would come from guaranteed annuity payments.

While the best way to ensure predictability in income stream while assets decumulate may be unclear, there appears to be one good way to persuade people to start saving more for retirement – show them a picture of what they will look like when they age.  A recently study found that people who were shown an aged image of themselves and then asked questions about retirement allocation, allocated twice as much as people who were shown a current image.