The value of my investment portfolio has fallen significantly and I am concerned that should it continue to fall, I may outlive my money. As a retired person, what wealth management strategies should I explore so I don’t outlive my money? (I live in West Vancouver, which can be an expensive place to live.)
You are not alone when it comes to having concerns about outliving your money. The World Economic Forum recently estimated that men and women in Canada will outlive their savings by 9.9 years and 12.7 years respectively.
Those are sobering statistics. They highlight the fact that what worked when you started your career no longer applies. For example, choosing low-risk GIC-buying strategies accompanied by low interest rates will no longer meet your spending needs. You now need to look closely at your spending and saving rates, lifestyle and the structure of your investment portfolio so any investment return shortfalls don’t harm your financial well-being through retirement.
Where should you begin?
First, consider engaging a knowledgeable financial advisor to help you create a long-term, goals-based plan. He or she will help you map out a formalized cash flow forecast that factors in future income and expenses. This will ideally help you to increase your savings to maintain your lifestyle into retirement while factoring in unexpected events.
With your cash flow projections in place, your advisor can then build a capital asset forecast using different asset allocation scenarios between fixed income and equities to determine your financial position over time. Once he or she has set your asset allocation and return targets, your advisor can structure your portfolio to manage risk while potentially achieving your goals-based return.
Monitor your financial plan on an annual basis. Alerting your advisor to changes in your lifestyle or financial situation also helps. Resisting the temptation to sell securities when markets are down to generate income is another way to avoid outliving your money. You might consider setting aside assets in a portfolio or emergency fund to carry you through uncertain times. Maintain a consistently balanced portfolio while ensuring you can access three-to-five years’ worth of income should things change. This will allow your long-term portfolio to grow without encroaching to meet unexpected situations as they arise. Finally, enjoy your wealth but plan carefully before making major expenditures. Last but not least, work closely with an advisor who will take the time to understand you and your goals while helping to build and monitor your holistic, long-term plan.
I have investments with several institutions and am becoming worried about the fees I pay and the number of advisors with whom I deal. Can I simplify my life and financial affairs by working with one group of advisors? While simplifying my life, could this benefit me in other ways?
It’s been said that to benefit from the skills of a team of athletes, you need a focused coach. Having a qualified financial advisor as your “coach” who will oversee your affairs can certainly simplify your life and potentially save you money. Working with one advisor versus several can also eliminate the risk of crossed wires of communication resulting in duplication of effort and missed opportunities for you. For example, if you work with several advisors, you many run the risk of overcontributing to RRSPs or TFSAs. Tax planning can be made more difficult when a group of advisors aren’t aware of the nature of your investments, contribution room or your long term personal or business goals. Working with one advisor with full access to investment expertise, retirement and insurance planning, cash management and other services provided by proven professionals provide you with the comfort and outcomes you need.
As a retired corporate executive who has just settled down in Kelowna, I have time to manage my personal investments and financial affairs. I also have my own team that includes an accountant and lawyer. After five years, so far so good, but tax rules and investing are becoming more complicated. I realize I need the help of a skilled and trust-worthy advisor (such as a CERTIFIED FINANCIAL PLANNER professional) who can look after all my financial affairs. How do I go about finding a wealth management firm that can help me while working with my existing accountant and lawyer, whose work I value highly?
Many people have trusted advisors with whom they have strong relationships. We are more than happy to work with them as part of a cohesive team with a shared goal: our clients’ personal and financial well-being. Feeling confident that your wealth will grow over time is critical to both a good investment experience and reaching your financial goals. We know that a robust personal financial plan consists of many moving parts involving many professionals, who work best as part of a cohesive team. You can benefit from having one skilled professional, such as a CERTIFIED FINANCIAL PLANNER (CFP) professional, taking on the role of your personal “chief financial officer” who oversees those moving parts. A CFP offers extensive education and accreditation following a rigorous national examination process, comprehensive continuing education requirements plus accountability to FP Canada (formerly the Financial Planning Standards Council). He or she can always ensure you have a financial plan that reflects your current and evolving financial and life needs. To identify an advisor who can meet all your needs, consider asking friends to refer you to their CFP, or to recommend another. Meet with the advisor to see if there is fit between your personalities, your financial goals and investment approaches. And remember that perhaps the greatest value a CFP can offer is the ability to help you see things objectively and to keep things in perspective and on track. An experienced CFP can be invaluable in helping you create, protect and distribute your wealth.
As a physician in my fifties, I am very busy in Kelowna caring for my patients and staying current with health industry developments. I don’t have the time or the expertise to properly manage my financial affairs, which are time consuming and getting more complicated as my income grows. I am frequently “pitched” new investment opportunities through friends and organizations I’ve never heard of. How can I make the most of my time while keeping my investments safe and growing?
A physician’s main goal is to serve patients while focusing on the health of their practice. There’s also a requirement to stay current with medical research and other developments. You may have a family to support, financially and emotionally and have your own life to live. Engaging an advisor who understands the challenges you face can free you to potentially enjoy your wealth more and focus on your practice. Advisors who have experience working with other physicians can guide you to the right, tax-effective investment decisions. For example, an experienced advisor can help you set up a Canadian controlled private corporation to reduce the tax on your active business income. And, he or she can set up a corporate life insurance policy to help you maximize deductions and credits to save you money. These are only two strategies you may wish to consider. We can tailor others to meet your unique needs. For example, an Individual Pension Plan (IPP) is an effective registered retirement vehicle that is worth exploring. (Please see Question 15 for details). Finally, like some physicians, you may occasionally receive pitches regarding random investment opportunities offering potentially attractive outcomes. An advisor can objectively review those investment proposals while saving you time.
I recently sold my business and am wondering how to best invest the proceeds in a tax-wise manner. I need professional guidance but am not sure where to start and what to look for in potential firms that could me on how to best manage my windfall.
A windfall, or liquidity event, is something many people dream about. For certain business owners, their dreams are realized after years of hard work or perhaps being in the right place at the right time. Consider talking to friends who may recommend an advisor. Speak with several advisors until you find one with whom you feel very comfortable. Here are some important questions to consider when choosing an advisor.
- How long has the advisor been in the business? Is he/she fully qualified with a good understanding of your business and personal circumstances? He/she should have a sound practical knowledge of wealth management and all its associated activities, such as tax, accounting, succession and insurance-related issues with easy access to a team of experts in those fields.
- Does the advisor fully understand you and your goals? Is he willing to take the time to first listen carefully and only then offer ideas that reflect your needs?
- You may want to be very involved in the management of your wealth. Or, you may prefer periodic reviews so you can better concentrate on your business. Does your advisor understand your personal preferences?
- Is the advisor willing to clearly explain all fees early in the conversation in a transparent manner? Will he commit to being accessible and to meet at pre-arranged times for investment portfolio reviews throughout the year?
- Will the advisor provide you with a written Letter of Understanding as part of your overall Wealth Plan? This important document outlines your advisor’s investment philosophy, the terms of his or her engagement with you, their compensation and other details you’ll want to confirm in advance of working together.
I know how I’d like to spend my retirement, but don’t have a formal retirement income plan. My shared focus over the past 20 years has been on my expanding career and helping to raise my family. How should I begin to fund my retirement without missing out on travel and other retirement plans?
While living a full and long retirement is definitely appealing, longevity can come at a cost. Risk is part of living, and it’s important to look beyond a diversified investment portfolio to other means when it comes to maintaining your quality of life. The proceeds of a life insurance policy are tax-free and may be paid out upon death. The right type of insurance policy can also act as a hedge to protect your wealth in the event of unforeseen developments. Critical illness insurance provides you with a tax-free lump sum if you have a diagnosed medical condition such as heart attack, stroke or cancer. Long-term care insurance can cover home or hospital-based quality care. As health care costs rise, long-term care insurance can reduce the pressure on all family members should you become ill. Life annuities offer a guaranteed lifetime income stream that will avoid you outliving your capital. You can structure a plan jointly with your partner so that income continues until you have both passed away.
My business partners and I have built a successful business serving the greater Vancouver area over the years. As CEO, I feel it’s time to evaluate my personal insurance, perhaps through a key-person arrangement or a buy-sell agreement. What is the best way to go about this?
A key person insurance policy is meant to protect a business in the event of the death of the CEO, or key person who runs the company. The company buys a life insurance policy covering the key employee, pays the premiums and is the sole beneficiary of the policy. The company can use the proceeds to pay off debts, meet obligations to investors, pay severance to employees or close the business in an orderly fashion without declaring bankruptcy. As you review a key-person arrangement, it’s important to make sure you have a properly funded buy-sell agreement in place. A buy-sell agreement ensures that your business can continue after you or a business partner leave the business, become disabled or pass away. By calculating the value of a share in the business using a previously agreed-upon formula, you can avoid disagreements and liquidity problems should the unexpected take place. A buy-sell agreement is rather like the business partnership version of a prenuptial agreement. (Please refer to question six for details about other insurance options).
I have several children and grandchildren, am in good health and support a number of charities. As time marches on, I want to put plans in place to leave a personal legacy to protect my loved ones and continue to benefit certain charities. When should I start to plan my legacy?
It’s never too early to start thinking about planning your legacy. It’s important to first draw up a will in which you identify your beneficiaries, which may include not-for-profit organizations. There are many ways to leave a charitable gift in the future. These include: life insurance, charitable trusts, RRSPs and RRIF’s, securities and mutual funds, charitable annuities and named funds. Charitable giving also lets you reduce taxes on your estate after death. The sooner you determine the people and organizations you wish to remember, the more time you’ll have to focus on enjoying them today. Formalizing your wishes with the help of an advisor with practical experience in trust and estate planning is a good first step to setting your legacy in motion. You can start building your legacy today by setting up pre-authorized donation schedules to benefit your favourite charities.
Tax law has become more complicated since I started my career over 30 years ago. As I plan my retirement, I want a healthy investment portfolio that won’t be unduly affected by tax obligations. What are some things I should consider and what kind of professionals should I look to for advice?
When planning for the future it’s important to first consider your personal situation, now and in the future before worrying about your tax bill. Taxes are the largest single cash flow expense for most Canadians. Therefore, it makes sense that a financial plan that focuses on a robust tax reduction strategy can dramatically increase your bottom line. Yet, not many planners focus on active tax management so it’s important to work with one who does and can help you realize potential tax savings.
You can then work with that advisor to build an investment portfolio that reflects your needs as time goes on, in parallel with a solid tax strategy. Your investment portfolio may hold three main sources of investment income (interest and dividend income and capital gains and losses). Each is taxed differently and a financial advisor can explain the potential effect on your tax bill today and in the future. The effect of each income source on your tax bill depends on where you hold those investments. For example, growth of investments in registered accounts, including your Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP) or Tax-Free Savings Account (TFSA) is not taxable. However, the tax treatment for contributions and withdrawals will differ with each account. It’s important to know that non-registered account investments, will result in a different tax situation. For example, dividends from foreign corporations are taxed as ordinary income while dividends from Canadian corporation receive better tax treatment. A skilled financial advisor can help create a balanced investment portfolio allocated to bonds, dividend stocks and equities held to create capital gains. (You can largely control capital gains as part of your tax strategy by deciding when you want to take gains or losses.) The advisor will help you allocate assets to each of the above categories while taking full advantage of varying tax treatments offered by each investment and account. Ensure that your advisor can clearly explain how different asset classes will affect your tax bill today and well into the future. The financial well being of you and your beneficiaries depend on it.
I want to give back as I’ve had a successful career and feel it’s time to share my wealth. I have been thinking about setting up a charitable trust or a private foundation. (Friends have set up charitable trusts and get great personal satisfaction from helping to support the Vancouver community.) How should I explore charitable giving in all its forms including via cash and share donations while getting familiar with potential tax management strategies?
Charitable trusts and private foundations are popular ways to give while managing tax-related issues. Before moving ahead with either, it’s important to grasp your full financial situation and goals, and then to decide on the causes that are important to you and your family. Meet with your advisor to review your philanthropic wishes and your current (and anticipated) financial situation. He or she may invite a trust and estate professional to join a subsequent discussion focusing on the steps for establishing a charitable trust or private foundation. The tax benefits of setting up each should be covered off as well as comparing them to the benefits of cash and share donation strategies.
I worry that I’m no longer getting good value for dollar from my current investment firm. For example, I feel their recommendations don’t fit my changing risk tolerance levels and my investment plan no longer reflects my current situation. My friends tell me their advisors charge them less than mine, give them more attention and that I should consider moving to another firm. This is easier said than done. What should be my next step and whom can I talk to?
You are wise to address your concerns with your financial advisor while remembering that what may constitute good service differs from person to person and can often be subjective. The fact is, it’s your financial well being and quality of experience with the advisor that is most important. Draw up a list of your concerns before requesting a meeting with your current advisor. Segment the list into specific sections including: quality of service (with examples of where you feel the advisor has come up short); your concerns regarding fees in proportion to your assets under management and your changing needs and how you feel the current advisor is not reflecting those needs. If you aren’t satisfied after the conversation, consider approaching friends or colleagues to recommend an advisor and meet with him or her. Research the advisor and firm to the best of your ability before committing to a meeting. (Please see question five for a list of things to consider then selecting a financial advisor.)
I am a professional engineer living in Vancouver who incorporated my successful business several years ago. I am concerned about the number and complexity of federal tax changes affecting corporations that have emerged over the past three to five years. Can Bay & Associates help me to first understand these tax changes and then help me to develop and implement my corporate tax planning strategies?
Helping clients stay abreast of corporate tax changes affecting them has long been an important part of an advisor’s role. The COVID 19 pandemic has dramatically altered many tax guidelines, and these changes continue to evolve at the time of writing. Bay & Associates can help you understand and efficiently navigate corporate tax rules affecting you before and after the pandemic outbreak in March, 2020. We would be pleased to advise you on managing your corporate tax situation using a number of strategies falling under the Tax Act that extend beyond incorporation.
I’m in my mid-twenties and recently started my career as a surgeon in the heart of Kelowna and have a significant to-do list. I have a student loan to pay off, want to get my career of the ground and start a family. I also need to understand how life, critical illness and other kinds of insurance can help me manage risk that is associated with reaching these goals. Who should I speak with to help me get started on reaching these goals?
The late John Lennon wrote that, “Life is what happens to you while you're busy making other plans."
As with many professionals who are just beginning their careers, it sounds like you have quite a to-do list. You might be well served to work with a financial advisor who will help you to first create your own life plan. The plan will include strategies for addressing each item on your list in a logical way that reflects your goals and lifestyle. Rather than overwhelm you, it will set out options you can consider in a relaxed way with the advice of an objective and empathetic advisor. He or she will help identify stages in your life journey and how to structure your investments to see you through those stages while protecting you, your family, your growing wealth and your business through the years.
I am a consulting engineer who recently relocated to Vancouver from South Africa. I’ve joined a consulting firm and don’t understand Canadian rules regarding investments, personal incorporation and other tax related issues. Does your firm have the accreditations and experience to manage the complexities of wealth management that many professionals like myself face?
Bay & Associates has considerable experience guiding clients in these areas. Our clients represent many different professions and we are familiar with the investment and tax management needs of health care practitioners, legal professionals, entrepreneurs and others who generate significant income. Please refer to question 9 for tax-related information of which all people new to Canada should be aware. Incorporating yourself as a business entity is a good way to manage your tax bill while limiting potential liability you may incur as part of doing business. We’d be delighted to discuss the pros and cons of incorporating yourself and to assist you, should we together decide it would offer you benefits. At Bay & Associates, we offer our clients the opportunity to become educated in wealth planning decisions that affect them. Throughout our collaborative planning process, we will take the time to answer your questions and share our thinking as we ensure you are part of this important conversation. Our approach brings us closer to our clients while increasing their confidence in us.
A colleague was telling me about the benefits of setting up an investment vehicle called an individual pension plan (IPP). It sounds complicated but worth looking into. Can you first explain to me how an IPP works and set up the right one for me?
An Individual Pension Plan (IPP) is the most effective registered retirement mechanism permitted under Canadian tax law. It is best suited to business owners, incorporated professionals and highly compensated employees seeking financially sound retirement savings and income as they plan for retirement. Employers can also benefit from significant tax advantages when making contributions.
As a registered defined-benefit pension plan, an IPP is a good option for you if you are: 45 or older; don’t have another pension plan; have been with the same employer or owned your own business for more than 10 years and show earnings on your T4 of $100,000 or more. Even if you don’t fall into any of these categories, there are other reasons to consider enrolling. For example, unlike an RRSP, the contribution room available in an IPP grows with age. So, the older the member, the more contribution room is available. It also means that employers can contribute more company capital on a tax-deductible basis while more funds are saved for retirement.
You should keep in mind that while an IPP is can be very tax efficient, setting one up may also reduce (or eliminate) new RRSP contribution room.
We are experienced in offering executive pension advice to employers, business owners and other professionals seeking a long and successful retirement.
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