When the worst of the market downturn hit in 2009, financial adviser Sloan Levett saw people walk into his Toronto offices in dire need of help. Some of them had seen as much as 25 per cent of their investment capital evaporate in less than a year.
But it wasn't just surplus cash or casual investments that were taking the brunt of the market turmoil. For most people, this was the estate they were planning to leave to their children. A new reality was quickly unfolding in the world of inheritance planning – there was suddenly considerably less to leave behind.
"A lot of people were scared," says Mr. Levett, president of Fuller Landau Family Office Services Inc., which manages money for high-net-worth clients. Since then, he says, many portfolios still haven't come back to their previous levels.
"It's not uncommon that there has been a 25-per-cent decline in capital base," he says of the portfolios he has set out to revive.
It is the new lean reality for the baby boomer generation, and the generations that come after them: Children who have been planning on inheriting tidy sums of money from their parents are quickly finding that this nest egg took a significant hit during the downturn. And with low interest rates crimping future returns, repairing that damage is not a process that is going to come quickly.
But the market turmoil is only one half of the challenge for estate planning now. As people live longer, many are finding they also need to spend more of the money they intended to leave behind. And indeed Canadians are living longer: When the most recent census data was published in May, the numbers carried some surprising revelations about the extent to which the country is greying. The number of people older than 100 rose to a record 5,825 people last year, a 35-per-cent increase from just a decade ago.
The result is that boomers may have to deal with lowered inheritance expectations.
"It has forced the next generation to not be as comfortable," Mr. Levett says. "I've seen it in a handful of client cases where [parents] have had to have that discussion with the next generation; that maybe five years ago the expectation was a certain number, but based on where things are at today, that number is more likely going to be lower."
The turmoil has reduced the number of high-net-worth individuals in Canada. Those with more than $1-million of investible wealth fell to 279,900 last year, from 282,200 in 2010, according to a June survey by Capgemini and RBC Wealth Management.
"There's definitely more concern out there from some clients than there used to be many years ago from their parents," says Prashant Patel, vice-president of high-net-worth planning services for RBC Wealth Management.
Low returns have meant financial planners must find other ways to invest yet not expose clients and their estates to an excessive amount of risk. In previous decades, safe investments such as GICs or bonds could provide attractive investment income. Today, they are unable to supply the growth most people need to fund their retirement and inheritance planning.
As such, both Mr. Levett and Mr. Patel say they are backers of annuities for clients who can afford to devote the capital to such investments. By carving off a slice of capital, say 15 or 20 per cent, and buying an annuity from an insurance company, investors can earn far more attractive rates of return than with traditional fixed-income investments, sometimes in the neighbourhood of 7 per cent.
The annuity pays out until death, providing reliable income for retirement, at which point a life insurance policy for an equivalent amount ensures the capital is returned to the estate. The downside of an annuity is that investors lose access to the capital during their lifetime, which is why Mr. Levett suggests deploying no more than 20 per cent to that strategy. When rates rise again years from now, other capital can be deployed elsewhere.
Mr. Patel at RBC says he is also a big fan of annuities as many Canadians face the reality of not having a fixed pension from their employer. "I think more and more Canadians should look at annuities, and will start looking at [them]," he says.
The pressure on estate planning and inheritances is evident in the projections Canadians have for themselves. A survey by the Bank of Montreal showed 30 per cent of Boomers expect to receive an inheritance in the coming years. However, as many as 19 per cent believe they will not be able to leave an inheritance to their children.
Sara Plant, vice-president and national director of wealth services at BMO Harris Private Banking, believes that as people live longer they should be continuously updating their financial plan to make sure they have the cash flow to support themselves. In tumultuous markets, she also advises writing wills that are based on leaving percentages rather than promises of dollar amounts, to avoid problems if the markets don't respond.
Ms. Plant says one of the most important things families often forget is to communicate the state of their finances, which can lead to unrealistic expectations later on.
"It's one of my pet peeves. It's important to talk to family members, to set their expectations, and to help them understand why there will be assets there, and why there will not be assets there when they go," Ms. Plant says.