Retirement Planning and Your Financial Future

The economic downturn is dampening Canadian baby boomers’ expectations for inheritances, a recent survey by the BMO Retirement Institute reveals.

In a May survey of more than 1,000 Canadians 45 years of age and older, nearly 20% of respondents said they would be unable to leave an inheritance due to current economic turmoil.

Nearly one-third of those expecting an inheritance felt it would be smaller than previously thought due to the recent economic crisis. Furthermore, almost one quarter of respondents said they would be relying more heavily than expected on their inheritance to reach their financial goals due to the downturn.

But despite the economic downturn, a $1 trillion transfer of wealth is expected to take place in Canada over the next 20 years, marking the largest transfer in history. And most families have not adequately addressed the challenges involved, a related report on inheritances from the Retirement Institute argues.

The survey showed that almost 30% of Canadian boomers are expecting to receive an inheritance from someone in their immediate or extended family.

A significant proportion of these families may not be properly prepared to manage this inflow of cash, according to the report. It finds that many families avoid candid conversations about death and the transfer of estates, which can negatively impact retirement planning.

“The lack of open conversation between generations can be a major contributing factor to poor inheritance and estate planning. It may even lead to misgivings and financial insecurity in retirement for family members,” said Tina Di Vito, director of retirement strategies at BMO Financial Group and head of the BMO Retirement Institute, a think tank that provides perspectives on retirement issues.

Families planning for an inheritance should be aware that its size could be impacted by such factors as unanticipated events and health care expenses, challenging markets, interest rates and inflation, and taxes on death, according to the BMO report. It points out that an inheritance of an RRSP worth $250,000 could result in taxes owing by the estate of up to $115,000, assuming top marginal rate of 46%, which may be further reduced by probate, executor, trustee and legal fees.

“Despite these challenges, there are strategies that Canadian families can take to help achieve their inheritance vision and maximize the intergenerational transfer of wealth,” said Di Vito. “Communication with advance planning is key and keeping your intentions a mystery until death can have negative consequences.”

The survey also found that 80% of boomers and 77% of seniors have not spoken with a financial advisor about what to do with their inheritance. A hefty 64% of boomers and 52% of seniors admitted that they do not plan to talk to an advisor about their plan to leave an inheritance.

From Investment Executive

When you die, you can transfer your assets tax-free to your spouse. But when your spouse dies and the assets are passed on to other heirs, 50% of the increase in the value of some assets will be subject to tax. So, assets like your cottage, stocks, company shares, and other investments left to your heirs may be subject to capital gains tax – a tax must be paid before your heirs get anything!

Most people don’t know about this devastating time bomb. But a simple plan can help you protect more of what you’ve worked for. What are your options?

Creating an effective estate plan means ensuring your beneficiaries are looked after. There are a number of ways to help pay for this tax, but which one is best for you?

Some choices:

• You or your family can start saving today.
  
• Your heirs can borrow the necessary funds from the bank.
  
• Your estate can sell the assets.
  
• You can purchase life insurance to cover the growing liability.
  

The best solution…

Life insurance can be the most effective estate-planning tool to fund the tax liability. You can design a plan to provide you with tax-free cash exactly when it is needed to pay the future tax obligation. It guarantees that your heirs don’t lose their inherited assets because of a large tax bill. What you get is peace of mind and your heirs get the property you intended them to receive.

If you are the child with a parent in the above scenario this may be something you want to discuss with them. Not a fun topic, but a conversation one should have in the event something does happen and you are the one left with a sizable tax bill.

I grabbed this from Advisor.ca, for those wondering what sort of impact the U.S. mess may have on Canadian mortgages.

The federal government’s decision to purchase $25 billion of mortgages from the Canadian banks is being viewed as a precautionary, rather than necessary move, to put liquidity in the mortgage markets. Experts maintain, while the housing market is slowing down, it doesn’t resemble anything like the U.S. crisis.

The federal Department of Finance emphasized that its decision to take over high-quality CMHC-guaranteed mortgages had nothing to do with the risk profile of the mortgages in Canada, but was rather a way to infuse more liquidity into the Canadian market because banks are hesitant to lend to consumers.

Granted, the purchase is a drop in the bucket, given that Canada will have more than $913 billion of outstanding mortgage debt in 2008, according to a recent report from the Canadian Association of Accredited Mortgage Professionals (CAAMP).

One of the key indicators of the strength of Canada’s mortgage market is Canadian homeowners generally have much more equity in their home than their U.S. counterparts. The Department of Finance points out that in Canada, the average homeowner’s mortgage debt relative to the value of housing is slightly over 30% versus in the U.S., where homeowners on average are carrying 55% of the home’s value in debt.

Granted, a decline in home prices can drastically affect that statistic, but for now, it points toward Canadians having the capacity to pay back their mortgages. The risk is in our banks not having the liquidity to lend for future mortgages, points out Jim Murphy, president and CEO of the CAAMP.

“I’m asked a lot about [banks no longer offering mortgages]. If you qualify and you’ve got a reasonable credit score, the answer is no. From our membership I’ve not been told about any situations where people can’t get mortgages,” he says. “There is an issue with the banks wanting to get liquidity to fund mortgages. There is a concern with the credit markets and perhaps a freezing of inter-bank borrowing. In terms of the availability of mortgages, there haven’t been any significant issues.”

Murphy says the only significant pullback in lending is for alternative lending solutions. He says some of these providers have left the country, but these types of mortgages represented a very tiny percentage of Canadian home lending.

A new economic report from CAAMP, compiled by the organization’s chief economist Will Dunning, says only 0.27% of residential mortgages offered by the seven largest banks were in arrears as of June 2008. That represents only about 10,300 out of 3.85 million mortgages.

The Bank of Canada estimates that about 2% of subprime mortgages in Canada may be in arrears or foreclosure. In total, CAAMP estimates about 20,000 to 25,000 Canadian homeowners out of 8.05 million might be in arrears.

Pascal Gauthier, an economist and analyst in Canadian real estate for TD Economics, says the only real impact the credit crisis has had on the home market is marginalizing those who would have only been able to purchase a home using a subprime or alternative lending. The consumers who generally have much higher credit risk are likely to be out of the market. This has an impact on home prices, because it decreases the number of buyers in the market.

This is not an ideal situation for homeowners hoping for an increase in their valuation, but it creates a neutral buyer’s market. For most Canadian homebuyers there shouldn’t be too much fallout from the credit crisis, because falling home prices will likely offset any increase in mortgage rates that could result from tightening in inter-bank lending.

“It’s difficult to think rates are going down. For affordability, that’s going to be offset by the drop in resale home prices,” Gauthier says. “The resale home market is softening — mostly out west — after running at a furious pace over the past few years.”

Even if rates were to drift slightly upward, Murphy points out that rates remain at historical lows.

“In historical terms, we are nowhere near the 1970s and 1980s. Today if you qualify and can some of the discounts out there, you can still get a fixed five-year mortgage under 6%. In historical terms that is very low,” he says.

The credit environment may force more homebuyers to look at debt-consolidation products, like a home equity line of credit, rather than traditional mortgages.

In November, CAAMP will have statistics for this last year to see if there’s been a pick-up in this type of product usage. Murphy says these types of financing represented 17% of home debt financing in their 2007, and homeowners tend to use them as a way to either consolidate debt or finance a new home renovation.

One of the more recognized of these products in Canada is Manulife One, which brings a person’s mortgage, savings and income together into one multi-purpose borrowing and chequing account.

Any savings and income reduce the amount the client needs to borrow, which saves interest costs. When income enters the account, it immediately pays down the debt and then clients draw on the account to pay for expenses. Interest is calculated on a daily basis as long as there is money in the account; there is less debt and therefore less interest.

Jane Strong, assistant vice-president, product and marketing services for Manulife Bank, says she sees these types of products as particularly appealing during periods of rate uncertainty.

“Most Canadians manage their finances by depositing their income and other short-term assets into chequing and savings accounts and then borrowing when they need to, through mortgages, lines of credit, personal loans and credit cards. Unfortunately, they usually receive low interest on the money they deposit, while they pay high interest on the money they borrow,” she says. “In today’s times, people should be looking to solutions to better manage their debt and cash flow, and Manulife One can help. It can simplify consumer finances, reduce interest costs and allow clients to be debt-free sooner.”

Mark Noble, Advisor.ca