The process of aging is different for everyone. When we are speaking with our clients about the aging process and how it relates to their finances, we start the process with a simple question: “How old do you feel?”
Our clients often tell us they feel significantly younger than their actual age. In fact, on average, the number they tell us is 10 years younger than their actual age.
In our opinion, most people do not talk about the financial impact of longevity. Living arrangements and health care costs are perhaps the two biggest financial components that we discuss with our clients.
We typically recommend owning a principal residence as long as possible, as long as it does not impact your other components of retirement. For individuals who are house-rich and cash-flow-poor, staying in a home may not be the best-balanced approach.
Assuming our clients are healthy, the following are the top 10 reasons for staying in your home — and the top 10 reasons for selling.
Top 10 reasons to stay in your home
Many of the clients that we have assisted over the years would like to stay in their homes for as long as possible. The top reasons we have heard for staying in their home:
1. Built the home and it has sentimental value
2. Raised children in the home
3. Comfortable with the neighbourhood
4. Would like their children to inherit the home
5. Current health conditions can make moving too difficult
6. Don’t want to leave neighbourhood with friends/family nearby
7. Are comfortable with the surroundings
8. Find the thought of moving too stressful
9. Can not find a better alternative
10. Fantastic tax-free asset
Top 10 reasons to sell your home
The top reasons I have heard from clients for selling or relocating are:
1. House is too big
2. Yard is too much to maintain
3. Can’t do the stairs any longer
4. Too isolated and lack of socialization
5. Want to move closer to family
6. Costs of maintenance and repairs
7. Downsize to extract capital to live off the equity in the home (house-rich and cash-flow-poor)
8. They are not travelling much, and want to upgrade their residence
9. Desire to move to a better neighbourhood and have a better quality of life
10. Relocate to an area where driving is not necessary and close to amenities (i.e. grocery store, hospital)
Meaningful conversation
Talking about one’s own longevity is not always the easiest topic to discuss. The reality is that we all have a life expectancy that isn’t yet determined. When we bring up the topic of life expectancy, we find that many clients are either in denial or in a period of perpetual procrastination.
We try to differentiate ourselves from other financial professionals and we encourage these meaningful conversations. The topic of longevity and health has direct financial consequences. We feel an obligation to speak with our clients about this. Ideally, for our married clients, we would like both to be present for the conversation.
This topic is so important that we feel it should be an independent meeting. To start the conversation off we will ask clients a few questions:
1) How old do you feel right now?
2) How many years do you feel you will be in retirement?
We find that the older our clients get, provided they still have their health, the greater the difference they feel from their actual age. A client who is 50 may feel five years younger than their actual age compared to someone who is 75 years old and who feels closer to 65, a 10-year difference.
Actuarial statistics
The average life expectancy of a female who is currently 60 years old is 86 and the average life expectancy of a male who is currently 60 years old is 84.
Let’s talk about the term “average” a little bit. Clients who have taken care of their health, and continue to make health a priority, are likely to live beyond the average age. This is especially the case if you have good genetics on your side.
Rather than focusing on actuarial numbers, we raise the question to clients: What if you live to 100? Many clients have worked 35 to 40 years of their life to accumulate funds. The decumulation stage can easily be longer than 35 to 40 years for clients that live beyond the actuarial average.
Common misconceptions
When I meet with clients who are making the decision to retire, they immediately feel that their investment portfolio should shift to be more conservative. With a time horizon of 35 to 40 years, the funds must generate a sufficient return to be sustainable.
Simply keeping money in the bank or putting it all into guaranteed investment certificates is not the right decision in our opinion. Your investment capital needs to generate tax-efficient income and a sufficient return, for your funds to maintain purchasing power and be sustainable.
Chronic illness
Let’s change the conversation a little bit and discuss what your financial condition and living arrangements will look like if you have a health issue. Statistically, one in every two clients over the age of 65 will have a chronic health issue.
What if you are not able to perform the activities of daily living? For couples, what would things look like after the first passing? What are the financial consequences of a severe disability?
Total Wealth Plan
We feel all our clients should have a Total Wealth Plan. Many have not heard that term before. The way we explain the “Total Wealth Plan” is to outline the process that they will go through. Like a traditional financial plan, we will gather all the typical components:
• Most recent T1 tax returns
• CRA notice of assessment including RRSP contribution limit
• Most recent bank account and investment statements held outside of Scotia Wealth Management
• Personal and corporate liability statements (mortgages, lines of credit, term loans, business loans, promissory notes, etc.)
• Annual employment pension statement
• Copies of your most recent will, powers of attorney and health directives
• Most recent financial statements for corporate entities, if applicable
• Most recent T2 corporate tax returns for corporate entities, if applicable
• Organization chart showing all corporate entities owned directly, or indirectly (your accountant may have one prepared, if applicable)
• Business agreements such as buy-out agreements, business valuation reports, shareholders agreement(s), if applicable
In addition to these details, our round table of specialists, which includes our Estate and Trust Specialist, Private Banking Specialist, as well as our Insurance Specialist, all review the Total Wealth Plan. The part that makes a Total Wealth Plan stand out is the meaningful conversations and planning that come out of the plan.
Insurance coverage (i.e. life insurance, disability insurance) and survivor benefits on registered pension plans can provide some offsetting risk management for the financial costs in the event of death or disability. Becoming aware of the residual financial costs not covered by insurance is part of The Total Wealth Plan.
Another part of the plan is to map out what the associated costs would be to deal with health issues and longevity. Some examples of this could be building ramps, stair lifts, and even elevators, within an existing home to enable our clients to stay in their home. This is especially the case when our clients want to leave their homes to their children.
We also make sure that our clients are aware of and access all available government support, including residential care workers.
In other situations, our clients are mapping out plans to sell their existing home (for one of the reasons above) and relocate to an independent living situation. Those clients requiring assistance with the activities of daily living will typically move into assisted living.
We work with our clients, and their Power of Attorney (POA) if applicable, in obtaining an understanding of the costs, for the different levels of care. We also obtain an understanding of if they are participating in any government programs that are income tested. These conversations are essential to ensure our clients are cared for as they age and are factored into the Total Wealth Plan.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit greenardgroup.com.
