December 21, 2013 Sections
Winnipeg Free Press - PRINT EDITION
Financing retirement is tough enough. But few life events pump up the anxiety about finishing the last leg of life while subsisting on Meow Mix more than marital strife.
Statistics Canada data show about 2,400 marriages break up every year in Manitoba. And while it's hard to make a generalized statement about the nature of them all, it's likely safe to say at least one spouse in most splits comes away less wealthy.
There's that familiar phrase: Two heads are better than one. The same thing can be said about finances.
A marriage or common-law relationship often brings together the financial wherewithal of two hearts instead of one. In divorce, that source of economic power is busted in half.
"Divorce can have a major impact because you can have a situation where people's expenses have literally doubled because now there are two households," says Christine Van Cauwenberghe, director of tax and estate planning at Investors Group in Winnipeg.
And depending on how long a couple has been together, a divorce's negative effect on retirement can often be irreversible.
"If the parties have already retired, then it's very difficult to make a big difference in terms of how much you can save," she says. "It's more likely you can't save very much at all anymore because you're in the drawdown phase of your life."
Just consider the effect on those guaranteed sources of retirement income, says Darren Quiring, a Winnipeg-based financial planner with Edward Jones.
"As a single person, you're at a disadvantage because your partner was also often bringing in OAS and CPP, and that's approximately $15,000 a year," he says.
"Over a 20-year period, your financial plan is out about $300,000."
Of course, it's better to live a little more austerely than to live in misery.
Many greying Canadians agree. The average age of divorce in Canada is on the rise. While the median age in Manitoba is the early- to mid-40s, Statistics Canada data point to "grey divorces" becoming increasingly common in Canada as boomers retire.
Splitting up isn't just tough emotionally. It turns retirement dreams upside down -- decades of planning out the window, says Tesia Brooks, a certified divorce financial analyst with Brooks Financial in Winnipeg.
"In your 50s and 60s, you're pretty close to retirement and you've done those plans together, thinking this is what your lifestyle will be like," she says.
"Now you've got to split the plan into two households and you're pushing retirement, and if there are shortfalls, someone may have to go back to work, delay retirement or have a lower standard of living than envisioned."
When a breakdown is inevitable, the first call should be to a family lawyer, Van Cauwenberghe says.
"You may be entitled to apply for support whether you were common-law or married."
Child support may no longer be an issue if the nest is empty, and spousal support is less common these days as more families have two incomes. Still, don't assume spousal support isn't on the table, Brooks says.
"Spousal support would certainly come into play when one spouse has been at home with the children and ended a career or took a long pause in that career so he or she is behind income-wise," she says.
"The support is usually to give that spouse a period of time to get back into the workforce earning money."
In other words, spousal support usually isn't indefinite.
The exception can be divorces later in life.
"When it's a 55-plus divorce, it's harder at that age to get back to being gainfully employed or equal to what the other person is doing," she says.
Support payments aside, there's still the matter of divvying up the assets fairly.
Typically, people want a 50-50 split of wealth acquired during the relationship (as well as the debts). The home, the RRSPs, the pensions, cars and all other assets are up for negotiation.
When you split, it's best to get hold of the statements for all assets immediately.
"The longer you wait, the more is at risk because you may lose out on certain things," Van Cauwenberghe says. "Even with support, if you don't file for support for two or three years, the court is going to wonder whether you actually need it because it doesn't appear there was much dire need to begin with."
Financial advice is also very beneficial because not all assets are equal, even if they appear so on the surface.
"A $300,000 house, which is subject to the principal-residence exemption and is not going to really have any tax owing on it when you sell it, will likely be worth a lot more than a $300,000 RRSP, which is 100 per cent taxable," she says.
But even then, it can be difficult to choose, Brooks says.
"If you take the house, you could be house-rich and cash-poor, not a good situation to be in," she says.
"The equity in the house can't buy you groceries."
Of course, you can still sell the home and realize a tidy tax-free profit because capital gains are exempt on a principal residence, whereas RRSPs, which can roll over from one spouse to the other tax-free in divorce, are taxable when withdrawn as income.
"The clients that are with me and struggling through a divorce, I motivate them to get the house rather than the RRSPs," Quiring says, adding they would otherwise end up paying 10, 20 or 30 per cent tax on the money when used.
But it shouldn't be a snap decision. Brooks says she typically will plan out two to three scenarios for clients, such as taking the house versus receiving the RRSPs.
"I do a financial plan that forecasts all the way into retirement to determine the potential impact of a settlement."
It's all about what's fair -- for both parties -- and while a 50-50 split is the ideal, it doesn't always happen, especially if one spouse is not up for the fight.
It's certainly understandable -- and even occasionally an advisable decision, Brooks says.
"I sometimes tell clients that they could end up spending a lot of money on lawyers," she says.
"Do you really want to spend $20,000 to gain an extra $30,000?"
The cost of advice:
Your retirement financial planner or investment adviser can provide a little bit of guidance to wade through the rough water of marital breakdown, but if you really want professional advice, you're best off with a certified divorce financial analyst (CDFA), says Darren Quiring an adviser with Edward Jones. He's an analyst himself, but he says they have training similar to certified financial planners, only more specific. The other big difference is they're fee-only. Tesia Brooks, a CDFA, says most charge an hourly rate ranging from $75 and $250 an hour.
Capital gains, adjusted cost bases, principal residence exemptions... it all sounds like Greek to you? People with little financial background often find themselves thrust into the role of household money manager. Here's a quick overview to bring you up to speed on the above terms, which are commonly heard when discussing assets' worth.
These refer to the potential profit that can be made on the increase in value of an asset such as a stock, bond or real estate property. For example, if you buy shares in a company for $10 and their value increases to $20, the capital gain is $10 if you choose to sell those shares. That realized profit is taxable, but only half of it is taxed at your marginal (top) tax rate. So if your total income earnings were $60,000 for the year, the marginal rate is 34.75 per cent. But because only half the capital gain is taxable, the tax rate on the realized stock profit is 17.38 per cent.
Principal residence exemption:
Most people will realize at least one capital gain on an investment in their lifetime, but it likely will have nothing to do with the stock market. It's their home, which generally will grow in value above what they paid for it by the time they sell. Those realized profits are capital gains. But your home is subject to the principal-residence exemption, meaning those profits are tax-free. Cabins and other properties, however, are not covered by the exemption unless you choose to designate one of them a principal residence instead of the home. This can be tricky, so it's best to seek advice from an accountant.
Adjusted cost base (ACB):
When calculating a capital gain, this can help reduce the amount of taxes owing because it factors in the cost of purchasing the asset. With real estate, other expenses such as upgrades to the property can also be added to the adjusted cost base to reduce the amount of taxes owing on the realized capital gains from the property's sale. While renovations that improve or add to the home, such as a pool or deck, can be included in the ACB, maintenance and repairs, such as a new roof or foundation work, can't be.
-- CRA website
Republished from the Winnipeg Free Press print edition January 26, 2013 B10
Updated on Saturday, January 26, 2013 at 4:34 PM CST:
changes headline, adds fact box