Increasingly seniors make up a greater percentage of debtors who find themselves in financial straights and in need of assistance from a Licensed Insolvency Trustee. These are the Top 5 financial pitfalls for seniors and some advice on how to avoid them.
House Rich – Cash Poor: Using Home Equity to Fund Retirement
Seniors often have significant home equity. It’s tempting to tap that equity to help loved ones, pay for cars and vacations, or even use it to fund day-to- day living expenses, especially when the cost of everything is increasing rapidly. This is even more true for seniors whose pensions and other retirement income is fixed or, even worse, is shrinking. Seniors have increasingly used their homes via HELOC (Home Equity Lines of Credit) and other vehicles to help fund their retirement years.
But seniors need to understand that HELOC and home equity loans come with risks and costs. Most equity loans are based on variable interest rates and as we have seen recently, are subject to change. Additionally, the lender generally has the right to reduce the credit limit available at any time, and as well, the lender has the right to demand repayment in full at any time.
HELOCs generally only require the borrower to pay the interest, meaning the principal balance remains the same. But the debt also remains against the borrower’s house. Before taking this step, it wise to make a clear plan for how the funds will be used. Think about a repayment schedule that includes more than just the minimum monthly interest.
Seniors need to understand that ultimately if home prices were to decline while the costs of borrowing increase as projected, there will come a time when there is insufficient equity available to maintain current borrowing or to fund additional debt. If this were to happen, the homeowner may ultimately be forced into selling the home in a depressed real estate market.
Most seniors are familiar with being paid by their employers in after-tax dollars. When pension income begins, especially if the senior is receiving more than one type of pension, many don’t have sufficient taxes deducted at source. Pension income from an employer’s plan plus income from Old Age Security and the Canada Pension Plan may quickly add up to owing tax, if one is not careful. Monthly taxes payable can quickly escalate to unmanageable tax debt.
As well, when embarking on retirement, some seniors cash out investment assets such as RRSPs to bolster their income. When cashing in RRSPs, there is some amount of tax withheld at source, however, this is rarely sufficient if there are other sources of taxable income earned within the tax year.
To help address this problem, seniors are advised to project their income for a given year to help calculate how much tax should be held back by CRA or an employer on each payment. Calling CRA directly and asking for more taxes to be deducted from monthly CPP and OAS payments is one solution.
Seniors are frequently asked by their adult children and grandchildren to co-sign for their debts. Many seniors don’t understand the basics behind this type of guarantee (referred to as “joint and several”). Guaranteeing a debt for a family member means that each party is responsible for 100% of the loan – not just 50%. The lender will pursue the co-signer (guarantor) for the full amount of the debt if the other party defaults on the payments.
For pensioners on a fixed income, it may be very difficult to manage even the minimum payment obligation on a large debt balance if they were suddenly required to do so because the primary borrower defaulted.
Before agreeing to co-sign for some else’s debt, seniors should look closely at their monthly budgets. If there is no ability to pay under a “worst case scenario,” then the senior should just say “No” to the request. If a family member can’t qualify without a co-signer, perhaps they shouldn’t be borrowing in the first place.
Many seniors today are caught between multiple generations. They find that their adult children return home or are asked to help with education costs for grandkids. Some retirees also find themselves caring and supporting for elderly parents in care facilities or in their own homes. That’s four generations funded from a fixed pension. Costs of this multi-generational funding often goes well beyond what most seniors can handle.
Seniors can help themselves by preparing a detailed budget outlining their own expenses. A budget will help identify if there is anything extra that can be used in the support of others without causing their own financial hardship. A budget will help separate family and emotions from finance.
Unexpected medical expenses
Personal medical and dental expenses often increase upon retirement. Not all seniors have extended medical plans that carry on into retirement. Many end up relying solely on their provincial health care insurance providers. But not all expenses are not covered by the provincial plans or by private healthcare benefits.
The best defense is to plan before retirement to set up a fund for expected medical costs and familiarization with provincial assistance programs.
There are private health care options available for those who can work a monthly payment into their budget. Meet with multiple insurance professionals and start by comparing coverage options and be sure to understand what costs are not covered by the plans.
Preparing for the future is always difficult especially in turbulent financial times. Even the best laid plans can prove to be insufficient to meet increased costs and unexpected challenges. Feelings of guilt and shame can be significantly higher for older generations who, when unable to meet debt obligations, can often suffer in silence.
Help is available with a local Licensed Insolvency Trustee who can assist seniors solve their debt issues so they can get back to enjoying their well-deserved retirement.