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July 2018

A Financial Plan for Every Stage

As life’s priorities shift make sure your financial plan keeps up.

Choosing a credit card You wouldn’t expect life at age 60 to be the same as when you’re 20. How you handle your finances won’t stay the same either.

But these days there’s more to think about. If you’re young, you’ll probably buy a home or raise a family later – perhaps much later – than your parents did. If you’re older, you could find yourself taking on new debt to help your children or bending the conventional retirement rules by electing to work past 65. More than ever it’s essential to have a comprehensive financial plan flexible enough to deal with life’s transitions, whenever they happen.

Laying the foundation

The same time you’re starting to move up the corporate ladder or getting a business off the ground, you might be buying a home, getting married or having children. While dealing with mortgage payments is likely front and centre, it’s important not to lose sight of other decisions which could have a major long-term impact on your wealth.

Take investing. When you have a lengthy investment horizon you can afford to be more aggressive with your investment choices with the aim of achieving superior returns. With decades to save for retirement, regularly putting away even a few dollars can build to a sizeable sum. In general, your portfolio should strongly favour equities over bonds, while retaining a portion in cash and stable investments like term deposits (GICs) for emergencies and meeting short-term goals. At this stage market corrections can be positive; they present a golden opportunity to add to your portfolio at lower prices.

If you’re early in your career and your income’s modest, think about first turning to a TFSA to save rather than an RRSP. That way you’re able to carry forward your RRSP contribution room to years when you’re bound to have more income and your tax deduction from contributing will be larger.

If you have children, take advantage of an RESP and the Canada Education Savings Grant (CESG) as early as possible to fund your children’s higher education. The basic CESG - think of it as free money from the government - equals 20 cents for each dollar you contribute to a maximum of $500 annually per beneficiary ($7,200 lifetime limit). That’s like enjoying an immediate 20% return on investment. There's another grant just for B.C. residents, the B.C. Training and Education Savings Grant (BCTESG), that is designed to augment the RESP and will provide another $1,200 towards your child's education savings.

It’s never too early to begin estate planning. At a minimum, create a will, an enduring power of attorney and representation agreement so your chosen representative(s) can make legal, financial and health-related decisions on your behalf if you’re no longer capable due to incapacity.

Your human capital – the ability to earn a living – is your greatest asset during these years. If you can’t work for an extended period because of illness or injury, the financial impact can be devastating. That’s why disability insurance is a must.

Life insurance should be a priority if you carry debt or have anyone who’s lifestyle and financial security are reliant on your income. Even if you don’t yet have many financial obligations or dependants, a life policy is typically less expensive and easier to qualify for while you’re young and healthy. Don’t assume your employer’s group insurance coverage is enough.

Accumulating wealth

Odds are by the time you’re well-established in your career you’ll be earning more than ever. If you’ve been diligent about paying down your mortgage and other debt, you’ll start finding yourself with extra cash at the end of the month. But there’s also the possibility you’ll face new challenges, whether it’s balancing raising kids and helping aging parents, or navigating divorce or remarriage.

With years to go until retirement you can still emphasize growth-oriented investments. Check your retirement plan’s progress and determine if you’re on course to achieving your goals. If you’re falling short, consider directing more dollars to long term savings or tilting your asset allocation further toward equities to boost long term growth potential.

As your net worth rises so does the need for smarter tax planning. You’re probably paying a lot more income tax than a few years earlier, so talk to your advisor about how you can save through strategies like income splitting, utilizing unused RRSP and TFSA room and claiming all the tax credits available to you.

Once you have enough cash flow to build a non-registered portfolio, pay attention to how your assets are organized for tax efficiency. For example, it can make sense to leave eligible Canadian dividend producing investments outside a tax shelter to benefit from the dividend tax credit. If you’re already routinely maximizing your RRSP and TFSA contributions, ask your advisor to explain how permanent life insurance can deliver additional tax-saving opportunities.

What will your retirement look like?

Whether you’re age 55, 75, or somewhere in between, there comes a point when your vision of retirement begins to take serious shape.

Before you leave a steady paycheque make sure you can afford to take the leap. Get a clear view of your future income and expenses. Knowing how much money you’ll receive from guaranteed sources like a company pension, CPP and OAS will help you figure out just how large your own pot of savings needs to be. Remember, you don’t have to collect CPP at age 65. You can settle for a reduced benefit and collect as early as 60, or, be rewarded with an enhanced payment by waiting until after you’re 65. Assess how moves like downsizing your residence or gifting funds to adult children for a home purchase might change your financial outlook.

Your investment priorities should now start shifting from accumulating wealth to preserving your capital and generating income. But there’s no one answer for when to start drawing on your RRSP. It might make sense to begin tapping those funds early to level out your retirement income, if it lets you minimize your future tax bill and avoid traps like the OAS clawback. Work with your advisor to understand your options.

Pre-retirement is when to pay special attention to the risk of rising health care expenses that go with aging. According to the 2016 Sun Life Canadian Health Index, among those suffering a serious health issue, 62% endured a negative financial impact. More than a third of Canadians under age 75 report being forced into early retirement, with two-thirds of this group citing poor health as the reason. Critical illness and long-term care insurance are two smart solutions to cover medical costs, so you don’t deplete your nest egg.

Retirement and later life

Retirement these days can mean many things, from full-on leisure to taking up a new career. Whatever your path, it’s about enjoying life on your terms with those closest to you. This phase can last for decades – plan for it.

Your asset allocation will normally be increasingly devoted to fixed income investments as you age, but that doesn’t mean you should phase out growth investments entirely. Why? You need to protect purchasing power. At 3% inflation the value of a dollar could be chopped in half over the course of your retirement.

Retirement is when managing risk in your investments is paramount. Being forced to sell assets at rock-bottom prices in the middle of a bear market to sustain your living expenses can do real damage to your savings. Instead, have sufficient cash and short-term investments on hand to satisfy your budget and give your portfolio time to recover from any setback.

As your wealth increases and your estate becomes more complicated, evaluate the capabilities of your executor, trustees and other representatives to see if they're still up to task. Don't assume your adult children can fill these roles; first confirm they possess the right skills.

Thinking about giving away your wealth while you're still here to see the benefits? Just remember, doing so can trigger taxable capital gains. That said, leaving everything to pass on at death may simply postpone the tax problem. If your heirs don’t have sufficient cash on hand to pay your final tax bill, it can mean selling your assets to raise funds, including property you wouldn't want them to part with. Seek advice on how to leverage tools like life insurance, trusts and charitable giving to avoid the pitfalls in transferring your wealth.

Have a plan, no matter your age

From buying your first home, investing and saving for your kids’ education, to estate planning and managing retirement, having the right financial plan can make all the difference.

If you haven't developed a plan or refreshed it recently, be sure to contact your financial advisor.


Insurance services provided through BlueShore Wealth.

1Ontario Securities Commission, Financial Life Stages of Older Canadians, Spring 2015
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice.
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