Why se­niors fall into money traps

Taxes and sup­port­ing fam­ily mem­bers are among many risks

Toronto Star - - SMART MONEY - ROBB EN­GEN SPE­CIAL TO THE STAR

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. “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,” Ter­rio said.

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.

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 (OAS) and Canada Pen­sion Plan (CPP) 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.

Se­niors are fre­quently asked by their adult chil­dren to co-sign for credit

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 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 No. 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,” Ter­rio said. 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 into 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 (HELOC) prin­ci­pal within ar­ea­son­able 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, Ter­rio said. “Run the HELOC terms by a trusted ad­viser 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,” Ter­rio said.

The best de­fence 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.

DA­MON WIN­TER/THE NEW YORK TIMES FILE PHOTO

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

DREAM­STIME

Be care­ful about co-sign­ing for credit, as you will be wholly li­able in the event of delin­quency.

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