Dear Mom and Dad:
About that inheritance you're planning. Frankly, we'd rather you spend the money on yourselves.
Baby boomers, do your parents a favour and tell them not to conserve their money so they can pass it along to you after they die as an inheritance. Lee Anne Davies, an expert on aging and financial matters, believes the expectation of an inheritance is weighing on seniors. "I think sometimes that it becomes a burden on the older adult," she said. "They need to focus on themselves."
Here's why: As lifespans get longer, so does the potential for large health care bills. It's commonly said that spending requirements decline as you age because you're not travelling as much and spending less on things like clothes and entertainment. But in a recent conversation we had about investing and retirement, money manager Paul Harris of Avenue Investment Management took a different view: "You probably need a lot more money when you're 90 than when you're 75 because of health care issues."
When I floated that idea with Ms. Davies, she said health care is the one factor that can cause spending to rise late in life. "Otherwise, you do go downward."
A change in thinking about retirement planning may be required to accommodate late-in-life health care costs like a stay in an acute care facility, home care or the retrofitting of a house to address mobility issues. Long-term care insurance is one possible solution, but it's a pricey addition to the many other financial obligations we have in our preretirement years – paying off the mortgage, topping up our retirement savings and helping our adult kids if they're struggling to achieve financial independence.
Another option is to create a reserve savings fund of some sort that we don't rely on for paying day-to-day expenses in retirement. Such a fund might be found in the money seniors are hoping to pass along to their children.
The financial industry's eyes bug out at the thought of this inheritance money. Back in 2006, an influential report suggested that $1-trillion would be passed down from seniors to their boomer kids over the two decades ahead. Helping this money change hands and then managing it in investments and other products would generate big profits for banks, insurance companies and investment firms.
Health care bills will end up soaking up some of this money, though. Longer lives are one factor driving this reality; another is smaller families. "[Society as a whole] didn't have enough children," Ms. Davies said. "So now we don't have that informal, unpaid caregiver."
Something else to consider is that governments are increasingly putting an emphasis on seniors with health problems remaining in their home. Ms. Davies said this can put more of a cost burden on seniors than if they were in government-supported hospitals or similar facilities.
Inheritances, whether they're cash gifts given by seniors while they're alive or money set aside to pass along after death, may be needed to pay these health care bills. So be a little bit selfish, seniors. Put yourself first in using up your savings, and worry less about providing a legacy.
Ms. Davies has been doing some research lately on how seniors who don't have a surplus of savings will pay their health care bills. In particular, she's been looking at reverse mortgages. Critics of these products say the administration fees and interest rates are high, but her preliminary conclusion is that they can make sense for seniors in their early 80s or older who own a house, aren't quite ready to sell and need cash. In particular, she finds that reverse mortgages make sense in cases where a parent would otherwise have to rely on money from kids to pay their health care costs.
In the past month, I have devoted a few columns to the financial strains on parents of young adults who have been unable to achieve financial independence (read one of them here). These parents are sometimes referred to as the sandwich generation, because they may also have to support elderly parents.
One of Ms. Davies' core principles is that it's best for families if seniors are able to take care of themselves rather than be supported by their children. "What you don't want to do is start to jeopardize the next generation's retirement as well."
By the numbers: Health care for seniors
$1.2-trillion: Cost of providing long-term care to baby boomers, as estimated by the Canadian Life and Health Insurance Association
$595-billion: Long-term care costs supported by current levels of government spending, according to the CLHIA
95 per cent: Percentage of the country's registered retirement savings plans needed to cover the unfunded amount for long-term care of boomers
750,000: The CLHIA's estimate of the number of senior citizens who could find themselves living in health-care institutions by 2036
300,000: Number of seniors living in health-care institutions today
$1,000 to $3,000+: Monthly cost of a stay in a long-term care facility, according to insurer Sun Life Financial
$10 to $200: The hourly cost of homemaking, personal care or nursing care, according to Sun Life
Sources: CLHIA, Sun Life Financial