The surge in business that some advisors expect from helping baby-boomer clients deal with fat inheritances may simply not materialize. Why? Although hard numbers are difficult to find, there is evidence to suggest that those inheritances from hard-working, post-war parents will probably be leaner than many pundits predict.

A host of unexpected factors have cut into seniors’ savings in recent years, leaving many of Canada’s elderly with little to pass on to the next generation.

“Old folks know they have to save that money for a rainy day,” says Moshe Milevsky, associate professor of finance at York University’s Schulich School of Business in Toronto. “And that rainy day is coming.”

Although U.S. studies talk about the imminent transfer of trillions of dollars to boomers, surprisingly little is known about the quantity and value of assets held by Canada’s elderly. Bodies as diverse as Statistics Canada, the Canada Revenue Agency and the Canadian Bankers Association say they have no way of knowing how much wealth seniors have, the size of their estates or how many have exhausted their savings and
depend on their children.

“We have very little data on wealth in Canada,” says Ernie Lightman, a sociology professor at the University of Toronto. “We have lots of data on incomes in Canada, but Canada doesn’t collect data on wealth.”

With such spotty data in Canada, experts warn advisors that expectations of widespread future inheritances for boomers could be unfounded. However, lessons can be learned from U.S. studies that suggest the older generation south of the border may have no intention of funnelling its remarkable wealth entirely to the next.

One such study, by John Havens and Paul Schervish, two academics at Boston College in Massachusetts, looked at wealth transfer in the U.S. — a sum that has been commonly estimated at US$41 trillion over the 1998-2052 period. They point out two serious misconceptions held by the baby-boomer generation and offer a stern warning: baby boomers, they say, “wrongly assume two things. First, that the entire transfer of
wealth is going to heirs; and, second, that it is only going to boomers.”

Of the US$41 trillion, Havens and Schervish say, only US$7.2 trillion will be passed down to the baby-boomer generation. About US$18 trillion will go directly to grandchildren, with most of the rest going to estate taxes, charitable bequests and estate settlement expenses.

This state of affairs may be worrisome for baby boomers. Many are seen as profligate spenders — they spend their paycheques, max out their credit cards and sometimes spend their future inheritances long before their parents’ demise.

In addition, they are probably one of four or five siblings, and they will have to share any inheritances. Yet, they may be expecting sizable inheritances to fund their retirement lifestyles and, as often as not, are not going to get them.

“Anybody who banks on an inheritance is being very foolish,” says Jean Blacklock, vice president of personal trust services at BMO Harris Private Banking in Toronto.
That comment also applies to advisors who are looking forward to building their books through client inheritances.

Whatever funds seniors now have available may be whittled down by a number of factors:

> Longer lifespans. People are living longer nowadays, and they are spending more while they live. These higher living costs are cutting into their nest eggs. “People underestimate their longevity,” Milevsky says. “They assume they will live five or six years [beyond retirement], but they need [to budget for] 30 years.”

Among the noteworthy Canadian studies on longevity is one by Steve Bonner, an actuary with Towers Perrin in Toronto, who worked out the cost of today’s longer life expectancies, and the impact on a retiree’s final estate.

For example, in 1980, a 65-year-old woman had a 14% chance of living to the age of 90. Now, she has a 29% chance. The implication of the potentially longer lifespan is that client, with help from her advisor, has to develop a strategy to create a bigger nest egg to carry her through a longer retirement. Bonner says a retiree in 1980 would have needed to put away capital of $175,000 to guarantee a pension of $1,000 a month after the age of 65. Today, that person would need $200,000 to support the $1,000 a month pension, after accounting for inflation. That means the sample retiree will have to spend $25,000 more to live in her retirement years, leaving $25,000 less for the children.

@page_break@“It’s Freedom 85 nowadays,” Bonner jokes, referring to a former advertising campaign by an insurance company that advocated ways to retire at 55 years of age.

> Escalating housing costs. Some of Canada’s elderly are living in the homes they bought for a song in the 1950s, barely able to pay the taxes and maintenance on homes that are far too large for them. They may turn to reverse mortgages or home equity-based lines of credit in order to live comfortably in their homes, thereby reducing any equity left to heirs. Also, they may have to undertake renovations such as installing ramps, elevators or special bathrooms, and employ full- or part-time help. And some seniors may opt for special services provided by privately run retirement homes, or require advanced care in long-term care facilities, which are funded by both the provincial government and the resident. These housing costs can eat through assets at the rate of several thousand dollars a month.

> Low interest rates. Seniors typically focus on secure income-producing investments such as guaranteed investment certificates. But rates on GICs have been miniscule in the past several years, which has been painful for many of Canada’s elderly. Higher-yielding income trusts have only partly filled the void, and these are now under attack from the federal government, which may change the tax rules and would make income trusts less lucrative. Meanwhile, inflation has continued to chip away at income.

> Health care. In their final years, most seniors have additional health-care and medical expenses. Provincial health-care programs pay for basic costs, but additional care, such
as home nursing, is often required.

University of Toronto economist David Foot, co-author of Boom, Bust and Echo, the book that awakened the public to the implications of the baby-boom generation, says Canadians spend about the same on health care as they always have. The only difference is that they spend it a few years later, when they are 82 instead of 77.

“People spend most of their health-care dollars in the last two years of their lives,” Foot says. “It doesn’t matter whether they are 65 or 75 or 85.”

If the inheritance picture looks decidedly muted for baby boomers, it’s even gloomier for the children of boomers. While some of these children will inherit money from their grandparents, anecdotal evidence suggests they will not get much from their spendthrift boomer parents.

“People are waking up and starting to say: ‘I’m in my 50s and 60s. I’m vibrant now but I can’t go on forever’,” says Robert Gold, managing partner of Bennett Gold Chartered Accountants in Toronto.

These boomers are looking to enjoy their money while they are in good health. That may mean spending more money on travel, or perhaps building retirement homes.
However they go about living life large, the net result could easily be a smaller
inheritance for the next generation. IE