DO YOU UNDERSTAND?

Are we putting enough money aside and hoping that the money will be there when we need it?

Is there an art/science behind the investment world?

Hopefully the information below helps you understand what each of the areas discussed are and how they work. If you have an investment portfolio then you most likely fall under the following categories below.

If you don’t have an investment portfolio as of yet then what are you waiting for?

You will find having an investment in your own financial future makes perfect wealth sense

When advisors discuss investing with clients, they are primarily talking about using the different markets to invest surplus cash for long-term growth of wealth. There are three areas of investment that most individual investors will fall under when investing for the future. 

The trading of stocks, bonds, and mutual funds, impacts the financial wealth of the world economy.

Examples of how capital markets work can be traced back to early hierarchy of our civilization. The capital markets were developed as a way for buyers to buy liquidity. In Western Europe, where many of our ideas of modern finance began, those early buyers were usually monarchs or members of the nobility, raising capital to finance armies and navies to conquer or defend territories of their own. Many devices and markets were used to raise capital, but the two primary methods that have evolved into modern times are the bond and stock markets. 

So, what are stocks and bonds?

Bonds

Bonds are considered debt. The bond issuer borrows by selling a bond, promising the buyer regular interest payments and then repayment of the principal (amount paid) at maturity (a set date in the future). If a company wants to borrow money, it could just go to one lender and borrow the money. But if the company wants to borrow a large sum, it may be difficult to find any one investor with enough capital and the inclination to make such a large loan, thus taking all the risk as the only lender. In this case the company may need to find a lot of small lenders who will each lend a little money, and this can be done through selling of bonds.

A bond is a formal contract to repay borrowed money with interest (often referred to as the coupon) at fixed intervals. Corporations and (e.g., federal, municipal, and foreign) governments borrow by issuing bonds. The interest rate on the bond may be a fixed interest rate or a floating interest rate that changes as underlying interest rates, rates on debt of comparable companies continually change. (Underlying interest rates include the prime rate that banks charge their most trustworthy borrowers and the target rates set by the Governments Financial Benchmark or The Federal Bank.)

There are many features of bonds other than principal and interest, but this is the easiest explanation that at least shows how they work. Because of the diversity and flexibility of bond features, the bond markets are not as transparent as the stock markets; that is, the relationship between the bond and its price is harder to determine

Stocks

Stocks are shares of ownership. When you buy a share of stock, you buy a share of the corporation. The size of your share of the corporation is proportional to the size of your stock holding. Since corporations exist to create profit for the owners, when you buy a share of the corporation, you buy a share of its future profits. You are sharing in the fortunes of the company.

Unlike bonds, however, shares do not promise you any returns at all. If the company does create a profit, some of that profit may be paid out to owners as a dividend, usually in cash but sometimes in additional shares of stock. The company may pay no dividend at all, however, in which case the value of your shares should rise as the company’s profits rise. But even if the company is profitable, the value of its shares may not rise, for a variety of reasons having to do more with the markets or the larger economy than with the company itself. Likewise, when you invest in stocks, you share the company’s losses, which may decrease the value of your shares.

Corporations issue shares to raise capital. When shares are issued and traded on a public market such as a stock exchange, the corporation is “publicly traded.” 

Only members of an exchange may trade on the exchange, so to buy or sell stocks you must go through a broker who is a member of the exchange. Money Managers – who work for big conglomerates brokers will manage your account and will offer varying levels of advice and access to research for a commissionable fee. Most members of the exchange have Web-based trading systems which can be easily accessed by the public so that you can buy and sell at a fraction of the cost of working with a Money Manager these discount brokers offer minimal to no advice or research which creates the platform for minimal trading fees. 

What are Mutual Funds?

Mutual Funds, and Index Funds

A mutual fund is an investment portfolio consisting of securities that an individual investor can invest in all at once without having to buy each investment individually. The fund thus allows you to own the performance of many investments while actually buying and paying for the transaction cost of buying only one investment. Mutual funds have become popular because they can provide diverse investments with a minimum of transaction costs. In theory, they also provide good returns through the performance of professional portfolio managers.

An index fund is a mutual fund designed to mimic the performance of an index, a particular collection of stocks or bonds whose performance is tracked as an indicator of the performance of an entire class or type of security. 

Mutual funds are created and managed by mutual fund companies, by brokerages or even banks. To trade shares of a mutual fund you must have an account with the company, brokerage, or bank. Mutual funds are a large component of individual retirement accounts and of defined contribution plans.

When corporations or governments need financing, they invent ways to entice investors and promise them a return. The last thirty years has seen an explosion in financial engineering, the innovation of new financial instruments through mathematical pricing models. This explosion has coincided with the ever-expanding powers of the computer, allowing professional investors to run the millions of calculations involved in sophisticated pricing models. 

The Internet also gives amateur investors instantaneous access to information and accounts.

So, in conclusion the ways that capital can be bought and sold is limited only by the imagination below you will find a brief recap of how each investment works in its simplest form. We hope this has made investing easier to understand. Again, this is the very basic understanding of investing as there are more complex explanations to each of the following.

• Bonds are
  • a way to raise capital through borrowing, used by corporations and governments;
  • an investment for the bondholder that creates return through regular, fixed or floating interest payments on the debt and the repayment of principal at maturity;
• Stocks are
  • a way to raise capital through selling ownership or equity;
  • an investment for shareholders that creates return through the distribution of corporate profits as dividends or through gains (losses) in corporate value;
  • traded on stock exchanges through member brokers.
• Mutual funds are portfolios of investments designed to achieve maximum diversification with minimal cost.
  • An index fund is a mutual fund designed to replicate the performance of an asset class or selection of investments listed on an index.
  • An exchange-traded fund is a mutual fund whose shares are traded on an exchange.

HOW IS THIS POSSIBLE?

Life insurance can be a core strategy for retirement savings…

Did you know if you are legally blind in the USofA you can carry a concealed weapon?  Apparently in 2001, a legally blind man obtained a permit in North Dakota to carry a concealed weapon. He has managed to satisfy the state’s shooting test by hitting a human-sized target 10 times out of 10 from a distance of 21 feet, or 6.4 metres. Even though this man is legally blind, he hits the target every time – once someone points him in the right direction.

Retirement planning can be like this if you don’t have a plan. Many people can’t see how much income or savings they’ll need to make ends meet in retirement, but if someone points them in the right direction, they might just have enough wealth sense to hit the target.

The talk about life insurance as one of those core strategies in retirement is something that has been met with a lot of resistance in the past. I truly believe this is more of not understanding the process than not believing this additional asset can be of value in the future. 

BEHIND THE SCENES

A little while ago, a client of mine, was concerned about how he was going to generate enough income in retirement. He is 46 years old, and is behind in his target goal in saving for retirement. He’s a business owner and had been putting most of his savings into his business to expand it (which is a common business scenario). He has a small retirement portfolio but because of the way he has invested in his business over the last few years he has not been able to reap the benefits of this current market run for his retirement. He is now in a position where he feels comfortable with where the business is and wants to focus on his future retirement needs. He has decided it is time to put a plan in motion that will help him meet his retirement goals.

…So, as we started to create a succession/retirement plan we discovered there was a need for insurance. While we talked about adding insurance to his portfolio, we also discussed the advantage of the investment vehicle within the insurance policy that would help him create some of the cash flow he and his wife will need in the future – a figure which they believe to be about $100,000 annually after taxes. By implementing an insurance policy as one of the core funding strategy some of the needed funds each year could be provided for them as part of their retirement plan on a tax-free basis. Because he is behind in his retirement planning portfolio, we wanted to create an accelerated plan for retirement that is a reasonably safe platform and not subject to market volatility.  As an added bonus this plan also covers off an insurance shortfall which was discovered in our initial review, should he pre decease his wife.

THE UNDERSTANDING

How does this actually work? 

We talked about the life insurance product and it’s features and set out some projections. Since it was determined there was an insurance need and at the age of 46, he purchased a whole life insurance policy with an initial face amount of $2,000,000. The premiums will be paid on a monthly basis and he wanted the policy to be fully paid up in 10 years. 

Each dollar of premium that he pays is used in two ways: Covering the Cost of insurance itself and making a deposit into a dividend fund inside the policy. That accumulating fund is known as the “cash value” of policy.

Starting at 65, he is going to receive $50,000 annually from this policy. 

How? 

He’s going to borrow $4167 from his policy each month tax-free ($50,000 annually) to use in retirement, by using the policy as collateral (which many banks are glad to do; they’ll typically lend up to 90 per cent of the cash value). This is not considered taxable income because loan proceeds are considered tax-free. There will be an annual interest charge on the borrowing of the money, which he plans to capitalize and will be paid out in full upon death (meaning – he won’t pay the interest annually, but the interest will be added to the loan balance from his policy over the years).

If he passes away at age 90 LE (life expectancy), the total insurance benefit to be paid out is projected to be $3,801,847. This money will be used to pay off the capitalized loan to the bank via his policy which is projected to be $2,032,295 at age 90. There will still be about $575,998 left over in his estate for his heirs and he and his wife would have received $1,250,000 tax-free during his retirement.

He plans to meet the balance of his cash needs in retirement using other strategies that were presented. You don’t have to structure your insurance plan exactly like he has. You could borrow less, or not borrow at all. You could reduce your premiums by stretching them out over a period longer than 10 years, or borrow money to pay your premiums (which is another strategy for another discussion). You can choose to cover whatever portion of your cash needs in retirement that suits you. 

The end result of this is the client now has a plan in place that will help him achieve his retirement goal.

As always speak to an adviser about your various options and create a plan that works to suit your needs.

HOW MUCH?

“How much money do I need for retirement?”

A simple question asked by many clients of their advisors. The response should be… “What life style do you want to lead in retirement?” 

The answer from said client… should be…

“I want to live in the lifestyle that I have become accustomed in my present state.”

One could say that is completely dependent on what your wants and needs are. If your wants out weigh your needs then you will need a lot of money to retire on. If your needs are more important than wants you will need less retirement income. How much money you need to save for retirement is in part a function of how much money you will spend – and for how long.

So, what are the parameters for determining your retirement budget and the lifestyle you plan to lead.

Well according to Statistics Canada, the average Canadian household spent $68,980 in 2019 on consumer goods, an increase of 9.5% from 2016. Since nobody really lives in an “average” Canadian household and retirees have unique spending differences from the general population. Then let’s look at those numbers, the average household spending for the retirement population would then change to between $45,725 and $87,459, although spending net of income tax, insurance and pension contributions was only $36,339 and $65,086. These latter figures may be a better gauge of average spending on goods and services for the retired population.

Do we believe these numbers? 

Not Really!

Since Statistics Canada relies on the population to report their numbers so they can be compiled and published, I would suggest on that the average spending on goods and services for the retired population is likely on the low side. It’s no doubt though that many of Canada’s retired population will be well above these averages. As many have now entered retirement with a mortgages and other big-ticket expenses that were not of past retirees.

Trends during retirement

We will get to life expectancy shortly but let’s say you retire at age 65 and life expectancy is 90… then you have 9125 days to play with. 

What will you do with them?

Let’s see… I want to see the world, I want to golf more, I will volunteer, I will spend time with friends, look after grandchildren, go fishing, hiking, gardening, play cards with friends, join fitness groups, etc. These are things we hear all the time. They are things that generally happen.

So, let’s do the math… 

If you go away for one month a year travelling for five years that equals 180 days. If you look after the grandkids one day a week five years that equals 260 days and so on. With all the other activities our wish list we could keep yourselves very busy for 1825 days or five years. Yes, you will be very busy for the first five years guaranteed. You will also spend more money during that time because every day is like a weekend. Since you don’t have to work during the week you can spend money every day other than your days off. All of a sudden, this retirement business is expensive. You have to understand that you are living on a fixed income moving forward as the money you have saved is all you will have.

But not to worry at some point during retirement you start to slow down and move a lot slower. You realize that you are busier now in retirement than you were when you were part of the work force. So, you give up the volunteer work, the grand kids tend not to need us as much as they age, and travel becomes a permanent residence in a warmer climate for half the year. The next 1825 days we see the need to rest and this is when the savings begin. We have done it all… 

We made it! Age 75 – 3650 days (10 years) into retirement we figured out that it’s time to rest – now what.

Time will tell and that will be based on health.

Things to consider…

Real estate

Real estate is a huge consideration when it comes to retirement spending planning. There are a couple of reasons.

If you own an older home, obviously part of your budgeting needs to include ongoing repairs and possibly renovations. Whether you like it or not, large capital costs will factor into your retirement spending particularly when you own an older home.

If you own a vacation property like a cottage or a place down south, hopefully retirement means you can spend more time enjoying these properties – if you so choose. But if you spend less time, either because the cottage is tougher to get to or maintain or you’re travelling instead of wintering in Florida, a point comes where the financial cost of maintaining a valuable, though mostly empty piece of real estate needs to be weighed against the usage. Renting a cottage or vacation home may be better financially, although capital gains tax implications and family attachment to a secondary home need to be considered before selling.

Obviously, a home downsize or a sale of a second property can also inject capital into your retirement assets and potentially allow you to scale up retirement spending.

And if you rent instead of owning your home during retirement, that makes a big difference in terms of your long-term retirement spending. Owning a home can create a safety net for funding expensive long-term care costs in your 80s and 90s that doesn’t exist if you’re a renter.

Life expectancy

We often hear about the average Canadian life expectancy, currently 79 for men and 83 for women in Canada as of 2017 according to Statistics Canada. But these ages are simply representative of the average age at death across the Canadian population. This means Canadians who die at a younger age skew life expectancy downwards as compared to the age to which a retiree is expected to live. Also, that is an old number we do know that people are living longer now than they have in the past.

For perspective in 2021, a retired husband and wife, both aged 65, have a 50% chance that at least one of the two will live to age 94 and a 25% chance that at least one will live to age 97. The life expectancy of a 65-year-old man is 89 and of a 65-year-old woman is 91.

It’s not only how much you’re going to spend in retirement that matters for retirement planning purposes, but also, for how long. An earlier retirement or a longer life expectancy will both increase how much money you need to retire and be financially independent.

Summary

Nobody is average, but everyone is looking for some perspective. Take the above with a grain of salt.

Statistics Canada data suggests that spending on goods and services was $65,086 for couples without children and $36,339 for one-person households in 2016, but this includes Canadians across all age groups. Studies suggests average retirees in 2016 spent $31,332 per year on good and services, though this excludes any housing costs beyond utilities and property taxes. It’s also a consolidation of married and single retirees, suggesting the figures should be higher for couples and lower for singles, while adjusted by both to reflect additional home ownership costs or rent.

Studies found a 16% reduction in spending as workers moved into retirement, but other global studies have been found to show more modest declines in spending.

Spending may increase in the early years of retirement, but those who live a long life may not only have more years of retirement to fund, but are also exposed to the risk of incurring long-term care costs as they age.

Retirement planning is more art than science, but at least with some reasonable sense of what to expect with your retirement spending, you can develop a long-term retirement plan. I feel it’s prudent to budget to replace 85% of your pre-retirement basic living expenses, but some people will spend more or less depending on their personalized retirement and financial goals.

HAVE YOU SEEN THIS?

Welcome to April which not only means we are one month closer to summer it also signals that filing your 2020 tax return is just around the corner. As many Canadians are preparing their tax returns for 2020. There are a number of tax credits that you can potentially claim that you may be unaware of with this year’s return. Some of these credits are listed below with an explanation, review, and why they’re worth looking at for your 2020 tax return. 

Indeed, a quick scan of the 2020 federal return shows more than 30 separate federal credit amounts, most of which are non-refundable, each valued at 15 per cent of the amounts claimed (other than the charitable donation credit, which can be worth 29 per cent or more, depending on how much you gave and how high your income was in 2020). 

Hopefully within the 10 credits listed below you can find an extra 15% or more of credit for your 2020 return. 

• Enhanced basic personal amount (Line 30000) — Value: up to $1,984

New for the 2020 return is the enhanced basic personal amount (BPA), which is the mechanism used to ensure that no tax is paid on a certain amount of basic income. For 2020, the enhanced federal BPA is $13,229, but the increase in the BPA doesn’t apply to everyone as it’s reduced, on a straight-line basis, for taxpayers with net incomes above $150,473 until it has been fully phased out once a taxpayer’s income is over $214,368.

• Digital news subscription expenses (Line 31350) — Value: up to $75

If you consume your news from a paid digital newspaper app or website, then you may be able to claim the brand-new digital news subscription credit worth 15 per cent on up to $500 for amounts you paid in 2020 for qualifying subscription expenses. You must have paid the amounts to a qualified Canadian journalism organization for a digital news subscription with content that is primarily original news.

If your subscription includes both print copies of the paper as well as online digital access, only the cost of a stand-alone digital subscription (or a comparable one) is an eligible expense. If there’s no stand-alone or comparable subscription, then you can only claim 50 per cent of the cost as an eligible expense.

• Canada employment amount (Line 31260) — Value: up to $187

If you’re an employee, you can claim a 15 per cent non-refundable federal credit on the lesser of $1,245 and your total employment income for 2020. The purpose of this credit is to give employees a break on what it costs to work, recognizing expenses for things such as home computers, uniforms and supplies that are not reimbursed by their employers. Note that this is in addition to your ability claim home office expenses if you’ve been working from home due to COVID.

• Home buyers’ amount (Line 31270) — Value: $750

If you bought your first home in 2020?  $5,000 home buyers’ amount is a 15 per cent non-refundable federal credit on the base amount of $5,000 if you or your spouse or partner were considered a “first time home buyer,” meaning you didn’t live in another home owned by you (or your spouse or partner) in the year or in any of the four preceding calendar years.

• Home accessibility expenses (Line 31285) — Value: up to $1,500

This non-refundable credit on up to $10,000 of eligible renovation expenses is available if you’re over 65 or qualify for the disability tax credit, and you made renovations to your home last year to help you live more independently. It may also be claimed by a supporting relative on your behalf.

• Adoption expenses (Line 31300) — Value: up to $2,484

This 15 per cent non-refundable credit is available on up to $16,563 of eligible adoption expenses for each adopted child who is under 18 years of age at the time the adoption order is issued or recognized by a government in Canada. Eligible adoption expenses include: fees paid to an adoption agency licensed by a provincial or territorial government, court costs and legal and administrative expenses related to an adoption order for the child, reasonable and necessary travel and living expenses of the child and the adoptive parents, among other fees.

• Pension income (Line 31400) — Value: up to $300

The 15 per cent federal non-refundable credit for up to $2,000 of eligible pension income has never been indexed to inflation and has remained at this level since 2007. For individuals under age 65, eligible pension income typically includes only lifetime annuity payments under a registered pension plan (RPP). For those who are 65 years and over, eligible pension income also includes lifetime annuity payments under a registered retirement savings plan (RRSP), RPP or a deferred profit-sharing plan, and any payments out of a registered retirement income fund (RRIF).

• Interest on student loans (Line 31900) — Value: variable

You can claim a 15 per cent non-refundable credit for interest that you (or a person related to you) paid on your student loan in 2020 or the preceding five years. To qualify, the loan must have been received under the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Apprentice Loans Act or provincial or territorial government laws similar to the acts above.

• Medical expense tax credit (Line 33200) — Value: variable

For the 2020 tax year, valid medical expenses for you, your spouse or common-law partner, and your dependent children who were under 18 in 2020 qualify for a 15 per cent federal credit, to the extent that they exceed the lesser of three per cent of your net income or $2,397. Group health insurance premiums you pay for your workplace medical or dental plan that are not covered by your employer also qualify for this credit.

• Eligible educator school supply tax credit (Line 46900) — Value: up to $150

I hope these new found deductions can help lower the tax you will pay on your 2020 income. As always, we are just providing information and are not tax experts. You should always consult and expert in the field to make sure you are eligible for any of these deduction above. This year will be a particularly unique year for the government and the way they review filed returns as there have been so many social enhancements granted during this pandemic.

WHAT DO YOU KNOW?

As I wonder what to write about this week, I am reminded by my sweet 17-year-old that I am too old to know anything. This comes about as she is learning to drive my car, now I guess after 40 years of driving my 17-year-old who yearns to be free is in that stage of Dads don’t know anything. This may be correct in today’s world of teenagers but I know one thing I own the car and control the keys.

The interesting fact about raising two girls is eventually I do know something and become the smartest person in the room as long as no one else is around. My 20-year-old went through a similar stage and now that she has bills to pay, she understands that the money tree in the house is not always fruitful. There was a steep learning curve but we managed to get through this together. I had to sit her down and draw diagrams as this generation works well with pictures since they are on their phone all the time. 

Let me set this up so you understand how I got to be the smartest in the room again.  

I gave my daughter her very own credit card. Yes, I did – Bad Idea not really in a society where cash is a thing of the past and everything you do requires a good credit rating. Teaching your child about good credit management before, they go to University and move out into the real world is a key lesson in Financial Wealth Sense.

The beginning of the lesson was harsh and a steep learning curve for all involved, as I paid the credit card bill monthly. The credit card was meant to be for gas and emergencies. She understood the gas part well but the emergencies quickly became Starbucks, Booster Juice, Boston Pizza and all other things that she had to have. In the beginning I did not mind her using the card at will as I knew what she was spending it on as the app on my phone notified me each time a transaction was made. Like I said I paid the bill monthly so she would continue down the path of having good credit and to be totally honest she did not have a job because of school and sports commitments. In the beginning it was fine but then the very fine line became easier to cross, she was starting to spend money at will. The learning curve was a $1,500 visa bill from various spends during a one-month shopping spree. Again, I knew it was happening and I let her do it to teach the lesson. Wait for it!

Once the month was over and the final bill was in, I filled up the car with gas gave her a gas card for $150 and put $250 in her bank account for extras. Because it was meant as a lesson not a punishment, I said this needs to last you six weeks, you now must choose how you want to spend your money and to clarify I did take the credit card away for the same six weeks.  Of course, she did not understand why and in fairness I never explained how this would play out. I already knew exactly what would happen given the parameters I set out for her when I gave her the credit card. She had no idea that she had spent that much in a month as her exact words where, “It was easy all I had to do was tap tap!” I also explained that it was nice that you wanted to pay for all your friends’ coffees, and dinners but that would have to wait until you had your own money to be that generous.

This is where the diagrams come in to play because remember this was about teaching a lesson not a punishment. With pictures and a lap top, I showed her how credit ratings work and why she needs a good credit rating in the future so she can buy a car, a house, or even apply for credit. I then explained that she had no money coming in (other than birthday, holiday money from generous relatives, and odd jobs) but she was spending as if she was gainfully employed.  

I then asked the $1,500 question. 

How will you pay this bill?  

Of course, there was a blank stare followed by the words, “I don’t know.”  This is where many individuals end up making monthly payments on consumer spending for money that they did not have in the first place and it’s too easy to get caught up in the cycle. 

I drew this diagram below to help explain the process of money and her future lifestyle: Three Kinds of Money

• 

Lifestyle: In its simplistic form are the things that we can afford to do and have while we enjoy the merits of living for today and days to come.

Accumulation: Is the process of collecting assets, through purchase or by obtaining them, an activity of collecting for a particular purpose in the future.

Transferred: This is money that is being directed away from your Lifestyle and Accumulation of funds that will not help you lead life the way you want in the future. This is where Credit Cards, and Debt usually reside!

So now that you understand the three kinds of money above:

Which would you least want to change moving forward?

If you said Lifestyle, you would be correct. No one wants to change the way they live on a daily basis. So, we cannot take away from your LifeStyle.

Which would you want change the most?

If you said Accumulation, you would be correct. We want this to be the biggest piece of the circle moving forward because our accumulation will help us keep the Lifestyle to which we have become accustomed to in the future.

So, by default that leaves us with Transferred, we want this to be the smallest piece of the circle in our future because this is money that we are losing unknowingly or unwillingly through Credit Cards, Debt, Interest and Monthly Payments.

“Does all this make sense?” I asked.

She said Yes! She now understands the process of money and it’s transactions, and for the next six weeks she managed her funds, she was proud of the fact that she made the money last although the car was running on fumes she did have money left in her spending account. 

She still has the credit card today but only uses it when it’s absolutely needed, she has managed to find a great summer job while in university and has made a fair amount of money. She has started an investment portfolio (Accumulation), she has also created a budget plan for herself and has managed to stay within her limits (Lifestyle). I have only had to provided some support for bigger ticket expenses that happen from time to time but I always attach a limit to those purchases to keep her in check (these would be the Transferred expenses). If I did not help there would be monthly payments and interest since they were not in the budget. To be fair she does try to contribute some money to these purchases. When she graduates and finds that dream job I will teach her the value of an Emergency Fund to compensate for things that happen outside of her budget.

My point here is simple we have to teach our children how to be financially stable, we must teach them how to live for today and be set for the future because if we don’t, they will find themselves in a cycle of never-ending debt with bad credit. It’s easy to do when you don’t understand the value of your needs versus wants or financial well-being.

I guess the moral of this story is that I may not always be the smartest one in the room at all times but the one time I need to be I will be.

WHAT IF I DON’T?

As we make our way through the cycle of life, we always find a way to put off the uncomfortable things for another day. We have been taught to be prepared whether it was for the unexpected or expected we should always be prepared. If only life were that simple!

Since Covid-19 planning has never been more top of mind for Canadians, but research shows that 57% of Canadians don’t have a will. My clients will attest to this as it is one of the first questions I ask in my interview process. Sadly, I concur only half of my client base had Wills in place before we met.

Estate planning typically isn’t at the top of our to-do lists because it can be complex, expensive, and – let’s face it – who is worried about dying while living. 

If you don’t want to see a lawyer about creating a will, Online wills are a thing, as are Handwritten wills.

Example of a hand written will…

“In case I die in I leave all my worldly possessions to the guy next door.” signed: The Neighbour

Seems simple enough – not to mention lucky guy next door!

“In case I die in I leave all my worldly possessions to the guy next door.” signed: Seems simple enough – not to mention lucky guy next door!

If you were to pass tomorrow and you left this handwritten statement to be found. Then the statement above would be upheld as a valid will, since holograph wills (handwritten wills) are legal in all provinces except BC and PEI. As long as a will is written entirely in your handwriting and signed by you, it’s legally valid. Please understand if you are writing your own will that it likely won’t be as comprehensive as a will created online or with a lawyer.  But in the end a will isn’t just about who gets your assets, it’s also about appointing an executor of your estate and guardians for any minor children. 

Let’s say you have an estate worth 1 million dollars, and you don’t have a spouse or any heirs. Typically, in this situation you may pass things to a friends, acquaintances, universities, alumni associations or charities to name a few. People without heirs will get creative in how they pass on their assets. It’s much more common to leave a gift to charity, friends, or organizations if you don’t have children. In fact, leaving a gift to charity in your will is one of the ways you can have a positive impact when you’re gone not to mention the tax break received by the estate – you can either leave a bequest (a specific item/amount of money), or a portion of your estate to an organization you care about.

The validity of the will can be challenged, and a judge will always look for testamentary intention.

What did the testator (the will-maker) actually intend? It’s important to be clear with your wishes, and it’s equally as important to say what you DON’T want as to what you do – for example if you want to ensure someone is disinherited or cut out of your will, stating that in the will and providing any additional details can ensure your wishes hold up after you’re gone.

Planning your estate and communicating your wishes as appropriate can protect your estate and, as importantly, allow your heirs the opportunity to prepare themselves for their changed circumstances. The “do nothing” option is not in the best interests of your family, your business or other relationships. As the world we live in becomes increasingly characterized by legal action and government intervention, estate planning is something everyone should do. 

So, the moral of the story is unless you want to work for the government in death create a Last Will of Testament that clearly state your intentions upon death. Whether you are leaving your processions to your heirs or creating a legacy the value of a will is not as complex as you believe it to be and also makes for great wealth-sense.

SO, WHAT HAPPENS NEXT?

We have all received one of a couple phone calls, where your jaw drops and your heart sinks. The phone rings and it sounds something like this…

“Hi! how are you?” 

“I’m doing well, you?” 

“Well, I just wanted to let you know that we are getting a divorce.” 

The words spring out of the phone loud and clear. The reaction to this news is generally silence followed by shock and then the realization that all is not lost.  But how do you explain this to the person on the other end of the phone. You don’t you listen and console them in whatever way you can.

There will always be that one person who has to say it out loud.

“I knew they were not the one for you!” 

Of course, that person was the first one at the bar on the wedding day celebrating with a drink in one hand and giving high fives to others gathered around on how this is the best wedding ever! Yes, but they knew…

With the Covid-19 pandemic surpassing it’s one-year anniversary we unfortunately have heard this conversation a lot more than we care to explain. It has been a mentally tough year for everyone and if there were cracks in the amour before this pandemic it has only made them more obvious. It is never easy to say goodbye to a loved one but in some cases the love has gone and the ensuing fight to the death has begun. If children are involved always be considerate of the children, they must remain the sole focus of this process. If not for you then make sure you do the right thing for the children, they are not to be used to better one’s position in this fight or exposed to the problems within as they never asked to be part of the problem. They are the future of our society and deserve your best when it comes to their well-being.

Let’s be honest most of the time divorce is for the best of all involved. There is value in moving on with one’s life both mentally and physically. In some cases, couples get divorced and remain friends and in other cases not so much. Hindsight will always be 20/20, but just because it did not work out this time does not mean it never will. As we move forward we would be hard pressed to say that society will never face another year like 2020, since the world had already experienced a similar circumstance in 1917. As our world is rapidly changing one never knows what is in store for us in the future or what our timeline is for another world stopping event. 2020, was taxing on all of us and our relationships have been pushed to their limits, for those that have survived with your relationship in tact congratulations and carry on. To those that have not survived consider it a reset, a time to move forward and seek what it is you are looking for in the solace of happiness.

So, what happens next?

Unfortunately, there is never a plan in place for this unforeseen circumstance, but because it has been documented many time before the steps needed to resolve this situation are well known. As always, we ask that you seek expert advice or consul when dealing with divorce. The following is the process which will help you finalize these proceedings so you can find that new beginning. We are not experts in this space as we leave that to the lawyers just remember there has been a plan set in place regarding your future. With that in mind we have put most of the tough questions behind you because we have looked at your future financial plan in detail.

Assets and Debts

A couple who intends to divorce must add up all their assets and subtract all their debts in order to arrive at a list of all assets and debts. The assets, known as “family property,” include everything the couple owned separately or together as of the separation date, regardless of who the property belongs to. This is important, since regardless of whose name is on the property deed, when a couple divorces all family property is split equally between the spouses unless an agreement or the courts say otherwise.

What is considered family property?

The house

Other land, houses, or condos

Bank accounts

Insurance policies

Investments

RRSPs

Pensions

Business interests

Contact the professionals you’ll need to consult

While many people will seek out a lawyer to initiate their separation and to finalize their divorce, other professionals may be required in the process, and in many cases, you will have these professionals already on your team and it’s best to involve them sooner, rather than later: 

A Real Estate Agent

Accountant (or tax specialist)

Financial Advisor

Assess the value of all property

Now that you’ve got your list of assets and debts, and your professionals in place, it’s time to figure out what everything is worth and what is owed. This is often the hardest part.

Finally, you need to list all common debt as well as personal debt. Debt brought into the marriage does not become the responsibility of the other person. However, debt assumed during the marriage is split equally, just like all marital property. Debt is an area that generally catches one of the spouses by surprise all of the time. Regardless of knowing or not you are now both responsible to reconcile the debt accumulated while together.

What happens to real estate during a divorce?

Divorce is a time of emotional and financial turmoil, which is hard enough—but then you also have to tackle tough questions about who owns what. Each spouse is entitled to half of the equity that’s accumulated during the marriage in the property that was used as the family home. If both spouses have agreed to sell the marital home and split the proceeds, then, typically, both are responsible for any costs and expenses associated with this process. Each will pay for half the renovations or upgrades required to put the home on the market; each will pay half the Realtor’s commissions and any other costs. The good news is that many of these costs can be deducted from the final sale price of the home, meaning that relatively few expenses will be out-of-pocket costs prior to the sale of the home. 

Negotiate

Now that you’ve got the numbers worked out, it’s time to find the middle ground. Whether working with a mediator or a lawyer, or just sitting and talking with your soon-to-be ex, you should expect a process of negotiation. Keep in mind, as well, that while the vast majority of divorces result in an equal division of assets and debts, there are circumstances when the court will be called upon to divide family property and family debt unequally.

If you can remember a couple of things while proceeding through this process it might help to complete the task at hand in a timely and efficient manner. At one point this was the person who you loved and planned on being with for the rest of your life. Your future is not set in stone you have the ability to create the life you want to lead and only you can stand in your own way of success.

WHY IS THERE A BIG DEBATE BETWEEN RRSP’s & TFSA’s?

In 2009, the Tax-Free Savings Account (TFSA) was introduced to Canadians. Since that time, TFSA’s have grown in popularity and as a result, there are lots of debates over which is better the RRSP or the TFSA. 

What does each investment do for you Immediately?

RRSPs give you an immediate tax deduction…

The most attractive feature of the RRSP is the immediate tax savings you get when you put money into the RRSP.  The value of this tax break is determined by the marginal tax rate that you are in.  This short-term tax gain is offset by future taxes when you take the money out of your RRSP.  When you take money out, you will pay tax based on your marginal tax rate at the time you take the money out (which should be a lower tax rate than at the time you originally put the money in).  Any growth inside the RRSP, grows tax deferred but eventually there will be taxes paid when withdrawn from the RRSP.

Tax Free Savings Accounts give you Tax Free growth…

Unlike the RRSP, there is no immediate tax deduction when you put money into the TFSA but there is no tax paid when you take the money out either. The appeal of the TFSA is actually the TAX-FREE growth on your investments within your TFSA portfolio. You don’t pay tax on any of the growth inside a TFSA.  That is its best feature.

Below we have the reasons…

What do you need this money for?

If you need to spend the money in the near future for a car, a kitchen renovation, or maybe for a vacation, the TFSA is a better option because using the money does not trigger tax.  However, putting money into a TFSA and then taking out on a regular basis kind of defeats the real benefit of the TFSA which is its long-term TAX-FREE growth. If the Tax-Free growth is the goal, then you might be better off using a high interest savings account instead of a TFSA as the savings vehicle.

Emergency Funds…

Most people will agree that a TFSA, conceptually, can be a great place for emergency money.  However, an emergency fund should not only be readily accessible but also a safe investment.  Putting safe investments in place with lower returns to remove market volatility concerns will also negate the true benefit of the Tax-Free growth.  If you want your TFSA to be a safe haven for your investment then you will probably get better results from a High Interest Savings account for your emergency money with zero risk involved.

Saving for your first home or for education…

While the TFSA and the NON-RSP (non-registered savings plan) seem like logical ways to save for a home or for education because they are not taxed, your RRSP does offer two opportunities to withdraw money through the First-Time Home Buyers Plan and the Lifelong Learning Plan. This requires you to pay back the loan overtime giving you a chance to pay yourself back in the long run. The only thing lost is the gain on the money while it is not in your portfolio.

There is no right or wrong answer…

One of the problems with the outcome of the TFSA or RRSP debate is it seems like people have to make the choice between one or the other which really is not the case. Both the TFSA and the RRSP have merits and a place in your financial plan.  

Why can’t you have both?

Both the TFSA and the RRSP have strong financial benefits that are good for you. One way to invest in both the RRSP and the TFSA is to invest in the RRSP first and then use the tax refund to invest into the TFSA.  

An example:

You could invested $5,000 into an RRSP, or you could invest the entire $5,000 into the TFSA.

But should you?

What should you do?

Well if you invest $5,000 to the RRSP this will generate a tax savings based on your marginal tax rate. 

Let’s say the marginal tax rate is 30% (this marginal tax rate has been chosen for ease of calculation), that is equal to a tax savings of $1,500. Now take the $1,500 of tax savings and invest that return into a TFSA.

So now you have $6,500 invested into your portfolio from your original $5,000 that you invested in your RRSP. Most people in reality just spend the tax savings on a trip or something they want which is normal when you find free money. But why not take advantage of that free money to increase your future investment portfolio.

So, which is better? 

TFSA investments which grow TAX FREE, or RRSP investments which grow TAX DEFERRED. They both have their own merits in your portfolio and it depends on what you need out of each. Tax savings today which is important to most at tax time, or if tax savings is not a concern then would you would want tax-free growth for the future. Now you can see why there is a debate.

Why does one have to be better than the other?

Why can’t you have both? Well you can but you have understand what each represents in your investment portfolio.

The decision is yours to make choosing one or the other or even both make great wealth sense where your investment portfolio is concerned. Is the debate over? No! But now you have an understanding of the merits of each investment and how they work…

As always seek professional advice when creating a plan for the future. The value found in the advice given could provide a bigger pot of gold at the end of the rainbow.

HOW MUCH MONEY SHOULD YOU BE SAVING?

If you ask yourself that question your answer should have been as much as possible, of course. But with so many debits coming out of your bank account saving up for your future is a daunting task. How can you prioritize your options, without knowing the importance of saving and investing your pay check or any extra cash, as you work towards reaching your financial goals.

As we have discussed in previous articles the answer to the question above is only a simple one if you implement and follow a strategic plan… Here is a look at things you should be doing when you start thinking about saving.

Pay down your credit card and other high-interest debt first

The average Canadian household carries a credit card balance of nearly $8,600 with interest rates that can be as high as 21 percent. Be sure to make minimum payments on all accounts to avoid accumulating more fees. The next step is to work on paying down your consumer debt from the highest-interest accounts to the lowest. Use any extra cash to pay down your credit card balances or any other loans, prioritizing those with high interest rates. Paying down high interest consumer debt will allow you to start saving for the future as the interest on this debt is lost potential.

Employer matching on your RRSP

When it comes to finances, there is nothing worse than leaving free money on the table. That’s why getting the most out of your employer’s RRSP match program is one of the most important “must do” strategies for your financial planning. Many employers will match your contributions up to a certain pre determined percentage of your gross pay dollar-for-dollar. Therefore you should be contributing up to the amount your employer matches because this is easy money and a winning strategy you will never regret.

Did you know that 85% of Canadians do not max their RRSP contribution…

Contribute to your RRSP

We’ve already covered how important it is to make the most of your employer’s RRSP matching program, but it’s also important to max out your tax-deferred RRSP contributions. For the tax year 2020, you can contribute up to $27, 230 in pre-tax dollars which will defer paying taxes on that money until you withdraw funds during retirement. That means you’ll pay less in taxes today, and depending on when you plan to retire, allow the money you invested in yourself this year time to grow. The advantages of paying yourself first have been covered in previous articles.

Contribute to your TFSA

Maxing your TFSA yearly can help save you money from taxation in the future. Your 2021 max limit is now $75,500 the benefits of a TFSA can be substantial: Your contributions grow as they would in an RRSP but the withdrawals you make in the future are tax-free. You have the same flexibility to invest in a range of investments, such as individual stocks or active management. Be careful not become a day trader on the stock market with a TFSA account as the government can change the status of your TFSA if they deem it to be a trading account. This account was set in place to be a buy and hold type of stock account – buy stocks that pay dividends and have the dividends reinvested into your portfolio. That is free money that will help you grow your portfolio.

Build up an emergency fund

2020 was a strange year that no one saw coming years earlier. You never know if or when you’ll experience a job loss, a major medical procedure, a housing emergency or other challenging life event. That’s why you should be establishing a “rainy day” fund to get you through until your next pay check. No amount of money could have been saved for what happened in 2020, but keeping cash for three months’ worth of expenses would go along way if needed.

The most efficient way to meet your long-term financial goals – retirement, university/college for your kids, or emergency fund. – is to take the short-term view of paying yourself first. Automatically funding your financial goals before your other expenses will help you adjust daily and monthly spending habits.

• Setting up RRSP or TFSA auto deposits
• Monthly RESP auto deposits
• Setting up a regular monthly transfer from your checking account, to a high interest savings account

After paying yourself first, you may find that you don’t notice the difference in income, but your investments and nest egg will be steadily growing all the while. All of which means you’ll be saving for the long term, and seeing your financial security become more stable.

A smart approach is to think of your savings plan as consisting of two separate figures: one for things you must have, the other for things it would be nice to have. The first and most important part of financial savings is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital during your retirement years.

So how much should you be saving? As much as you can afford!

WHAT DO YOU HAVE TO DO TO BECOME WEALTHY?

We often find ourselves lured by the thought that there are shortcuts to living a wealthy lifestyle. We may dream about winning the lottery, investing in the next enormous stock tip, or having that one business idea that becomes the latest hit. If only you had jumped on that stock tip that was guaranteed to make you rich. We have all been given the stock tips that will make us rich – but the only people getting rich on the tips are the people who truly know what they are doing. If getting rich is so easy, why are only 4% of the Canadian population considered rich?

What can you do right to accumulate wealth in Canada?

Wealth is not built overnight and since only one percent of our population’s wealth has been inherited. Most wealthy Canadians have built their wealth one step at a time. One of the key habits of wealthy people is their ability to create a systematic disciplined savings plan. If you want to succeed then develop a plan that pays yourself first. Put a percentage of your paycheck into a savings portfolio before any other expenses or deductions are incurred. Just think if you could save 5% – 10% of your income before expenses how much money would you have saved in a year? Continue that over a few years with the added value of compounding interest you would have created a savings portfolio with incredible growth potential.

Keep debt in check

Ever wonder what a wealthy person looks like. The typical wealthy person might not be the one that drives the nice new Mercedes, lives in the biggest house, or wears the top designer clothes. Rather, the millionaire next door is the person that has lived in the same bungalow they have lived in for the past 20 – 30 years, they may drive a nice car but it is an older well-taken care car with lower mileage. They live within their means.

Know where your money is going

Most wealthy people not only live below their means but also are very conscious of where they spend their money. If you want to become wealthy, you should develop a habit of tracking where you are spending your money every month. Budgeting can be a very intimidating word but the fact remains, it is an essential habit for wealth accumulation.

Avoid debt

Wealthy Canadians make a very conscious effort to avoid, minimize and pay off debts. It is so easy in our society to access debt. But if don’t spend money you don’t have. You will be able to build wealth with the money you do have.

Maximize income

There is a correlation between wealth and income. While this makes sense, it may not always be easy to just go out and increase your income so you can increase your wealth. Building wealth will take some effort and your wealth will be directly correlated to your situation. Wealth has a different value for everyone, for instance, if you earn $50,000 a year and you managed to put $5,000 into your savings portfolio that would be incredible. Now, what if you could earn a 6% return on investment compounding interest per year on that investment (strictly stated for illustration purposes) – that would mean over the next 8 years you would have saved just over one year’s salary. Given the same time frame and math, the same can be said for someone earning double the amount and saving $10,000 a year. It’s all relative when it comes to maximizing your savings.

Own things that appreciate

A majority of wealthy people are on their way to owning their own home. Owning your residence creates a positive net worth on your balance sheet. This intern creates a positive asset that is used when discussing wealth. Besides, having equity in your home, your newly found saving plan is also considered an appreciating asset. The next time you put your money into something, ask yourself if it is an appreciating asset or a depreciating asset.

Get professional advice

Wealthy people typically work with professionals to help them accumulate, manage and protect their wealth. This might include accountants, lawyers, and financial advisors. Although they use professional advisors, they ultimately make the final decisions themselves. If you want to become wealthy, you must seek help but understand that you are always the one to decide on when to move forward on the recommendations given.