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Tuesday, June 11, 2013

Financial planning: a GPS for your life


You’ve got to love those GPSs. Instant directions from anywhere to anywhere. Make a wrong turn, it just reorients itself and tells you exactly how to get back on track.
Sanjay Thakur, CPA, CA, an Investment Advisor with Queensbury Securities Inc., a wealth management advisory firm in Toronto, believes a good financial plan should do pretty much the same thing. “Nothing goes in a straight line, and any financial plan will need regular adjustments. But if you don’t have a plan, you have no idea how things will turn out and no strategy to get back on track when you slip off.”

John Budd, FCPA, FCA, a Client Portfolio Manager with Cumberland Private Wealth Management, also in Toronto, is co-author of The Canadian Guide to Will and Estate Planning. He says the ultimate goal is to not run out of money before you run out of lifespan. “These days, with baby boomers especially, the old standards about life expectancy and how much money we’ll need just don’t apply,” he says. “Very few people can really afford to retire at age 55, let alone at 60 or 65. Most aren’t paying attention to what their net worth will be in 20 or 30 years, or even beyond.”

Professional advice can be invaluable, especially if you need strategies to minimize taxes, manage an inheritance or maximize your savings and assets. Given enough time, even small seeds can grow to be big trees. So the sooner you develop some sort of plan and start working it, the better off you’ll be. Here’s how to start.

Decide what you want. Expect this to be a moving target. As you start working, your focus may be on buying that car, taking a vacation or paying off student loans. As you enter your middle years, you’ll probably be paying for a home, saving for children’s education and building some security for retirement.

Know where you are. Your first visit with a financial advisor will be a fact-finding mission. “People are amazed at the level of detail we go into,” says Thakur. “We take inventory of your current investments, assets and savings. We also ask about debts, liabilities and dependents. We need to know your current salary and any other sources of income you have, what insurance you carry and any estate plans you have in place.”

Measure the distance between the two. When GPSs estimate your travel time, they factor in traffic, weather, speed limits and whether there’s construction on the highway. “No life is smooth road,” says Budd. “So think of various ‘what if’ situations that may play out in five, 10 or more years.”

Plan your route. “The first priority is making sure your essential needs will be met. For many, it’s a big wake-up call,” says Thakur. “I advise everyone to try to save at least six months salary for emergencies, and to have a proper will and a power of attorney done by a lawyer. Then think about how you want to live in retirement.”

Once you have a savings plan in place, both Budd and Thakur stress the importance of reducing the taxes you pay. Knowledgable investment advisors, especially those who are Chartered Accountants, work closely with their clients to ensure that their returns are as tax-efficient as possible. For most people with medium-range incomes, RRSPs are the best strategy for doing that in the earning years.

To be safe, be conservative. Your income may grow as your career progresses, but expenses will probably increase, too. So if your salary goes up, consider it a bonus.  “For retirement, factor in Canada Pension Plan and Old Age Security payments to know how much you’ll have to live on,” says Budd. “During the year you turn 71, you must begin converting RRSPs to RIFs, and that’s designed to erode value. You’re not required to spend your mandatory RIF payment, so reinvest as much as you can in a tax-free savings account or an investment account.”

Thakur agrees that RRSPs should be your last drawdown, and that every effort should be made to keep the principal intact. “People used to plan to withdraw close to 10 per cent per year, but no longer. Expected rates of return in a low-growth economy and greater life expectancy will likely mean reduced retirement income for many. I don’t hesitate to tell people if I think they’re spending too much.”

With many investments yielding such modest returns these days, Budd is amazed that many retirees want to withdraw more than their portfolios are earning. “You shouldn’t take more than three or four percent per year from your investment portfolio,” he says. “We’re living longer, so if you’re healthy, why not continue working for a few more years? Do everything you can to preserve capital, and leave enough on the table to keep pace with inflation. Maybe you’ll even be able to pass on a little something to the next generation.”

Brought to you by The Institute of Chartered Accountants of Ontario - 2013
StarBuzzOnline.com

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