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Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, "It makes sense to splurge a little on yourself, as early as you can." |
By Joanna Pachner
National Post
FP Weekend
Saturday, December 02, 2006
The man had spent a lifetime socking away money for retirement. When he did retire, he remained frugal. Then came Sept. 11, 2001; it changed his attitude. He decided he had not done enough travelling. He took $100,000 out of his investment portfolio and spent a year trotting around the world with his wife -- he just kept moving in the same direction until he had circled the globe.
He could afford it: His financial advisor, Adrian Mastracci of KCM Wealth Management in Vancouver, who relates this story, helped him ensure he wasn't endangering his retirement nest egg.
For many members of the war generation, this kind of indulgence is out of character. Unlike their offspring -- the free-wheeling, debt-loving Boomers -- they are known as savers.
Yet, whether it's a world event, a brush with death or simply the realization they have more than enough to get them through old age, some retirees are deciding to live it up late in life.
"If the money they now have came to them later, maybe they didn't enjoy things like travel, maybe they want to go back to the old country," says Mr. Mastracci. And unless there are financial issues for which they have earmarked the estate, Mr. Mastracci tells his clients to spend something on themselves. "There's no need to be chintzy about it."
Some take that advice whole-heartedly. One man used a million dollars to build a house -- a castle, actually. A retired couple became high rollers in Las Vegas, spending up to $25,000 on weekend sprees. In fact, there's a booming industry devoted to helping seniors spend their money, tempting them with vacation properties, luxury goods and exotic travel packages that have been dubbed SKI -- spend the kids' inheritance tours.
The desire to indulge oneself isn't the only motivation for these born-again spenders: depleting the estate keeps it out of the taxman's hands. RRSPs and RRIFs are taxed at the highest marginal rate; dispositions of property and investment portfolios are subject to capital gains; probate fees eat up more than 1% of the estate.
"Taxes will only grow between now and death," says Sandy Cardy, senior vice-president of tax and estate planning at Mackenzie Financial Corp. "If you're going to deplete, start with the highest-taxed assets like RRSPs. And you may pay less if you spread it over a number of years."
Angelo Vicere, a financial advisor in Hamilton, Ont., encourages clients to max out withdrawals from RRSPs or RRIFs each December, even if they don't need the money, to bring their income up to $29,580, which is the highest point of the lowest tax bracket.
For some parents, the very idea of passing on a large estate is anathema. "There is that sense that it will make their kids less disciplined and hard-working," says Ms. Cardy. It's a concern increasingly shared by governments as Boomers start coming into their inheritances. A whole generation may be able to drop out of the workforce early, cutting into the economic growth rate.
Blowing the inheritance doesn't have to mean mass consumption -- you can always give it away. One option is to pass some assets on to the kids now; handing over the family cottage while the parents are alive may well be more tax-efficient. Others turn to philanthropy. Mackenzie Financial has started the Charitable Giving Fund, which allows donors with as little as $25,000 to establish the kind of private foundations typically reserved for millionaires. The capital doesn't get spent, but a certain percentage each year goes to a select charity, generating a tax credit for the donor.
The danger of late-life spending is that once you start, it may be hard to stop. Advisors caution clients to make sure they leave enough to cover themselves for the future. As life spans stretch, it is important to have a plan for eventualities such as failing health, nursing homes, even a spike in inflation rates.
Stephen Pollan, the New York-based author of Die Broke, has seen seniors become overly enthusiastic consumers and forced to go back to their kids for loans.
Of course, offspring may grow concerned seeing their parents acting uncharacteristically spendthrift -- often for selfish reasons.
"Children feel they have an entitlement," says Mr. Cardy, "especially the Boomers. Heirs need to remember, it's not your inheritance, it's your parents' life savings and retirement fund."
Ms. Cardy, for one, thinks the current generation of retirees will prove generous to their heirs. "Where I think we're going to see extensive spending is when they leave their estates to Baby Boomers," she says. "Boomers are more consumption-driven and that's when we'll see the kids' inheritance spent in a more lavish fashion."
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