Debt and Retirement

A great deal of time is spent considering and planning for income during retirement. However, there are other factors that go into a successful retirement plan. Debt management is one of those factors.

The closer we get to retirement the more effort should be focused on reducing or ideally eliminating debt, especially consumer debt. More and more Canadian seniors are beginning their retirement years still in debt – either mortgage or consumer (credit card, etc.)

According to a 2017 Sun Life Financial survey, one in five retirees are making a mortgage payment, one in four are making a car payment and about two out of three are have unpaid credit cards (consumer debt). While a home is an investment that will likely grow in value, the consumer debt and vehicle payments are for items that depreciate in value and typically have much higher interest rates.

As much as you spend time defining and building a financial savings plan, it is also important to determine a debt payment plan so you can transition into your life after work with only necessary or minimal debt. Afterall, your retirement income plan was likely not designed to support debt.

When we are in the working phase of our life, usually a substantial part of our monthly budget goes to paying off debt – mortgage, car loans, credit cards, lines of credit, etc. Debt is one of those things that is very easy to find ourselves in and can take a long time to get out from under.

In the years leading up to retirement, it is recommended we avoid adding consumer debt whenever possible. Pretty much everything outside your mortgage is considered consumer debt. If you borrowed money to consume a product that isn’t appreciating in value, pay it off as soon as you are able and avoid carrying it into retirement.

Like all financial planning, debt repayment should take all areas of your current financial situation and future goals into account. As mentioned, paying off debt is important but so is saving for retirement and planning your future income.

To build a debt repayment plan, first you need to gather all the information for your current debt. This includes interest rates you are being charged and all current outstanding balances.

There are two methods recommended for paying off consumer debt:

The first one is called the snowball method. This method has you pay the minimum on all but your smallest debt. Add whatever extra money you can afford onto the smallest debt until it is paid off. Then add the amount you were paying on that debt to your next smallest until they are all paid off. As you continue to pay off more and more debt, the amount you are paying off begins to build like a snowball rolling down a hill.

The other method is similar but is based on the size of the interest rate rather than the size of the balance. Once again you pay the minimum on all, except this time you pay more on the one with the highest interest rate. You begin by paying off the debt with the highest interest rate and snowball the payments onto the next highest interest rate until they are all paid off.

This second method makes the most sense mathematically since you are saving more interest payments by doing it this way. However, the psychology at play with seeing results quicker can make the first option better for some. Being able to eliminate your smallest debt quickly allows you to see results early and helps motivate you to continue paying off debt at an accelerated pace.

Either option will get the job done. Choose the right one for you. The one that will help keep you motivated. Most importantly, stop using your credit cards and line of credit if you are not able to pay off balances on a monthly basis. After all, if you find yourself in a hole, the first thing you should do is stop digging. Some debt is better than others. To find out if you have the best debt re-payment and retirement income plan in place, feel free to connect with us.

Will I have enough?

‘Plan for retirement.’ This phrase is something many of us have heard since the time we landed our first full-time job. But even now, as it was back then, it is a pretty vague directive.

When we are younger it translates to putting money away, likely into a registered account. And for anyone under 25 that’s a great first step. Sock away money and let compound interest work for you. Perfect. Done and done.

However, as you get older this approach to retirement planning should evolve and become more formal, with defined goals and a clear plan. A plan that can grow and change as we do, adapting to our lives and goals. This is when the question ‘will I have enough’ begins to become part of the discussion.

If we peel everything away, each of us faces the fear of NOT having enough saved by the time we retire to live out our retirement years in relative financial comfort and provide enough income to meet our lifestyle goals. For some, this fear can stop us from working with an advisor to build a plan. Check out our blog ‘There is No Time Like Now’ to learn more on this topic.

The easiest way to face any fear you have about the retirement nest egg you are building is to learn the facts. Work with a financial advisor to build a retirement plan based on both your current reality and your future goals.

One of the first considerations is the type of retirement you want. Do you hope to travel? Will you move into a different home? Do you or will you have a vacation property? How many vehicles will you have? All choices have an impact on your income needs during retirement.

Any company-based pension plans or savings plans and their income during retirement need to be considered, in addition to RRSPs, non-registered and TFSA savings you are putting aside for retirement. Company-based pension plans are less common today than in the past, but if you have one, the income they will generate during your retirement need to be factored in to your retirement income planning.

In addition, any government income you will be eligible for during your retirement need to be taken into account for retirement income planning. Old Age Security (OAS) and Canadian Pension Plan (CPP) are two common government benefits many of us look forward to receiving. There are some options in terms of when you can begin receiving these benefits. Your specific situation should be reviewed to know what is in your best interest. There are strategies available to ensure you maximize your income options and minimize annual taxes.

For many of us, the concept of retirement planning feels like a distant concern; one that ‘future me’ will be better equipped to deal with. In fact, the earlier you can start, the better. There’s a Chinese proverb that says, “The best time to plant a tree was 20 years ago, the next best time is right now”.

Find a financial advisor you trust and connect with them to help you build your retirement income plan.

A study of Canadians done by the Investment Fund Institute of Canada found households who worked with an advisor had as much as 2.73 times more assets after 15 years compared to identical non-advised households.

You will benefit in many ways from having a financial planner — an expert in your corner keeping your best interests as their priority. They will work with you on a customized plan, help you stay on track and modify as needed. To review your personal financial plan and projection for your retirement income, please feel free to connect with us.

Giving an Unexpected Gift

The holidays are upon us.

Annual holiday gift guides have been circulated. Wish lists have been compiled and shared. The annual review of gift-giving and the intentions connected to why we give gifts and to whom is well-underway.

For many of us, we give gifts to people who are important to us and try to focus on things they want or need. In today’s world, gifts tend to be geared towards instant gratification.

Rather than get caught up in the season’s hottest trend or coolest gadget, this year consider giving your children or grand-children a gift that will help them achieve future success.

Permanent life insurance and child critical illness may not be at the top of their wish lists, but they will be a gift much appreciated the older they get. Insurance is a wonderful foundation for them to build their dreams upon.

A child’s insurability will change with age and other factors, as will their insurance needs. One of the highlights of permanent life insurance and critical illness insurance for children is locking in insurance while the child is young.

When you purchase the policy, you can add on the ability to increase or extend coverage in the future even if insurability has changed. This option can prove very valuable should your child’s insurability become a factor as they go through life. Occupation, hobbies, travel and health issues can impact the ability to buy more insurance in the future.

Your child’s permanent life insurance policy contains a cash value that grows with time and can be accessed, allowing for opportunities that may have otherwise been financially difficult. This cash value can help with education costs, a down payment on a home or income when they need it.

Child critical illness insurance can include a return of premium option, if no claim is made it allows for premium payments to be paid back in a lump sum and to be used to support your child’s dreams and future plans.

Permanent life and critical illness insurance give you the opportunity to set your child or grandchild up for success and help them be prepared for unexpected events.

Learn how insurance can be one of the greatest gifts you give by connecting with us.

Exit Planning: What Baby Boomer and Millennial Business Owners Have in Common

In the world of business ownership, “exit planning” is still misunderstood.

For mature business owners, the term “exit” can make them feel as though they are being rushed into retirement. For Gen X (1965-1980) and Millennial (1981 -2000) business owners, the idea of “exiting” may seem like a vague and distant event with very little impact on the day-to-day demands of owning a business.

In fact, exit planning involves much more than simply “exiting”. It is a holistic approach to maximizing the value of your business in the present, to achieve optimal value in the future when it’s time to transition or sell. Just as a baby boomer planning on retiring in the next 10-20 years needs an exit plan, so does a millennial business owner who’s just starting out.

This is especially apparent given the potential for an entrepreneurial boom in the coming years, “beginning with two of the biggest demographic forces shaping the U.S. [and Canadian] economy: the aging of boomers and the emergence of millennials into the workforce” (Kaufmann Foundation, Sixth Annual State of Entrepreneurship Address).

Millennials are expected to be the most educated and entrepreneurial generation to date; surpassing even baby boomers whose needs, desires, and ambitions have consistently stimulated the creation of numerous global industries and cultural shifts. This said, millennials also have the most student debt in history and fewer financial means than many baby boomers did when they were starting a business.

An exit plan can help to mitigate financial stress by refining the direction of your business and ensuring it runs smoothly. Amongst other things, a comprehensive financial analysis (i.e. bank fees, pay-roll, assets, inventory, processes, etc.):

  • Increases stability
  • Standardizes business processes
  • Provides a valuation of your business and,
  • Fosters team enlightenment and empowerment

As millennials increasingly join the workforce, they will continue to challenge companies to redefine what it means to work effectively, be productive, and attain success. They are likely to change careers more than previous generations and will strive to attain a work-life balance, even if it means foregoing promotions or pay increases. Some millennials may start, sell, and/or buy numerous business in their lifetimes and having an exit plan means your business is attractive, saleable, and leverageable when the next great opportunity comes knocking.

Connect with us to learn more about building your exit plan.

Exit Planning is a Journey, Not a Destination

To many baby-boomers, the idea of retirement is more terrifying than it is exciting.

For the generation of entrepreneurs who invented the 50-60 hour work week, the thought of shifting away from a work-centric lifestyle can be unfathomable. Countless hours – years of your life– have been invested in growing your business and its continuation and success is significant.

In the next 10 to 20 years, the majority of baby-boomers will be ready to transfer their businesses. This will create a buyer’s market and making your business attractive will be key to a successful sale.

In other words, younger generations (Gen X and Gen Y) will have the opportunity to be very selective with where they invest their money. In his book Walking to Destiny, Christopher Snider writes, “only 2 out of 10 businesses that go to market will actually sell.”

For those business owners that expect to transfer their business to a family member, only 30% of all family-owned businesses survive into the second generation. Twelve percent will still be viable into the third generation, with 3% of all family businesses operating at the fourth-generation level and beyond” (Joseph Astrachan, Ph.D., editor, Family Business Review).

Creating a succession or exit plan is one of the best ways to ensure you either get the best value from your business or that it continues to thrive when it comes time to start the third-act of your life. Pulling all your key advisors – lawyer, accountant and financial advisor, to name a few – together to work with a Certified Exit Planning Advisor (CEPA) will enable you to build an exit plan considering all scenarios.

Questions like “who will I be when I am no longer a business owner?” and “how do I want to spend my time in retirement?” can be intimidating enough to dissuade business-owners from establishing an exit plan. Sometimes, baby-boomers are put-off by the thought of transferring their businesses to younger generations for fear that years of hard work will be squandered by those who don’t understand their vision.

The key thing to remember is: exit-planning is a journey, not a destination. A critical aspect of establishing and running a business is also having a succession strategy in place, even if retirement is decades away.

Having an exit plan, put simply, is good business strategy. It integrates business, personal, and financial goals and works to maximize business value while also prioritizing what life after business will look like.

If you have any questions about your exit plan or how to find a Certified Exit Planning Advisor to help you make yours, connect with us.

What Happens if Your Legacy Isn’t What Your Beneficiaries Want?

blog, cabin succession

Let’s face it, there are many differences between generations. This can become very apparent, especially when the generations come together as a family.

For many Canadians, the cabin is where this coming together takes place and many wonderful, multi-generational memories are housed. Amazing things happen at cabins, from bonding and making memories to coming together to partaking in regular maintenance and collaborating on projects that require sweat equity, like rebuilding the dock.

Anyone with a cabin knows there are many considerations – financial and emotional – that go into preparing to transfer the family cabin to the next generation. Sometimes people get so focused on how to transfer the cabin – capital gains tax, equity between children and so on – they forget to ask the next generation if the cabin is something they want to inherit.

The fact is, sometimes the next generation may not have a strong connection to the cabin or the means to pay for (their share of) the costs associated with maintaining the cabin. Perhaps the next generation would rather have the proceeds from the sale of the cabin instead of the property and the ongoing costs associated with it.

Passing the cabin to the next generation can get complicated. Having open, frank discussions with all the generations and parties can identify the options and determine what everyone’s wishes are. You may find it helpful to have your financial advisor at this discussion to talk through options and impacts of various scenarios. Not to mention a third party can help keep people focused on the discussion at hand.

Once the intentions for the family cabin are identified, a plan can be developed to execute and achieve the goal. It is important to document your family’s philosophy for the cabin in your estate plan and will. A regular review every few years will help ensure if your family’s circumstances have changed, your current situation and wishes are reflected.

If you would like help discussing the options for transitioning your cabin or would like a knowledgeable financial professional to work with your family, connect with us.

What’s the Deal with Capital Gains and Cabins?

In the simplest terms, capital gains are ‘gains’ usually monetary, obtained from the sale of capital property. Capital property can be real estate or securities like shares and stocks. The gains are the positive difference between what you paid for the item and what you sold it for, minus any legitimate expenses connected to it and the sale of it.

In Canada capital gains are taxed based on your marginal tax rate, which varies by province. However, only 50% of the gains are taxable. For example, on a capital gain of $100,000, only $50,000 would be taxable. So, for a Canadian in a 33% tax bracket, a $50,000 taxable capital gain would result in $16,500 taxes owing. The remaining $83,500 is the sellor/investors’ take. (The Canadian Revenue Agency offers step-by-step instructions on how to calculate capital gains.)

When it comes to vacation properties like cabins, capital gains are the difference between the purchase price and the selling price, minus the cost of any enhancements (not including ongoing upkeep) made to the property.

For the sake of this discussion, let us consider:

  • A family cabin purchased for $100,000 and worth $500,000 today
  • The cabin is owned by a mature couple (parents) with two adult children

For this example, assume the parents’ will is set up to transfer their share of the cabin between the couple after the first of the pair dies and then to their adult children after the last parent dies.

In this case, the capital gains wouldn’t be triggered until the last parent dies and the cabin transfers to the adult children. The capital gains tax would be due immediately as the asset, cabin, is deemed to have been sold to the second generation once the remaining parent dies. So, capital gains would be calculated based on today’s $500,000 fair market price minus the original $100,000 purchase price, with 50% of the $400,000 capital gain taxable.

During the time the cabin was owned by the parents if any capital expenditures were done, outside regular maintenance, like an addition for example, the costs associated with that addition can be subtracted from the overall capital gains.

For the purpose of this example, an addition was done and cost $50,000, leaving $350,000 as the capital gains and $175,000 as the taxable portion of the capital gain. The capital gains tax will be payable by the estate at the marginal tax rate of the estate. If the estate is rich in property and low in investments or cash, a sale of one of the properties may be needed to pay the taxes.

There are many variables involved in transferring a cabin between generations. Some of these variables include: primary residence status, multi generational transfer with multiple kids, joint owners, blended families, and more. It is easy to see how important planning for the cabin’s transition is and how complex it can become – it is worth the time invested to ensure the family cabin is passed onto the next generation in the most tax efficient manner.

There is no way to avoid paying capital gains tax. However, there are ways to plan when to incur tax and be prepared to cover the cost. Connect with us to learn more about what you can do to prepare for your cabin’s future.

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A Financial Plan Brings Comfort

 

It is easy to avoid things that make us feel uncomfortable or exposed. Turning the lights on and looking in the corners; asking the hard questions and finding the right, most appropriate answers can require us to feel a little exposed.

Building a financial plan will be one of the most important investments in yourself and your family. And it may stretch you outside your comfort zone. However, what most people may not know is, having a comprehensive financial plan also makes you feel reassured, prepared and in control.

A financial plan is the first step to achieving your financial goals. It is important to put in the time and commitment into building the plan, as the pay-off is immeasurable when it comes to overall preparedness and comfort in knowing what your financial future looks like.

A great deal of the initial steps in building a financial plan have little to do with money and more to do with defining your hopes, dreams and expectations. During this part of the process questions like:

  • What does retirement look like for us? Will we travel?
  • What are our current lifestyle needs? How will they change over time?
  • What do we need to save to sustain our lifestyle needs during retirement?
  • What are our financial obligations – dependent children or grandchildren?
  • What do we want our legacy to be? What do we need to achieve this goal?

Once you have identified your goals, the next step is to determine any challenges in the way and the options to help you achieve your goals. Your financial advisor will develop a plan with various recommendations including contingencies for your review. A good plan will be tax efficient, manage any risks you may have, and consider your investment style all while allowing you to live comfortably today.

You and your financial advisor will review and evaluate the recommendations made in the plan to choose the solutions and strategies to help you achieve your goals. Once these decisions are made, the plan can be implemented.

The final step in developing a financial plan is ongoing review. As we know life happens. Our lives change, our families grow, there are unexpected financial emergencies or windfalls, and dreams evolve. It is important to review your financial plan on a regular basis to make sure it remains structured to achieve your goals.

Contrary to popular belief a financial plan is relevant and needed for all people, regardless of net worth. Make sure you and your financial advisor invest the time and effort into building your personalized financial plan. Then commit to implementing and reviewing. You will benefit from the comfort of knowing your financial needs and goals will be met in a comfortable manner.

If you have any questions about your existing financial plan or how to find a financial advisor to work with you to develop yours, connect with us.

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