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How to prevent a midlife crisis from messing up a lifetime of retirement planning

NEW YORK — Say the words ‘Midlife Crisis’, and most people think of cringe-worthy scenes like graying men squiring around much-younger paramours in zippy sports cars.

Matt Welch went in a more wholesome direction: Baseball cards.

Specifically, the 46-year-old editor-in-chief of Reason magazine set out to collect every Topps-brand baseball card ever printed of his beloved Angels. It took roughly five years and $1,000, but this past New Year’s Eve, the final two cards came in the mail.

“Strange things happen to men in their 40s, and this was my midlife crisis,” says Welch, a New York City resident originally from Long Beach, California. “I hadn’t thought about baseball cards in 30 years. But then I bought one, then two, and it was so pleasurable I thought ‘Oh hell, why not?’”

A relatively harmless midlife crisis, to be sure. And one which his wife Emmanuelle Richard has given her tacit approval. “She’s said from the beginning, ‘It beats the convertible, and it beats the expensive mistress,’ “ he jokes.

But it is a crisis nonetheless, which no doubt feels very familiar to 40- or 50-somethings who feel increasingly alarmed at the passage of time. One common response: Whip out the wallet.

They got to this big empty house and said, ‘What have we done?’

Whether it’s for an extravagant vacation, a pricey hobby or a shiny new ride, the many challenges of midlife can lead us to throw off our usual financial restrictions, if only for a moment.

“People spend all this time investing in their marriages and careers and families, and then 10 or 20 years down the line, they often want to renew their enthusiasm for life,” says Dr. James Hollis, a psychoanalyst in Washington, D.C. and author of “Finding Meaning in the Second Half of Life”.

“That can lead to risky purchases. I knew one couple whose marriage was teetering on the brink, and they went out and bought a home they couldn’t afford. They got to this big empty house and said, ‘What have we done?’”

The danger is that the midlife splurge comes during a period of life when North Americans can ill afford it. After all, in their 40s and 50s, many members of the so-called ‘Sandwich Generation’ are dealing with the twin financial challenges of raising children and helping their own elderly parents.

Meanwhile, they must save for their own retirement, a task for which most Americans have fallen woefully behind. One recent Wells Fargo survey found that 41 percent of those in their 50s were saving nothing for their golden years.

FINANCIAL DANCE

That all makes for a delicate financial dance, with no room for a misstep. That’s why experts advise that those in midlife need to be extra vigilant that some big, emotional purchase doesn’t mess up a lifetime of diligent planning.

Financial planner Robert Foley of Tustin, California says the key is to recognize these midlife emotions when they occur. “It’s normal and okay to have these feelings,” says Foley, who just turned 50 himself and admits to “longing for the sports car I never had”.

Set up some roadblocks for yourself, so those emotions don’t translate into massive bills. Clearing larger purchases (over $500 and up) with your partner, for instance, can be one line of defense against overly impetuous decisions.

Also, build some smaller indulgences into your budget instead, advises Charlotte, North Carolina financial planner Michael Baker. Allow yourself a bigger-than-usual vacation, tie it to some milestone like a birthday or an anniversary, and then work towards it in anticipation.

That way, like a dieter allowing yourself an occasional dessert, you won’t go crazed with deprivation and react by going too far in the other direction.

Matt Welch’s baseball card quest was just such a minor extravagance and seems to have done the trick. At the very least, his affordable midlife crisis got him an excellent collection to show off to fellow Angels fans.

His favourite card: Bobby Grich, a “badass” second baseman with flowing locks and a gigantic ’70s mustache.

Welch’s advice for others desiring a midlife splurge? “Get the spouse’s buy-in early on,” he quips. “That’s very important.”

© Thomson Reuters 2015

To TFSA or not: Why you should think about paying down debt first

Here’s a new idea: instead of following the crowds pumping unthinking amounts of money into so-called Tax Free Savings Accounts (TFSAs), how about paying down some of your own debt?

In fact, consider completely eliminating all your debt before venturing anywhere near a TFSA. This is especially true of “bad debt” such as credit cards, consumer loans and mortgages on your principal residence. This debt is bad because your interest expense is not accompanied by a tax deduction. Examples of “good debt” include investment loans and mortgages on rental properties where your interest expense is a tax deduction.

Beware that the banks and other financial institutions would like you and your family to have lots of TFSA deposits. At the same time the banks wish you to burden yourself with loans, mortgages and outstanding credit-card debt. In reality you borrow your own money. In effect, the banks profit by renting your own money back to you.

This might not be so bad if it weren’t for the massive spread involved. Your $5,500 TFSA deposit might earn 2.5% for annual interest income of $138 on which you might have paid about $50 in taxes. That’s less than a dollar a week in taxes saved. However, an outstanding credit card balance of $5,500 costs annual interest expense of $1,100 at the 20% charged by most banks. Remember that’s an after-tax figure. To have $1,100 in your pocket to pay the credit card interest expense, you have to go to work and earn about $1,700 before income tax depending on your tax bracket. The before-tax cost of your credit card is actually about 31%. The spread.

Better no TFSA at all if it means having less bad debt. This is true of almost all debt as the spread always favours your lender.

As columnist Jane Macdougall recently rejoiced in the Weekend Post as the nation’s attention turns to financial matters (“Burn Notice: The pleasures of putting your financial feet to the fire” Jan. 3, 2015): “I called up a friend to see what she had to say about where the money goes. She couldn’t come to the phone as she was confined to bed with a severe overdraft.”

In street parlance, many bank customers are being hosed. Perfectly legal.

Elsewhere on the same day in the Financial Post (“Five ways to kick-start tax savings” Jan. 3, 2015) a bank-employed tax expert advised: “After all, there is really no reason anyone should have anything invested in a non-registered account if you haven’t maximized your cumulative TFSA contributions.”

Really really? Surely being debt-free makes for better TFSAs than non-registered investments, doesn’t it?

On the same page as the tax expert, the Family Finance feature at last made the infrequent suggestion to Harry and Priscilla of sacrificing all TFSA monies to partially crush their mortgage. (“Couple worry whether they can keep quality of life in retirement – and own a winter home in the sun” Jan. 3, 2015)

Well done.

As columnist Garry Marr outlined in three recent front page Financial Post articles (“Fat TFSAs in taxman’s crosshairs” Dec. 2, 2014, “TFSA audits raise fears of wider tax grab” Dec. 3, 2014, “Investors locked out of TFSAs under audit” Dec. 4, 2014) there can be real frustration if your TFSA makes so much money that you might not be allowed to keep your money. If you know what you’re doing or you’re really clever or you just get lucky once in a while, then you would think your TFSA is the perfect investment vehicle for you. Perhaps not in the eyes of Canada’s income tax authority.

Maybe the best thing to do (once you’re free of bad debt of course) is to invest your TFSA money in the common shares of your bank.

Spread the joy of the spread!

Christopher Cottier is an advisor at Richardson GMP, Canada’s largest independent investment dealer. The opinions expressed in this article are those of the author and readers should not assume they reflect the opinions of Richardson GMP Limited, Member Canadian Investor Protection Fund.