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Borrowing against your home equity to invest was the savviest move in personal finance until recently, writes Rob Carrick, the Globe’s personal finance columnist. Stocks were flying, and so was the housing market. Plus, you could borrow at rates that seemed trivial in comparison to projected rates of return.
The mindset that home equity must be exploited to generate economic gain persists, even as rising rates jack up the cost of carrying a home equity line of credit.
A reader recently enquired about the $700,000 he has in his home. “Should I be using that equity to invest or for another purpose, such as purchasing another property?” he asks.
Answer: No, not now. Read Rob’s full story here
The important financial steps to take after a spouse dies
Death, while inevitable, is not often predictable, and this can leave many people financially unprepared if their spouse suddenly dies – especially if the deceased was the one that took care of the household balance sheet.
This is why it’s important for financial advisors to prepare clients with the steps they need to take before the death of a partner, as well as what is required after the event occurs. It may seem cold, but it’s a life event, and like other life events it requires financial planning.
“Having a financial plan is like the blueprint to your wealth plan,” says Mark Slater, senior wealth advisor and portfolio manager at Slater Financial Group at CIBC Wood Gundy in Toronto. “I think everyone should have a financial plan and understand where all their sources of income are coming from before and after the death of a spouse.”
Mr. Slater gives his clients a basic spreadsheet to fill out so they know exactly what their financial picture would look like before a spouse passes and after.
This also helps to know what questions to ask to fill in any gaps, such as: What health benefits does a spouse have? Is the living partner entitled to those benefits after death? Should the client make certain accounts joint accounts prior to death to make it easier to access upon death? What are the household investments and do both parties have access after death? Daina Lawrence reports for Globe Advisor
If you’ve filled up your TFSA, does it make sense to claim an RRSP deduction?
Young Canadians who have maxed out their tax free savings account (TFSA) might wonder where they should put their savings next. The registered retirement savings plan (RRSP) is often the suggested next move – but when is the right time to start contributing and claiming the deductions?
An RRSP is a tax-deferral account, which generally operates under the assumption that investors will be in a higher tax bracket when they contribute than when they withdraw funds, triggering taxation. This means that deciding when to invest in an RRSP is particularly important when someone is at the beginning of their career and could expect rapid increases in their salary over the next few years.
After filling up their TFSAs and before investing in an RRSP, experts recommend maintaining an accessible emergency fund – which is particularly important now as some experts are predicting a recession in the next two years. Irene Galea reports
This couple retired early to travel in an RV, but what should they do with their condo?
The loss of a loved one recently lent a sense of urgency to Keith and Beverly’s future plans; suddenly, life looked precious and brief. So, they abruptly quit their work and hit the road in their RV, planning to spend as much time as they want traversing North America. Fortunately, they can afford to do so. Keith, who is 56, worked in consulting. Beverly, who is 62, worked in financial services.
They have substantial investments and a big city condo valued at $1.5-million with $480,000 in debt against it. Neither has a work pension plan. “With the pandemic and a personal tragedy, we re-evaluated our situation and decided to take early retirement to focus on enjoying our next stage of life,” Keith writes in an e-mail. They plan to travel and do volunteer work.
They have parents requiring some financial support, but their children are grown and independent with only the youngest still living at home. “The market downturn, recession worries, inflation and the price of gas have us concerned about the sustainability of our travel plans,” Keith writes. They’re considering selling the condo and buying something less expensive elsewhere in the country to increase their savings. Alternatively, they could rent out the condo for a tidy sum and keep on rolling in their RV until they feel like settling down. With a monthly budget of $9,500, is this sustainable? Keith asks.
In the latest Financial Facelift column, Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Keith and Beverly’s situation.
In case you missed it:
How to confidently spend your money in retirement
As a financial planner, Warren MacKenzie applauds the efforts of his clients to save money for retirement. But he sees many struggling to spend the funds they so carefully put away once they’re retired.
Mr. MacKenzie tells the story of one Ontario-based retiree in his late 60s, with a net worth of $8-million, who has the cashier at McDonald’s ring through his breakfast order in separate transactions. That way, he can avoid paying the provincial sales tax, which doesn’t apply to restaurant meals under $4 – a saving of 56 cents on a total food bill of $7.
“It’s a force of habit, and his instinct is to be frugal; why throw away 56 cents?” says Mr. MacKenzie, head of financial planning at Optimize Wealth Management in Toronto. He says the example is not uncommon among people who are used to being frugal, regardless of their net worth. “People have learned a lot about how to accumulate wealth and how to manage wealth, but they have very little information about how to use wealth wisely to maximize happiness,” Mr. MacKenzie says.
Spending money can be difficult for many retirees, especially after decades of thrift. Managing in this so-called decumulation stage – especially amid rising inflation and a possible recession on the horizon – requires the same careful planning they used to create their nest egg. Mary Gooderham reports
Ask Sixty Five
Question: I’m in my 60s and planning to retire in the next few years. I have a good retirement nest egg and I own my home (no mortgage) but I’m not sure if I have enough to pay for the cost of long-term care should I need it. How do I plan for long-term care costs?
We asked Jason Heath, certified financial planner and managing director at fee-only planning firm Objective Financial Partners Inc. in Markham, Ont., to answer this one:
It can be difficult to plan for long-term care costs. Some people will never have any out-of-pocket long-term care expenses and others may incur significant costs for several years. Statistics have shown that the average long-term care home stay is generally between 12 and 24 months. But in many cases, in-home costs or unpaid family assistance precede a long-term care home stay.
The Ontario Long Term Care Association reports that more than half of long-term care home residents are over age 85. As such, planning for long-term care costs is often synonymous with planning to have a long retirement. FP Canada’s Projection Assumption Guidelines recommend that certified financial planners assume a retirement projection period for clients where the probability of outliving their capital is no more than 25 per cent. This would generally suggest a life expectancy of age 95 and planning to be able to fund a 30-year retirement at age 65.
Spending may change a lot from your 60s to your 90s with travel and car ownership costs replaced by housekeeping and nursing care. Retirement spending tends to decline over time on an inflation-adjusted basis but, by planning to maintain a similar level of expenses throughout retirement, this may take into account the potential for various levels of long-term care later in retirement.
You can buy long-term care insurance to provide some protection against long-term care costs. There are income plans and expense reimbursement plans. Income plans provide a monthly income if you require care that can be used to cover increased expenses. Expense reimbursement plans cover long-term care expenses up to a pre-determined limit. Unfortunately, the long-term care insurance market in Canada is relatively small.
Some people consider their home to be their long-term care insurance policy. That is, a home could be sold to fund long-term care expenses. The challenge is many seniors would prefer to stay in their homes as long as possible or may never want to be in a long-term care home. Even if a senior does not have cash or investments to fund costs, borrowing options like a reverse mortgage can be used to access home equity while staying in a home to pay for care.
Have a question about money or lifestyle topics for seniors? Please e-mail us your question at [email protected] and we’ll try to find an expert to answer it in a future newsletter. We can’t answer every question, but we’ll do our best. Note: questions may be edited for length and clarity.
Have a question about money or lifestyle topics for seniors? Please e-mail us at [email protected] and we will find experts and answer your questions in future newsletters. We can’t answer every question, but we’ll do our best. Questions may be edited for length and clarity.