The Road to Happiness

August 4, 2016

We don’t invest our hard earned money for the sake of having a portfolio; we invest so we can have life experiences and be happy. Only with the confidence of an income we cannot outlive will we attempt to achieve our desired life experiences and ultimately true happiness. Focusing just on our portfolio or a specific number or Rate of Return may hit a mark but miss the objective.

Being happy in many respects is a choice and a journey. As a financial planner I can help my clients on the road to happiness by helping them get to a position of never having to worry about running out of money. From a financial planning perspective there are five steps to get to this place and potential happiness:

The first step – decide what’s really important

Starting with being very clear about what is important to us excites us and gives us the drive to do the work necessary. It gives us a reason to do and keep doing the things to get us to what’s really important. At the deepest level, the things that are important to us are expressed by our values – enduring beliefs that do not change.   Values have a priority and this helps us in our decision making. An example of my values list is – Family, health, impacting the lives of people and leaving a legacy. This represents very clearly the things that will get my time and money. As Walt Disney said – “When your values are clear, your decisions are easy.”

The second step – fixed and desired expenses

When we stop working, our living expenses do not decline at first– we still live in the same place, drive the same car, and pay the same utility bills. Knowing what these numbers are will help us understand the lowest threshold of income we need that will not impact our basic lifestyle – and typically tell us that achieving this level of income is quite realistic. Next, going through the exercise of deciding how much income we would want to have all the other experiences in life first requires us to clarify and confirm what’s really important – a key step for happiness. Decide what’s important and spend your money on that. Lastly, understanding how our fixed and desired income will change throughout our lives forces us to come to terms with aging and potentially the desire to spend more of our money earlier in our retirement.

The third step – sources of income

Understanding all sources of income should come after understanding fixed and desired expenses so as not to limit our desires. We can always go back if the math doesn’t work – spending too much can be avoided – spending too little is a disservice to yourself and those you love.

There are three primary sources of income we may have in retirement:

Pensions

This includes the Canada Pension, Old Age security, government and/or private pensions. Understanding the options available such as when they could begin and the payment amounts and tradeoffs, the differences in indexing and survivor benefits are all very important and need to be researched and strategies planned. Pension income is guaranteed and often indexed and can often exceed a couples fixed expenses – going a long way in achieving a strong level of comfort. This is passive income at its greatest as it requires no effort to earn.

Business and Rental Income

I’ve lumped these together only in that this source of income often requires some effort on us to act or manage. Given that there will likely be a time when we won’t want to act or manage this type if income also requires a strategy to liquidate any assets involved. This source of income has various tax implications which could be beneficial (or not) if not planned properly. For example, too much taxable business income could exceed one spouses OAS claw back limit – $73,756 (for 2016) which effectively adds a 15% tax on income over this amount increasing the marginal tax rate to over 46%!

The average individual will not have the desire to understand the tax impact nor be able to develop a strategy for this source of income and needs to have a good CPA and a financial planner who understand the tax implications. How and when this income is withdrawn will impact the overall strategy given all other sources of income.

Income from investments

Income from investments includes all income that will be withdrawn from our registered (i.e. RSP’s/ RIF’s, LIRA’s/LIF’s, TFSA’s etc.) or non-registered investment accounts. This is passive income as it requires little involvement (if working with a Financial Advisor).

Income from registered accounts (RSP’s/ RIF’s, LIRA’s/LIF’s) is 100% taxable and can be income split at age 65. The longer investments are left to grow tax deferred in registered accounts, the greater the assets held will be. However, it is possible to have too much in registered accounts – especially when the income withdrawn causes a OAS claw back (see above) So projecting how much investments will grow based on annual contributions and rates of return can provide us with the potential income we can expect.

Non-registered accounts are typically the most tax efficient source of income – each withdrawal is proportionally taxed based on the adjusted cost of the investments and the market value at redemption. For this reason, non-registered assets are typically the source for initial income.

Not only must we understand how this source of income will grow and be taxed – we need to understand how to manage our investment portfolio’s to maximize the returns.   This of course is the topic for another article!

The fourth step – clarify and strategize

Reviewing a strategy for how best to withdrawn income, how to minimize tax, what expense could be minimized or avoided needs to be done at least annually. This is where the big picture is looked at and all the pieces considered.

The fifth step – regular reviews

If you’ve completed all these steps, but never repeat them – your great work would be for nothing. This process must be repeated each year – understand current expenses and sources of income, strategize, and project forward. This continues to build your confidence in your plan – allowing you to continue to seek out experiences and not worry about whether you will have enough.

So, working through these steps will help you get to a position where you are comfortable you will have an income you cannot outlive. The last piece is then your decision – will you use your time to decide and do, what makes you happy?

Richard WR Yasinski CFP

Life Thoughts

June 7, 2016

I love reading inspirational articles posing questions to ask of myself regarding my priorities. This article describes some thoughts anyone who wants to do a check on their values or priorities might enjoy.

Read here.

 

The Seven Key Areas of Financial Literacy

November 20, 2015

The following are seven key areas of basic money management skills every individual needs to strive to have a basic understanding in order to develop money confidence.  Encourage you to review each of these areas with respect to your own situation. If you need clarification specific to your situation, please give me a call.

Cash Management – How is a cash flow plan prepared for your household?

Cash Management is about knowing what comes in and what goes out.  This simple budget planning worksheet is a great way to get a handle on your income and expenses.

Tax Planning – What is your tax bracket and how does it impact your financial decisions? Bonus question – What are the three types of income and how are they taxed?

Our tax system is based on brackets of “bands” of income that is taxed at a higher rate.  The best way to understand your tax brackets and how you pay tax is to go to your full tax return and to schedule XX for your Federal tax and Schedule XX for your Provincial tax.  These schedules will tell you your marginal tax rate (MTR) which is the highest rate of tax you pay on the last dollar you earned.  The reason knowing your MTR is important is any additional income you earn (by triggering a capital gain or earning a bonus or severance etc.) will be taxed at this rate.

The three types of income and how they are taxed are: 1 – salary and interest @100% 2 – dividends @ 0 to 23% depending on other taxable income and type of dividend and 3 – Capital Gains are taxed at 50%

Risk Mgt – What’s the difference between T10 and permanent life insurance?

Term insurance is provided at a flat rate for the period of the term (i.e. 10 years) then renewed at a higher rate.  It’s ideal for periods when a lot of insurance is needed (i.e. young and with dependents)   Permanent life insurance remains in place for life and is provided at a flat rate for life. When a legacy gift is desired or for final tax to be paid on assets.

Credit Mgt – What’s a FICO score and what impacts this number?

FICO stands for “Fair, Isaac, and Company” and is one of the ways a creditor (bank, mobile phone company etc.) uses to decide the “credit worthy ness of a candidate.” There are two companies (Equifax and TransUnion that provide Canadians with their scores and to any creditor that has authority from an individual.  The kinds of things you would expect go into this score, loans paid or not paid, late bill payment etc.

Investment Planning – What are dividends and how would you get them?

Dividends are the excess profits businesses pay out to shareholders based on the number and type of shared owned.  Canadian Dividends can be received from both public and private companies and attract a lower tax rate then interest income and close to capital gains – depending on the type of dividend.  If you own shares of a company that pays dividends outside your RSP, you may receive them.   If you own dividend paying companies within your investment funds, these dividends may not be paid out but re-invested – but you still pay tax on those dividends!

Estate Planning – What happens if you die without a valid Will?

Dying without a Will means you die intestate.  Provincial laws then take over as does the Public Guardian’s office to manage your estate and decide how to distribute.  In Ontario, for example, assets owned individually go to surviving spouse and children and then parents and siblings and then extended family based on a specific percentage.

Retirement Income Planning – How much income will you need when you stop working and where will it come from?

Typically, a retiree will spend about the same amount of fixed living costs in retirement as was paid while working – which is why know your fixed costs is so important.  Beyond that, it depends on the activities planned for retirement.  As to sources of retirement income, we typically have a combination of private pensions, govt pensions, Canada Pension, Old Age Security, investment income and part time earnings.  Investment income can have very different tax impact which will impact marginal tax rates.

So, how did you do?  Were you comfortable with the questions and answers?  If not, let’s chat and help you get comfortable.

Richard WR Yasinski CFP