The Art and Science of Wealth Decumulation (Part II)

The Art and Science of Wealth Decumulation Part II

Author: Vince Olfert, MBA, CIM, CFP® – Certified Financial Planner®

Much of the financial services industry is focused on Wealth Accumulation.
You’ve likely heard:

“Contribute to RRSPs”

“Maximize your TFSA”

“Buy an RESP for your child’s education”

So what happens when you reach retirement and all that hard work of building wealth for your future becomes your main source of income?
Your questions might now become:

“Should I take my CPP at age 60?”

“I’ve heard RRSPs are the last investment you should use before age 72. Is this true?”

“Should I really reduce my non-registered investments first?”

The Answer – it depends.

How to Decumulate well is both an art and science. In the first part of this three-part series, we discussed why planning is a lifelong process. This second part of the series will identify some of the biggest financial challenges faced in decumulation during retirement. The third article will outline important basics for decumulating wealth well.

BIGGEST CHALLENGES

The following challenges must be addressed in a decumulation strategy that leads to financial success in retirement.

Market Volatility

If retirees do not plan their asset allocation well, a bear market can significantly impact their odds of success in retirement. Research has shown that if a retiree can survive the first several years of retirement, their odds of success increase significantly. Having low volatility investments (bonds) or guaranteed investments (GICs) can help weather volatile markets.

An often overlooked asset class for cash flow certainty is Annuities. Annuities provide guaranteed cash flow and Life Annuities guarantee this cash flow for the rest of your life. Annuities do not change in volatile markets. It is worth considering the option of an annuity of you want to guarantee a specific level of annual income. If your assets are non-registered, there are prescribed annuities which can create tax efficient cash flow throughout retirement. Annuities are worth considering but make sure you keep the annuity within the guarantees offered. After all, an annuity could be around for a long time.

Low Interest Rates

For today’s retirees, low interest rates are causing a significant challenge. While their parents enjoyed a yield of 6% – 7% on their interest-bearing investments, retirees today are dealing with 1% – 2% yields. On a $1 million portfolio that’s the difference between $60k per year versus $20k. No wonder clients are taking more risk with their portfolios to increase their yield.

Beware of chasing yields to increase cash flow. This strategy can run into trouble in times of stress. Ask good questions before investing, including the downside risk of the investment.

Taxes

Tax gets mentioned again because it can be such a killer of wealth. Each year, it is critical to review taxes and look for ways to reduce, defer, or avoid tax through legitimate strategies in the most efficient manner possible. Tax is one of our biggest financial partners in life. Take the time to manage this relationship well.

Business Ownership

For many of our clients, owning a business is their biggest wealth accumulator. Business owners often sacrifice a lot to achieve this success. Their next challenge is often how to move money from their business to themselves personally in the most tax efficient manner possible.

The rules of building wealth are getting more and more difficult. We expect this challenge to continue for the foreseeable future as public debt increases and governments seek alternate ways to generate tax revenue. Be shrewd while working within the tax laws of Canada. It’s worth the effort.

SUMMARY:

In many ways, decumulating wealth is a greater challenge than accumulating wealth. In wealth accumulation, time is on your side. In decumulation, time is working against you. You don’t have time to recover if your investments don’t do well. In the final article of this series, we will provide five strategies for decumulating wealth well.

In this rapidly changing world, never before has managing your wealth in retirement been so important.

Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting edge technology to maximize planning efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at www.connectwealth.ca

Read Part III of "The Art and Science of Wealth Decumulation"

Saving For Retirement

What Are Your Options?
What is the best investment plan to use to save for retirement? It used to be fairly simple; the answer was maximizing your RRSP. Do you know what is the best strategy for your situation? Do you know what your options are?

Here is a basic overview:
1. Save – The first rule of thumb to be concerned about is that you are saving money for your future. Too many Canadians are spending all of what they earn and not putting away any money for their future. A good place to start is to aim at putting away 10% of what you make.

2. Tax Efficient – Ever since the launch of the TFSA, there has been a debate by financial professionals over which investment plan is more tax efficient to use, the RRSP or TFSA? My opinion is that it depends on your situation both now and in the future and should be looked at on a case-by-case basis to see what fits best. I would be cautious if a financial advisor is always only promoting one plan type over the other, both have their benefits. (For more info on TFSAs, see my article from Sept 2013 – http://jaybrecknell.ca/demystifying-tfsa/)

3. Business Owner – If you are a business owner the question can get even more complex as you have more options. Should you use your RRSP, TFSA or instead save your retirement funds in a holding company? Since corporate tax rates are at an all time low in Canada more business owners are saving corporately versus in a RRSP or TFSA. There can be many benefits to saving corporately as it can provide flexibility to the business owner. As this can be complex it needs to be put together by a professional that understands your corporate structure and the tax and legal rules that are involved.

As with any financial strategy we would recommend ensuring that you have your personal situation reviewed by a professional to make sure that is done in the best way possible. If you have any questions or would like your plan reviewed feel free to contact us.

Questions?

December 1, 2014/by Vince Olfert

Business Planning

Business Owners Fail To Plan

Prepare Your Business For Sale
Only 9% of business owners have a documented transition plan in place and yet 70% of small business owners plan to transition in the next 10 years*! As a financial planner I continue to meet business owners who are planning to sell or transition their company but they do not have a plan. Typically they are either unsure of the process, so they procrastinate or the business is their baby and they do not want to let it go. It is understandable that a major decision like this is hard to make, especially without someone to assist you.

When a business owner is considering selling here are some things to consider:

1. Don’t Leave the Party Last – You see this with professional athletes when they face the question of when to retire? In my opinion you are either growing your business or it is shrinking it, there is no standing still. A lot of business owners later in their career can get into maintenance mode, which usually means the business is starting to decrease in revenues. At first the revenues may hold but after a couple of years you typically see them start to decline. If you want to maximize your selling price and be attractive to potential buyers be careful to wait too long.

2. It Takes Time – Selling a business can take you longer than you think. You need to find the right candidate to take over your business. You are looking for an individual that is an entrepreneur; remember there are more employees in the world than business owners. Also, in most transitions the current owner is asked to stay with the company to assist with the passing of the reigns. You should plan for 1-2 years to sell. This means you should be creating a plan 5-7 years prior to your planned exit.

3. Change – Every industry is faced with changes due to technology, regulatory, competition, etc. If you owned a video or record store in the 80 or 90’s, when was the best time to get out? What if the technology that Google is working on to make it so that cars drive themselves eliminate car accidents in the future. Could that affect you if you own an auto body business? What changes face your business?

4. Financials – Often times the financial statements for a business are ignored until it is too late. Yet they will play a very important role in the sale of the business. You want to make sure that your financials present the best view of your company so that a potential buyer is enticed to make an offer.

There are many things to consider when selling a business. The first is to get a professional that can assist you with putting a plan together to ensure that you maximize the value, save tax, and control when and how you sell your business. As with any financial strategy we would recommend ensuring that you have your personal situation reviewed by a professional to make sure that is done in the best way possible. If you have any questions or would like your plan reviewed feel free to contact us.

Questions?

*Source – http://www.advocis.ca/Update2014/index.html

December 1, 2014/by Vince Olfert

Insurance, Personal Planning

Protecting Your Biggest Asset

The Most Overlooked Risk
What is your biggest asset? Most people might answer your house, boat, car, or investments. When in fact it is your income and your ability to earn a living.

When I review a person’s financial situation, one of the most common areas that is overlooked is to protect their ability to earn a living. Disability insurance is a critical part of a person’s risk management plan. When you think about all of the things that people have insurance for, cars, houses, electronics, death, etc. Unfortunately if you do not have an income all of these other areas fall apart.

When it comes to managing risk, a financial planner looks at two main factors:
1. Risk – what is the chance of this happening?
2. Impact – If it does happen, what is the potential damage?

As an example, the risk of a house fire is low but the damage it can cause financially is extreme. Hence why people buy home insurance.

The Risk Is High:
Did you know that 1 in 3 people, on average, will be disabled for 90 days or more at least once before they reach age 65?*

The Impact Can Be Severe:
How long could you survive for without your income? Most families could last maybe 4 to 6 months before they would have to start selling other assets such as investments or their home. How would you survive till age 65 and then into retirement?

The main way to manage this risk is to have long term disability insurance to protect yourself in case of an illness or injury.

Possible Options:
1. Canada Pension Plan – This will only pay for the most severe disabilities and the amount is small.
2. Worker Compensation – This only covers you if it is a work related injury.
3. Group Plan – This is how most Canadians are covered. IMPORTANT! You should have your coverage reviewed to make sure you are properly protected.
4. Individual Plan – You can purchase this through the major insurance carriers.

Key Facts:
• If you are an executive or earn over $80,000 per year and you have group coverage you should have it reviewed, as you may not be fully protected.
• If you have group coverage your plan definition typically will change after 2 years of being disabled. This can allow the insurance company to decline your coverage if your disability is not severe enough. This is done to keep your rates lower for your group plan. You can get individual insurance to protect against this.
• The definition of a disability policy is critical.
• Most disability insurance is designed to cover you till age 65; some may have only a 5-year benefit period.

Questions?

*Source – “A guide to disability insurance”. Canadian Life & Health Insurance Association

December 1, 2014/by Vince Olfert

The Art and Science of Wealth Decumulation Part II

Author: Vince Olfert, MBA, CIM, CFP® – Certified Financial Planner®

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