By John Niekraszewicz
A number of studies show that Canadians want to be financially independent and able to provide for their family, but do not have a financial plan or business exit plan. Putting a plan in place with time tested strategies that are easy to implement will help you create a framework for financial success.
1. Start Saving for Retirement Early in Your Working Career
The #1 way for Canadians to save money and tax at the same time is by contributing to a Registered Retirement Savings Plan (RRSP). And the easiest way to implement an RRSP is though a company Group RRSP Plan. Both employees and employers recognize that money taken off paycheques at source and invested in a workplace Group RRSP is a smart way to enable employees to build savings. If left to do it on their own, most people will find ways to spend every penny of their paycheque and more. As an added incentive, many employers will match employee contributions dollar for dollar.
Here is an example. Mary and her employer contributed $1,000 each month to Mary's Group RRSP Plan. Mary invested in a diversified portfolio and was able to achieve an annually compounded rate of return of 3.5%. After 40 years, Mary was able to retire. She has reached her "magic number." Her RRSP was worth over $1million. Mary's RRSP consisted of contributions of $480,000 plus growth of $533,000.
2. Allocate Assets by Tax Status
The largest expense for most Canadians are taxes – income tax, sales tax, excise tax, and property tax. The amount left over to invest is also taxed, but the amount of tax that interest income, dividends, and capital gains attract are different. Placing your stock holdings outside of RRSPs and bonds inside your RRSPs increases your ability to benefit from a lower tax rate on dividends and capital gains.
Here is an example. Susan had her RRSP, Tax Free Savings Account (TFSA), and corporate investment savings all invested in exactly the same investments and in the same proportion. By shifting the higher taxed investments into her RRSP and the more tax friendly investments into her holding company, Susan was able to generate tax deductions as well as immediate tax savings.
Diversify Investments by Asset Class and Geographically
You may be familiar with the old adage, "don't put all your eggs in one basket". This is good advice for most investors who want to lower risk in their RRSP and TFSA investment portfolios. Spreading assets across different baskets such as Canadian stocks, US stocks, European stocks, Asian stocks, floating rate bonds, corporate bonds, global bonds, commodities and real estate is smart. Ideally what you want are investments that behave differently at certain times – some investments to go up when some go down. This way your portfolio is constructed and adjusted to grow with reduced volatility, which enables you to sleep well at night.
4. Consolidate Investment Accounts
All too often, too many accounts with too many advisors leads to conflicting advice and higher fees. Many investment companies offer volume discounts. So, the more money invested through one advisor can lead to increased returns just because of the fee savings. And this applies not only to your account, but that of your spouse. Another benefit of consolidating your family accounts is that investment overlap can be eliminated. For example, instead of investing in 5 European stock investments, investing in the 2 best ones will provide adequate diversification and superior risk adjusted returns.
5. Don't Name the Government of Canada Your Main Beneficiary
When you die, here is a list of typical expenses from your estate: capital gains, outstanding income tax, probate fees, legal fees, executor fees, accounting fees and monies owing to creditors. Your net worth before death may be substantially more than the net amount your family (or surviving partner's new family) will receive.
Here is an example. Bill and Carol passed away unexpectedly at the height of their business building years. Their main assets were non-liquid and included their business and real estate. With no qualified family member to take over the business, the banks called their loans, family members couldn't agree on selling terms for the business and the competition took clients. The business had to be shut down and real estate assets liquidated at "fire sale prices" so that estate taxes could be paid.
6. Leave Your Family Clear Instructions
The road of life is full of twists and turns. Guardianship of children and grandchildren can become a contentious affair when there are no clear instructions available when death is premature. If a loved one is in a coma, how long does a family wait before "pulling the plug"? Without clear direction, disputes can lead to fractured family relationships. Why not alleviate future potential conflict and legal costs by regularly reviewing the estate documents you have already put in place.
7. Control Cash Flow to Heirs and Charities from the Grave
If you are concerned about the ability of your spouse, children and grandchildren to manage the receipt of significant wealth or business assets then control the cash flow. In certain situations, creating a lifetime stream of income for a loved one is better than leaving a lump sum. Creating a money transfer plan will accomplish this goal quite easily and should be done while you are still alive and in your right mind.
Before implementing any tax, investment, life insurance, or estate planning solutions it is best to seek professional advice. Have an experienced team of professionals work together to uncover the weak links in your plans and implement the correct solutions. Don't just leave your plans to chance because without structuring your family's wealth and estate plans properly, often, bad outcomes occur.
Many of these strategies listed have been discussed in more detail in previous issues of Signal, so if you would like a copy, don't hesitate to call.
Secure the dog house and invest wisely, then you can enjoy life & have fun.
About the Author
John Niekraszewicz (Nick-ra-shev-itch) BMath, FCSI, CFP, FMA is the Certified Financial Planner responsible for the AHIP Association Health & Dental Plan provided by JVK Life & Wealth Insurance Group. John is also the Principal of JVK Life & Wealth Advisory Group, specializing in Wealth & Estate Planning. John welcomes your questions and can be reached at 1-800-767-5933 or email@example.com
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