Men, women view wealth differently

Women view wealth and retirement quite differently than men a new study finds.

A survey of 1,200 Canadians, undertaken by Fleishman-Hillard on behalf of Sun Life Financial, finds women more committed to retirement, but far less willing to work past the age of 65.

Twice as many men (32%) than women surveyed say they want to work past age 65, according to the second edition of the Sun Life Canadian Unretirement Index. Among the women who expected to work past the normal retirement age, 71% said they will do so to earn enough money to pay for basic living expenses, compared to 65% of men.

“We found men and women had diverse opinions around what factors should be considered in a retirement plan, with women more likely to cite long-term care, low interest rates and death of a spouse,” says Kevin Dougherty, president, Sun Life Financial Canada. “Interestingly, we found that Canadians on the whole were significantly more confident about their retirement if they had worked with a financial advisor for a year or more than those who did not have an advisor.”

More women (61%) also believed their company pension will not be enough to live off of, compared to 56% of men.

More than two thirds of female respondents (66%) believed their current rate of return on retirement savings would not be sufficient, versus 59% of men. Concerns about mortality and health seemed to weigh heavier on the minds of women, with 72% of women worried about long-term care expenses, compared to 60% of men. In addition, 67% of women were worried about their financial plan if their spouse was to die, versus 54% of men.

Only 49% of women felt confident about their ability to fund basic expenses in retirement versus 57% of men. Statistically, women are better savers, but still lack the earning power of their male counterparts, which may account for some of this increased anxiety.

“Women have substantial reasons for worrying that they won’t have enough money to enjoy the lifestyle they want in retirement,” says Alison Konrad, professor of Organizational Behavior at the Richard Ivey School of Business, University of Western Ontario. “The average Canadian woman earns about 66% of what the average Canadian male earns. So even though women tend to put a larger percentage of their income into their retirement nest eggs, men save almost $1,900 more each year.”

Women place extra value on the home

A recent TD Canada Trust survey founds that even though women continue to expand their position in the workforce, they still place a greater value on of their home than men do.

According to the third annual TD Canada Trust Women and Home Ownership Poll, which surveyed women who have purchased a home independently, 44% of women ranked financial security as the best thing about home ownership, compared to 23% of women in the 2008 poll. Second on the list of best things about owning a home was not having to pay rent or pay other people (38% versus 13% in 2008).

“It’s not surprising that the financial reasons for ownership have increased in importance for people,” says Chris Wisniewski, group product manager, real estate secured lending at TD Canada Trust. “People are looking for ways to feel financially stable again and see home ownership as a way to build equity and invest in their future.”

While financial security continues to top the list of home ownership benefits, the comforts of home are increasingly important to Canadian women. When asked to describe the best things about home ownership, 34% of respondents said it was having a place of their own, 34% said is about being able to decorate or renovate the way they want and 34% say it is about and having a backyard or garden.

Again, theses responses increased dramatically from the first survey conducted in 2008. Women had cited having a place of their own at 22%, being able to decorate or renovate the way they want at 14%, and having a backyard or garden at only 5% back in 2008.

“Even though the comforts of home have become increasingly important to women, the financial reasons for home ownership have also increased in importance,” Wisniewski says.

High household debt a risk to financial system: Bank of Canada

TORONTO, Dec. 10 (Xinhua) — Rising levels of household debt would emerge as the most prominent risk to Canada’s financial stability despite improving financial conditions, the Bank of Canada warned Thursday.

In its semi-annual “Financial System Review” report, the central bank illustrated and assessed five key risks to the country’s financial system. Among them, household debt was the only increased risk, while the other four were either unchanged or decreased.

According to the central bank, the ratio of household debt to income has climbed to “historically” high levels of more than 140 percent.

The threat triggered by surging household balance sheets has increased, which, according to analysts, is a direct consequence of the central bank keeping its benchmark interest rate at near zero, or 0.25 percent, in an effort to stimulate the economy after the economic slowdown.

Besides household debt, deteriorating budget balances worldwide would be another prominent risk to the Canadian financial system over the next few years, said the bank report, adding that “the bank projects a more subdued global recovery than in previous cycles.”

The central bank’s review aims to assess the downside risks that could cause stress in the financial markets, even if they are low-probability events, according to the bank.

Economic downturn casts gloom over legacy planning

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

Canadian mortgage market fundamentals remain strong

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

Canadian Credit Crunch Looming?

With what is going on south of the border should we expect it to have a significant impact on our national economy and in turn our personal financial situation? Short answer…Yes! Does it mean doomsday as some media in the USA would have us believe? No, but it certainly is worse than was being reported a few months back and could get worse yet. The USA economy is a world leader for a reason. The health of their economy obviously has an impact on the the health of the world economy.

The reality is that the more exposure you have to the markets the more at risk you will be. The more credit you require the more you will pay to get that credit. So you will have less and having less will cost you more…make sense? Well for example with prime at 6%, the difference between a mortgage rate of 5.4% versus 5.1% could mean almost $15,000 extra in interest on an average Canadian home over 25 years (based on a 10% down payment.) Now imagine what you could have done with that 15K in an RRSP or an RESP?

We have not seen huge stop gap measures that have been happening on Wall Street but things are happening on Bay Street as well. The spread on long-term loans – the difference between Bank of Canada government bonds and mortgage rates – has been widening as the perceived risk increases. The gap is now 184 basis points compared to 115 basis points in June.

Maybe we should consider returning to a simpler time…a time when consumers saved for purchases rather than just financing them with debt. The credit culture has finally gone too far, the sense of entitlement and “need” for more stuff now has repercussions that are being realized. If you cannot afford to own something you should not own it. The banking industry in the U.S. took advantage of a push to have more accessible financing terms available to people who could not afford to have what they were buying. In a lot of ways they preyed on the ignorant and uninformed.

I spoke with a regional director with Wells Fargo and we discussed what had gone wrong in the US. He also explained in very simple terms why Wells Fargo is not being hurt by what is going on, “We simply did not take on those high risk mortgages”. He also talked about the clients they prefer, they don’t feel the need to push for more business and reach into markets that will cause them problems if any number of “worst case” scenarios happen. Realistically if you let Florida and California drop into the ocean you would remove nearly 30% of the mortgage crisis in the U.S.

There are still signs that the worst is yet to come in the U.S. Orders to U.S. factories fell in August (reported Oct 2^nd, 2008) by the most in almost two years, signalling that business spending slowed down even before the recent worsening of the credit crunch. This downturn in business spending is bound to have an impact on manufacturing and as we see Europe and Japan’s markets falter there will be another blip worldwide as one of the world’s largest consumers cannot afford to buy things.

All things being considered the biggest risk in Canada will be those with greater exposure to the stock markets and those who might have variable lending rates attached to credit. This is as good a reason as any to start looking at your financial plan and figuring out what alternatives there are to the markets and which would provide more security and still enable you to achieve the results you want.

CIBC’s Rubin takes perilous tone on financial markets

Things are going to get a lot worse in Canada and the U.S. if U.S. legislators don’t realize their folly in rejecting a bailout package, says a new report from CIBC World Markets.

This type of message is a stark turnaround in tone from the chief economist at CIBC World Markets, Jeff Rubin, who has a reputation for being more of a bull than a bear. Rubin is deeply concerned that the U.S. government has made a critical error in rejecting the bailout, and he says it’s Main Street, not Wall Street, that will feel the greatest effects of the fallout.

“In acquiescing to a skeptical Main Street, Congress voted thumbs down on the Wall Street bailout package, leaving the country’s, if not the world’s, financial system exposed to further price declines in the U.S. housing market,” Rubin says. “Notwithstanding the growing list of banking casualties in the U.S. and ballooning credit spreads, particularly for financial institutions themselves, Wall Street’s crisis is yet to make a big splash on Main Street.”

Rubin says if Main Street is the barometer by which Washington is measuring when to intervene, the crisis may drag on for some time.

“It is the very benign nature of today’s downturn on Main Street that could pose the greatest danger tomorrow,” he says. “Without a material worsening in the unemployment rate or GDP growth, Main Street could well remain unimpressed with Wall Street’s balance sheet ills. And it could still take a quarter or two before average Americans feel the full impact of what is happening to their financial institutions.”

In the meantime, the world’s financial system may not be able to “tread water” that long, he points out.

“That’s why it is so pivotal that a package come now, before systemic damage is sustained,” he says.

As yesterday’s trouble on the Toronto Stock Exchange showed, Canada is far from immune to the spillover effects of this crisis. Rubin says the TSX is more leveraged to the crisis than either the Dow or the S&P 500.

“Fears of a financial market meltdown do not bode well for investor sentiment towards commodities,” states Rubin. “The recent wild ride in oil prices underscores how concern over toxic balance sheets on Wall Street can spill over into other markets, even where there is little to fundamentally connect them.”

Rubin expects Canada’s economic fundamentals to weather the storm, though. The CIBC World Markets notes that while housing prices in Canada are cooling, there is little worry of a U.S.-like meltdown in prices. Canadian housing prices have not followed the path of U.S. housing prices, which have been falling for two years, with a cumulative decline of 18% to date on their way to an eventual correction of 25%.

The report says by almost any measure, American households entered the current housing crisis from a more vulnerable position relative to their Canadian counterparts, carrying a heavier debt load and a much lighter net worth position.

The report stresses at the peak of the cycle, sub-prime and Alt-A mortgages accounted for a third (33%) of originations in the U.S. market, whereas in Canada, at their peak, non-conforming mortgages reached 5.4% of originations.

Mark Noble, Advisor.ca