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).
— Scott Terrio (@CooperTrustee) July 10, 2017
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
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.
I grew up in Calgary in the 1980s and became a huge Calgary Flames fan at a young age (’89 baby!). The Flames organization, like many Canadian sports teams, struggled in the 1990s as the league expanded and the Canadian dollar sunk below 70 cents (player wages are paid in U.S. dollars).
By 1999, attendance had fallen off severely, prompting owners to issue an ultimatum: buy more tickets or the team would relocate to the U.S. The appeal worked, for the most part, and by 2004 the Flames returned to the post-season with one of the most memorable Stanley Cup playoff runs in history. The Saddledome has been sold-out ever since, but now the club’s ownership group is pushing the City of Calgary for a new arena.
It’s a compelling argument on the surface. A brand new arena will attract world class events and provide the city with a shiny new jewel in the heart of downtown Calgary. But the argument breaks down when it comes to funding the arena.
The ownership wants to put the bulk of the build on Calgary taxpayers while maintaining free use of the land (i.e. no property taxes), plus keeping all the arena revenues for themselves. The City of Calgary countered with a balanced proposal that would see the $555M project cost split three ways between the City of Calgary, the Flames ownership group, and the users of the facility through increased ticket prices ($185M each).
Meanwhile, Garth Brooks didn’t do the Flames owners any favours when he played seven sold-out concerts in the ‘dome earlier this month.
Despite claims that cities benefit from subsidizing sports arenas, economists aren’t buying it. In fact, Trevor Tombe, an associate professor of Economics at the University of Calgary (and one of the smartest guys on Twitter), said the research is clear there aren’t aggregate benefits of such subsidies for the city as a whole.
Tombe went on to say that public subsidies for professional teams usually only benefit political careers of city politicians.
“Cynically, I would phrase it as it provides a very good photo op.”
So, the unpopular opinion of this sports fan is that cities should stop caving to the demands of billionaire owners and league officials to subsidize new arenas and stadiums. The City of Calgary did the right thing here and I’ll bet the Flames come around in time.
Other unpopular opinions
At the risk of alienating half our readership, here are some other unpopular opinions I share:
- Raising minimum wage won’t be the kiss of death for business.
- Tax reform on private corporations won’t crush the dreams of entrepreneurs or send all our doctors south of the border.
- Universal basic income is an idea worth exploring (pilot projects are underway).
- Renting isn’t throwing your money away.
- You don’t need a university degree (or Master’s, for that matter) to have a successful career.
Happy to discuss in the comments below!
This Week’s Recap:
On Monday I explained how to trick your primitive lizard-brain into saving more money.
On Wednesday Marie explained what you need to know to convert your RRSP to a RRIF in the year you turn 71.
And on Friday Marie offered some retirement planning advice for singles.
I hope those of you that grabbed your free ticket to the Canadian Financial Summit got a chance to take in the interviews and presentations this week. It was extremely well done, so hat’s off to Kyle and Justin at Young & Thrifty for pulling this off.
Frank Wiginton explains why you may have all you really need to retire.
A strange yet interesting read on what the rich won’t tell you, written by socially professor Rachel Sherman for the New York Times.
Rob Carrick hit close to home with this article on how to get ahead when your income is hardly growing. I especially enjoyed this part:
“If you want to build wealth, regular investing in financial assets such as stocks and bonds is crucial in a world of weak income growth. A low-cost, diversified portfolio could conceivably produce average annual returns of 2 or 3 per cent after fees and inflation. Invested money grows like you wish your paycheque did.“
Dan Bortolotti on how ETF investors sabotage themselves. The problem isn’t your funds; it’s your behaviour.
MoneySense’s Romana King explains how to avoid selling your home at a loss.
This reader’s mom left him the house when she died suddenly three years ago. The day after she died, one of his brothers threatened to sue him for his share of the inheritance. What does he owe his two brothers?
65% of Canadians made a contribution to either a RRSP or a TFSA in 2015. That’s great, but I wonder how many people made a contribution, only to withdraw it a short-time later for another financial need (or want)?
A reader asked CFP Jason Heath how risky are robo-advisors. The answer is they’re not dangerous or safe – the risk lies in the investments you hold. Just don’t worry about robo’s running off with your money.
Million Dollar Journey author Frugal Trader was recently laid off from his government position – a situation that has this millionaire pondering the next stages of his life and career.
Finally, a nice profile of Canadians who didn’t finish university or college degrees – and have zero regrets.
Have a great weekend, everyone!