The Art and Science of Wealth Decumulation

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 wealth well (to decrease in amount or value) is both an art and science. In this first part of this three-part series, we discuss 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.

Life Long Planning:

Government Changes:

It might seem that just when you build a plan that works within government regulations, the government changes the rules. Especially for business owners with holding companies, rule changes can significantly impacted their future planning. With governments now ballooning debt due to Covid-19, we need to be prepared for new government changes in tax that will likely help pay for this.

Reviewing government legislative changes regularly is important.

Tax

The Government is one of your biggest financial partners in life. They take the largest amount of your income; in some provinces, amounting to more than ½ of your income. Managing tax and monitoring tax rules is critical.

Annually managing your taxable income can legitimately keep more money in your pocket rather than passing it on to the government.

Income Changes:

RRSPs are one of the biggest game changers the government implemented to help people retire. An RRSP allows for pre-tax money to grow tax sheltered and then to be taxed in the future at (hopefully) a lower tax rate than when you initially earned the money.

At age 72, a good saver may encounter tax challenges and in some cases Old-Age Security (OAS) clawbacks (loss of government programs).

Reviewing portfolio values and income changes on an annual basis can benefit a retiree’s pocketbook.

Imbalance of Assets

Part of good planning is ensuring that during a wealth accumulation stage you are strategically allocating assets so that in retirement one spouse doesn’t have significantly more income than the other. This is especially true for retirement income prior to age 65 when income splitting rules kick in for RRIF, LIF and Corporate Dividends.

Reviewing assets on a regular basis to ensure they are optimally balanced is important to keep more of your income rather than paying it in tax.

Life Changes

Life doesn’t always go as planned. For example, sometimes a spouse pre-deceases another just into retirement. This can create tax challenges for the surviving spouse. RRSPs that were meant to be split between two people are now only for one. Non-Registered income is now taxable in the hands of a single person. CPP and OAS are often reduced as the survivor benefit doesn’t offset the reduction in government programs.

When doing planning, it is important take into consideration the health of the couple. Are both individuals healthy? Do their families have a history of longevity? Your financial advisor may recommend decumulating differently depending on these facts.

If one of the clients is in poor health, it is most likely beneficial to start CPP as early as possible. Whereas a healthy client with a family history of longevity may wait longer and take advantage of the government bonuses on CPP and OAS.

If a spouse is diagnosed with a serious or even a terminal illness, it is important to prepare for the worst while still hoping and praying for the best outcome. A lack of planning can significantly impact the surviving spouse and their income stability into the future. In this case, ensuring the ill spouse’s TFSA is maxed out prior to passing can transfer into the surviving spouse’s account and double their TFSA limit.

When life circumstances change, it is often valuable to meet with your advisor to review your financial plan.

Estate Planning

For some clients, passing a significant portion of their wealth onto their kids/grandkids is important. This can change how we decumulate. For example, for business owners, this may include restructuring their corporate structure to efficiently transition a business for the success of the next generation.

We find that ongoing discussions regarding estate planning are helpful to discover what is really important to the client with regards to estate planning.

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 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 II 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

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

Life Long Planning:

Summary:

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