The following article first appeared on RBC Wealth Management, Research and Insights.
The good news is: Canadians are living longer. But what does longevity mean when planning to hand down your wealth?
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 data from Canada’s Office of the Chief Actuary.
While this is obviously good news, the so-called “longevity boom” taking place in developed countries may be putting pressure not only on financial systems and economies, but also on individuals looking at how they should save, spend and transfer their wealth over a longer lifespan.
The potential of living longer may mean setting aside additional funds for your retirement years, and may delay when and how much wealth you pass down to the next generation. For example, 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 as healthcare expenses tend to rise for people later in life, including costs for long-term care facilities or in-home care.
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 need to be mindful about the types of wealth transfer they set up during their lifetime, she says. 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 may run out of money.
“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, education cost, or 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.
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, consider looking holistically at your overall asset mix and your goals. It may also be key to review regularly your written will and designated beneficiaries in order to accommodate for any major life changes, such as new grandchildren, a divorce and/or second marriage, or the unfortunate loss of a family member. Reevaluating regularly may be the best way to ensure that hard-earned assets are protected, and are there for everyone who may need them, for years to come.
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