Scott Terrio’s Twitter feed reads like a financial horror story. Terrio, an insolvency expert at Cooper & Co. in Toronto, uses the 140-character medium to share the multitude of ways seemingly well-off Canadians end up buried in debt and turning to debt consolidation, consumer proposals, and even bankruptcy.

Canada’s record household debt levels have been a cause for concern for years, but Terrio sees a new problem on the horizon. Canadian seniors are the demographic increasing debt at the fastest rate.

Take Dorothy, an 81-year-old widow who owns a home with a 1st mortgage from a secondary lender. She refinanced a couple of years ago to do house repairs ($18,000), assist her son with divorce legal fees ($37,000), and to help her grandson with tuition ($8,500).

When her partner died she was no longer able to make the mortgage payments. A friend from church referred her to a mortgage broker.

The broker suggested a reverse mortgage which would let her stay in her house without the monthly mortgage payment. But the money from the reverse mortgage wasn’t enough to pay out the 1st mortgage after fees and penalties. She needed a private 2nd mortgage at 12 percent to pay the balance.

Dorothy co-signed a $26,000 car loan for her nephew and co-signed with her son for funeral expenses ($12,000) for her partner. Her son stopped paying, so Dorothy was pursued (100 percent).

She then ran into tax trouble by not having tax on her OAS & CPP deducted for the first few years. She owes $21,000 in tax, much of it penalties and interest.

This scenario is becoming more common among seniors today.

“Many are in a unique quandary. They’re asset-rich, but cash-poor. Cash flow is tight. Pensions are fixed, and many have underestimated retirement costs,” said Terrio.

So what do they do? Many seniors cash out assets to make ends meet. Others raid their home equity and take out lines of credit. All have financial consequences.

5 Financial Traps Seniors Must Avoid

5 Financial Traps Seniors Fall Into And How To Avoid Them

We asked Terrio to share the top financial traps seniors fall into and how to avoid them:

1. Tax problems

Most seniors were used to being paid by their employers in after-tax dollars. At pension time, many don’t have taxes deducted to offset their Old Age Security and Canada Pension Plan income and therefore end up spending taxable pension income.

It doesn’t take long before a small $5,000 tax problem balloons into a $20,000 tax bill.

Many seniors also cash out assets to bolster their income. This is taxable income at tax time.

To fix the problem, Terrio says, seniors can arrange to have sufficient tax deducted at source before they’re eligible for CPP and OAS.

“Then you’ll never spend somebody else’s money (the Crown’s).”

2. Multi-generational funding

Many seniors today are caught between multiple generations: they help fund their adult children, grandkids, and even support elderly parents in care facilities. That’s four generations funded from a fixed pension.

Terrio says the costs of this multi-generational funding often goes well beyond what most seniors can handle.

Avoiding this financial trap means going on a budget and sticking to it; separating family and emotions from finance.

Cash out some assets if it makes sense, said Terrio, but make sure to plan for taxation (see trap #1). Ask a professional. Or just say no. Seniors get into money trouble by saying yes too often.

3. Co-signing/Joint Debt

Seniors are frequently asked by their adult children to co-sign for credit. Many don’t understand the basics: each party is responsible for 100 per cent, not just half the loan. The lender will pursue the co-signer for the full amount upon delinquency.

“That’s why you signed,” said Terrio.

It’s difficult for seniors living on a fixed pension income to handle even minimum payments on a large-balance debt. If that’s the case, just say no. If family can’t qualify without a co-signer, perhaps they shouldn’t borrow at this time.

If you co-sign, first determine the maximum amount you may end up having to pay monthly in the case of a delinquency. Don’t sign if you can’t manage the worst-case scenario.

4. Home Equity Lines of Credit

Seniors often have significant home equity. It’s tempting to tap that equity to help loved ones, or pay for cars or vacations that regular monthly cash-flow may not allow.

Make a specific plan to pay back the home equity line of credit principal within a reasonable time frame. HELOCs only require you to pay the interest, meaning the balance remains. But the debt also remains against your house. Also, the interest portion, as we’ve seen recently, is subject to rate changes.

Don’t be pressured, says Terrio. “Run the HELOC terms by a trusted advisor before you sign.”

5. Unexpected medical expenses

Many medical expenses are not covered by the Ontario Health Insurance Plan (OHIP), or by private health care benefits.

“There is an assumption of ‘universal’ health care, yet many things are not covered. Costs can be huge,” said Terrio.

The best defense is to plan ahead and establish a proper savings cushion well before retirement.

Terrio suggests meeting with multiple insurance professionals and comparing coverage options. Ask what may not be covered. Budget monthly amounts that will provide maximum coverage for items you deem necessary, but that are not covered by government insurance.

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4 Comments

  1. Denis on September 18, 2017 at 3:59 pm

    I am not a fan of paying tax when you are not required but you need discipline. I like borrowing from the govt not the other way around.

    If that 81 yr old is a true story, then wow. The stress must have killed her early if not yet. I never lend money, I give it if I can or makes sense. Lend money and you lose friends and family quickly.

  2. RICARDO on September 19, 2017 at 5:40 pm

    I have been running a HELOC for investment purposes for several years now. Interest on the HELOC is tax deductible against the dividends paid out.
    As I have just retired I have paid off the Heloc and transferred the remaining equities to another investment account that I can access when ever I want to, like right now.
    I do plan to utilize the HELOC again for investment some time soon. As long as it 1) pays the interest and 2) pays down some of the principle every month then I am happy.
    There are a lost of things going on right now, such as rising interest rates, though so caution is a prerequisite.

    RICARDO

  3. Dave D on September 22, 2017 at 10:30 am

    Any son or daughter that would have their parent refinance their home to pay for divorce costs or their child’s tuition should be ashamed of themselves. Taking money from an elderly parent that can’t afford it should be a crime whether the senior agrees to it or not.

    Dave

  4. Barry on September 24, 2017 at 9:51 am

    I have friends who have co-signed bank loans and loaned money to children and grandchildren. To reward their generosity one daughter refused to repay the loan and stated “take it out of my inheritance”.

    As previously stated by Dave D she should be ashamed of herself, but she isn’t. I don’t subscribe to using inheritance as leverage, but if she were my daughter I’d have to say…..”You’ve just had your inheritance, so don’t expect anymore”.

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