Life in Canada isn’t just good; it’s also getting longer. Thanks to advances in medicine and greater awareness around healthy living, the average life expectancy for a Canadian born in 2013 is 82 years, up from 77 in 1990 and 69 in 1951, according to a report from Canada’s Office of the Chief Actuary.
While this is obviously good news, the so-called “longevity boom” taking place in developed countries is putting pressure on financial systems and economies, as well as individuals looking at how they should save, spend and transfer their wealth over a longer lifespan.
The potential of living longer means setting aside extra funds for your retirement years, and could delay when you start passing down wealth to the next generation while still alive, and how much. An estate transferred by a 75-year-old will likely be larger than one passed down by a person lucky enough to live to be 100, or older. This is especially true given that healthcare expenses tend to rise for people in the later stages of life, including costs for long-term care facilities or in-home care.
“People need to be mindful about the types of wealth transfer they set up during their lifetime,” says Leanne Kaufman, head of RBC Royal Trust Services, RBC Wealth Management.
“If too much is given away too early, that person, despite the best of intentions, could find themselves in the position where they don’t have enough to keep themselves going, especially if they end up in a long-term care type facility. They could run out of money.”
Take care of yourself first
It may sound selfish to some, and hard to do for many, but people need to put themselves first in their estate planning, says Deborah Jacobs, a lawyer, journalist and author of Estate Planning Smarts.
“You should always take care of your own financial needs before you starting thinking about giving away money to others,” Jacobs says. “None of us knows how long we are going to live. We have to budget as if we are going to live to whatever our current life expectancy is.” Retirees should also feel entitled to live it up in their later years, Jacobs says.
“People work hard for their money and want to enjoy it. While we’d like to leave the kids something, I think not shortchanging yourself is a really huge thing,” says Jacobs.
Retirees also need to plan for the unexpected, including the inevitable ups and downs of the stock market and a continued low interest rate environment. The recent volatility across global markets, combined with low interest rates, has squeezed returns for retirees looking to live off of the proceeds of their investment portfolios.
Jacobs says the current market conditions underscore the importance of setting aside enough money to live comfortably, especially in the short-to-medium term, before giving it away.
“Even in a diversified portfolio, it can be unreliable,” Jacobs says, “leaving most of us with a measure of uncertainty.”
She recommends retirees hang on to any assets they may need to draw from in the next five years, to “minimize anxiety” in retirement and to weather any economic storms.
Giving while living
When it comes time to give away assets, Jacobs says many parents chose to help their children with housing costs, such as a down payment on a home, educate them or their grandchildren, or offer financial support in times of crisis, such as the loss of a job or a spouse. “Those are the ways people tend to be most generous,” Jacobs says.
Some also want to provide support to children stuck in what’s known as the “Sandwich Generation,” which refers to people caring for both young kids and aging parents.
“There are lots of reasons why individuals might want to do a transfer of assets either to their children or another generation during their lifetime,” Kaufman of RBC says with many people relying on trusts to distribute wealth both in life and after they die.
“Trusts are a really great way to distribute wealth, and can be as prescriptive or permissive, allowing as much discretion to your trustees as you wish,” she says.
“They are very customizable and can really offer a lot of flexibility at the drafting stage.”
However, she warns trusts become a lot less flexible once they’ve been set up. “So, unless there are provisions to be able to amend, clients should be aware that it can be very difficult for trustees to go outside of those terms,” she says.
Douglas Gray, co-author of The Canadian Guide to Will and Estate Planning, points to various strategies retirees can use to make their money last longer in retirement. That includes different types of trusts and insurance products. “There are so many different strategies to consider,” says Gray. “The key is to know your options and use your money wisely so that it lasts throughout your life ... and you can spend it the way you want to.”
See the big picture
To make your wealth last, Kaufman recommends retirees get advice from a professional who can make recommendations on how to best distribute the assets, by looking holistically at the overall asset mix and your goals.
“An advisor can help identify whether giving while living might actually put the parent or person doing the gifting in peril, financially,” says Kaufman, “especially if they do end up living longer than they planned.”
She also recommends having a Power of Attorney to manage funds should the person become incapacitated and unable to do it on their own. A Power of Attorney should be someone who lives in close proximity, is trustworthy and who can minimize potential family conflicts should they arise. If no suitable friends or family members can act on your behalf, you may want to consider appointing a third-party professional to act as an attorney should you become incapacitated.
It’s also critical to review your written will and beneficiaries regularly to accommodate for any major life changes including more grandchildren, a divorce and/or second marriage or the unfortunate loss of a family member.
“Whenever there is any major change you need to revisit your estate plan,” Kaufman says.
It’s the best way to ensure that hard-earned assets are protected, and are there for everyone who may need them, for years to come.
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.