By Sandra E. Martin
National Post
FP Money Section
Saturday, January 29, 2005
Don't relinquish the financial reins if you're a stay-at-home spouse. To do so could turn you into a desperate housewife -- or husband -- and you don't want that.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "If one of you is staying home and one of you can make the contribution, ideally it would be good to put it in the name of the spouse who doesn't have an income now.”
With their well-appointed suburban homes, designer sweats and convoluted social lives, it seems the last thing TV's Desperate Housewives would bother to worry about is money. And yet in a recent plot twist, brazen cuckolder Gabrielle Solis (portrayed by Eva Longoria), is plunged into the unfamiliar territory of household bill-paying and -- gasp! -- limited cash flow after her husband is arrested by the FBI.
Gabrielle's financial straits are exaggerated, of course, for the sake of television drama. But the situation raises an important point for real-life stay-at-home spouses, male and female. Whether through job loss, illness, divorce or death, when the unexpected befalls a household's primary breadwinner, it can hurt the whole family -- especially if the stay-at-home spouse hasn't been an equal partner in financial decisions made to that point.
You might think the under-informed housewife has gone the way of crinolined skirts and Leave It To Beaver-type family values, but financial advisors say in a lot of cases, one spouse still holds the reins on money matters.
Diane Kirkland, a CFP, points out that although, these days, maintaining ignorance of household finances is still the biggest mistake people make.
When she meets with a couple for the first time, she says, "I find that one of them is very good at the cash flow and one of them is good at the rest of it ... [but] it's important to know both."
Adrian Mastracci, investment counsel with KCM Wealth Management, a fee-only firm based in Vancouver, agrees there is usually one "dominant" spouse, who handles the household's big financial decisions while the other sits mostly on the sidelines.
Every couple hopes to make it to happily ever after. But in case you don't, these financial planning tips will help you through a crisis.
Put everything on the table. Start by getting fully up to speed on the household finances, including investments, income and expenses. If you have trouble prying open those rusty channels of communication, a financial advisor can serve as a mediator.
"I ask them very pointed questions and [then] I just shut up," Mr. Mastracci says, laughing.
Then, to avoid backsliding into financial imbalance, schedule an annual meeting to review your cash flow and net worth statement, Ms. Kirkland recommends. This simple practice will help you bring each other, and your advisor, up to date.
Rev up your RRSP. Just because you aren't currently in the workforce doesn't mean you should let your retirement savings idle.
Most financial planners agree the ultimate goal is to save in such a way that both spouses have equal incomes when RRSPs are drawn down in retirement.
To that end, Mr. Mastracci says, "If one of you is staying home and one of you can make the contribution, ideally it would be good to put it in the name of the spouse who doesn't have an income now."
(See this week's Financial Post’s RRSP Clinic for complete how-tos.)
That said, the big challenge to this grand plan is often finding enough contribution room to keep the non-working spouse's retirement savings motoring along.
If the working spouse participates in a defined contribution pension plan at work, the corresponding pension adjustment may eat up most or all of that person's contribution room -- meaning there's also no room to contribute to a spousal RRSP.
In case that's your situation, consider these alternatives to keep the stay-at-home spouse's retirement savings on track:
- Check your own Notice of Assessment. You may have accumulated contribution room still left over from your last job. Similarly, if you opted out of an employer pension plan when you left your last job, forfeiting the employer contribution, you may be on the receiving end of a pension adjustment reversal -- which will free up some previously "in use" contribution room, says David Ablett, manager of advanced financial planning.
- Save outside your RRSP. Provided you have the cash, there's nothing to stop you from setting up a non-registered savings plan. In fact, as the lower-income earner, it makes sense for the household's non-registered investments to be in your name since -- provided you work it the right way -- income on those investments will be taxed at your much lower personal rate.
Beware, though, that your spouse cannot simply hand you a whack of cash and say, "Here, honey, put that towards your retirement." Canada Revenue Agency rules state that income earned on such funds must be taxed at the gift-giver's rate.
To avoid this, Mr. Ablett recommends you borrow money from your higher-income spouse, at the federally prescribed rate (currently 3% per annum). While there's no deadline for paying back the borrowed funds, you must pay interest annually -- and the lending spouse must report that interest as income on his or her own income tax return.
However, because you've borrowed the money to invest, you can write off that interest as an investment expense on your income tax return. Bottom line, this strategy will put your combined finances ahead -- and keep your retirement goals in sight.
Fluff those safety cushions. A misstep that almost every couple makes is overlooking the importance of insurance in their financial plan, notes James Campbell, financial services manager: "I would say most Canadians don't have the right amount of insurance or the right type."
Having adequate insurance coverage is even more pressing when there's only one income earner, because if anything happens to that person, the family could struggle to cover even basic expenses. Mr. Campbell points out a major cause of mortgage foreclosure is disability or critical illness that prohibits you from earning a living.
And don't think the group life insurance and long-term disability coverage from the working spouse's employer is adequate, he warns.
Most group life policies will pay out twice your current salary upon your death -- an amount he says won't go very far if you're the surviving spouse left with a mortgage, car payments and children to take care of.
Moreover, if your spouse changes jobs and does not secure replacement coverage within 30 days, either privately or through a new job, he or she runs the risk of being assessed at a much higher premium or losing insurability altogether.
"A private plan is cheaper and it's a lot more flexible," Mr. Campbell says, noting a 35-year-old nonsmoking man can purchase $500,000 worth of coverage for a 20-year term (meaning the premiums won't increase for the first 20 years of the policy) for the very modest premium of $55 per month.
Similarly, employer-provided long-term disability coverage (LTD) will only pay out two-thirds of the breadwinner's usual salary -- and only if he or she is physically unable to work.
"If you've broken your leg and you can't go to work it'll probably be fine," he says. But if you're diagnosed with cancer, for example, a doctor may give you the all-clear to go in to the office -- disqualifying you spouse from claiming LTD.
To soften the blow of dealing with a serious health issue such as cancer, stroke or heart attack, private critical-illness coverage to age 75, paying out a $150,000 lump sum can be purchased for a 35-year-old man with the same credentials as above for about $80 a month.
Finally, as mundane a detail as it might seem, make sure you are named as the beneficiary of your spouse's will and that you have power of attorney in case your spouse is incapacitated.
"Many people assume they can act for their spouse without needing a power of attorney or some sort of legal document," Mr. Campbell observes. But simply being married will not allow you to withdraw money from a bank account exclusively in your spouse's name, or give you the right to claim a cheque made out to your spouse.
In case a crisis does catch you unprepared, it is possible to obtain power of attorney through the court system, but a relative of your spouse could challenge you for that right; moreover, that process could take days or weeks.
"Power of attorney means you can act immediately," Mr. Campbell says.
And sometimes in a crisis, every second counts.
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