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Rob Carrick

Why you shouldn’t count on an inheritance to bail you out Add to ...

An emerging theme in money is that having a lot of seniors in the population will drain the country’s financial resources.

The hardly discussed counter-argument: Seniors could be the lifesaver for many a financially troubled household.

Back in 2006, the research firm Harris/Decima issued a widely quoted report suggesting that $1-trillion will be passed from Canada’s seniors to their baby boomer kids in the next two decades or so. It all sounds a touch optimistic today as a result of debts being carried into retirement, falling house prices, weak investment returns and longer lifespans. But even if the coming generational wealth transfer is half or one-quarter of what’s predicted, a lot of money will be on the move in the years ahead.

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This is fortunate because some families will have trouble getting by without it. For example, there are the baby boomers heading into retirement with credit card debt, drawn down credit lines and mortgages that are still a ways from being repaid. Another example would be the members of Gen Y who are struggling to repay student debt so they can buy homes and start families.

An Investors Group survey from early this year suggests that 53 per cent of Canadians are expecting an inheritance and, of those who think they know how much they’re getting, 57 per cent expect to receive a six-figure amount. But even while anticipating our inheritances, we’re starting to wonder about the cost to the country of our aging population.

Statistics Canada has estimated that roughly one in four people will be 65 or older by 2036, which means the cost of health care and benefits such as Old Age Security will rise sharply. Already, the federal government has announced that the age of OAS eligibility will gradually be pushed back two years to 67 starting in 2023. It’s increasingly common to hear skepticism from people of all ages about whether today’s government benefits will be fully or in part available to younger Canadians when they retire.

The irony here is that today’s seniors represent the last stand of the sensible, old attitudes about money. Specifically, the belief that debt is abhorrent except when used to buy something tangible and life-enhancing, such as a home or post-secondary degree, and that saving is the best defence against future uncertainties.

Seniors, you’re not responsible for today’s lax attitudes toward debt and saving. Also, your first financial obligation is to yourselves. Gifts and inheritances are affordable only if you have saved more money than you can reasonably expect to spend on everyday living, medical care and housing, be it the family home or a long-term care facility. It’s worth noting that in the Investors Group survey, 45 per cent of people aged 60 or more said they think they’ll need their savings and won’t have money left over.

If you do have a surplus, consider passing it along now rather than waiting until after you die. Earlier this year, I interviewed blogger and accountant Mark Goodfield of Cunningham LLP for a video in The Globe’s Let’s Talk Investing series about the satisfaction people get from passing money down while they’re alive and able to see family members benefit (watch it at tgam.ca/Dgmn).

More and more, grandparents are e-mailing me to ask for ideas on how to help their families. One man’s inquiry was posted on my Facebook personal finance page on Sept. 25 under the headline: The Case of the Generous Grandparents. Check it out for some suggestions on how to effectively help grandchildren with a gift of money (facebook.com/robcarrickfinance).

Canada’s baby boomers were born between 1947 and 1966, which means they should be well established financially. The fact that many are heavily indebted, even as they edge toward retirement, suggests seniors must do some hard thinking if they have money to give away. Should they help a 55-year-old daughter pay off the last of her mortgage and attend to a long-neglected retirement saving plan? Or, should they help a 25-year-old grandchild pay off a student debt and avoid what could easily be a decade-long slog of debt repayment? Consider giving where the need is greatest (that would be the 55-year-old in this example), and don’t hesitate to put conditions on the money where possible.

As for people counting on an inheritance, that’s only one step away, in financial-planning terms, from waiting for a lottery win. Your parents or grandparents may yet bail you out of your financial problems, but it’s kind of pathetic to base everything on this hope.

Coming soon: Financial help that seniors should not provide.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

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Five ways to help the grandkids

1. Contribute to a registered education savings plan (RESP): Note that contribution limits apply in aggregate to all plans set up in a child’s name, not to each plan individually.

2. Set up and contribute to a tax-free savings account (TFSA): A smart and easy option for grandkids aged 18 and older.

3. Help with tuition or books: A way to extend parents’ savings and minimize student debt.

4. Help pay off student loans: It could easily take 10 years for a student to repay substantial borrowings.

5. A cash gift: No tax consequences for grandparents or grandchildren.

Rob Carrick

Follow on Twitter: @rcarrick

 

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