Financial Planning 101: Q and A

John is a financial educator and planner. He and I are working on content for a downsizing course (mentioned in my last blog). Yesterday he was kind enough to sit down with me and answer my questions about financial matters that are relevant to me. I thought they might be of interest to you too. 

What would be the most important thing you would want empty-nesters to know?

Plan, plan, plan. When we were young and had children at home, our financial priorities were consumed with meeting the short term and medium term needs of our family. At the same time we were at the beginning of our careers and our wage or salary was low. Now, as we hit our late 40’s and 50’s our situations have changed. The number 1 priority is to retire any bad debt you have. Credit Card balances and car loans need to go. Have you had a look at your spending habits recently? Did you pay yourself first when you were younger? If not, start now.

Add a structured savings plan into your fixed expenses, just like you do with your mortgage or hydro bill. Pay yourself first and spend what is left. As we get older we begin to also think about our legacy. Do you have a Last Will and Testament? Is it up to date? Our vision for our future changes as we age. Make sure you keep you vision for when you are no longer here up to date as well.

Last thing, when was the last time you and your partner sat down and reviewed your financial plan? Do you have work pensions? What can you expect them to give you when you retire? How much will you need to supplement your income? If you have a great plan, keep saving, but be tax efficient. There are many tools available for everyone to use that can increase your income and reduce your taxes. It’s not just wealthy folks who can take advantage of the tax structure. Every informed person can do the same thing. So get informed.

I am thinking about selling my revenue property.  What would you suggest?

Great question, hard answer. Real Estate has been an investment vehicle that Canadians have flocked to over years. It feels like a safe place to park your money. When you look at Real Estate from an investment perspective it can be actually be a high risk investment. Especially in the current market. Lots of volatility is entering the market and prices are falling if you are looking to sell. Property taxes are also going up. Many municipalities are increasing property taxes 4-5% to cover off and an increase in spending is required. I don’t see that changing any time soon.

I also think you need to look at your cash flow needs. Real Estate is a fixed asset. You can’t sell a portion of the house. It’s not liquid. When you go to sell can you wait three to six months before you have your cash in hand? Do you have excellent tenants? I hope so. Changes in tenants is a lot of work if you are managing the rental on your own. If you have a management company doing that for you, are they giving you good value for the money it costs you?

Lastly what are the tax implications of your investment? If you sell, what will be your capital gain? This is taxed. It’s one of the best kinds of tax to pay (if there is such a thing as a good tax) especially when you compare it to the tax you pay on the rent you collect. That is taxed at your highest tax rate. You have to “run the numbers” as you look at what your purpose is for the investment. There are maybe other options that will meet your needs.

My mum just asked me to set up her financial situation in light of her declining health. Any comment?

These can be such emotional conversations. I’m thankful that she wants to plan now and not leave anything to chance if she were to have a major crisis and be unable to plan. I am going to assume that your Mum is okay with her current financial situation. She has a plan and solid cash flow to meet her current and future care needs. If not, that’s where we start. The two other big issues we have to plan for are taxes and inter-generational transfers when she is gone. Her generation was told to pour as much into RRSPs as they can. Well, the Canada Revenue Agency, is waiting for the deferred taxes that are due when someone passes. There are some situations where Registered Plans, like the RRSP, can be transferred to a beneficiary. It just takes planning. This is where knowledge is your best asset. Work with your Mum and her financial team to put a plan in place that take advantage of the investment and insurance options that can create a very different financial future. The key here is to plan as early as possible so there are more options.

Aging parents are often are asset rich and cash poor.  Any pitfalls?

So many. Remember when we talked about Rental properties and I talked about a house is a fixed asset? This is what I was talking about. We can’t sell a bedroom of our house when we need cash. It’s all or nothing. The challenge in this conversation will turn on the idea of change. Something has to change. Not an easy topic for folks who can be very set in their ways. Starting the conversation as early as possible is critical. It is about having a plan. So many people just leave it to chance or believe they can’t do anything. We can do some basic things like property tax deferrals but that will only generate a few thousand dollars per year of cash flow. Reverse mortgages are also an option but the best advice I can give is to make a plan.

I have heard that 80% of Canadians are $200 from insolvency.  Do you have any suggestions to prevent this?

Would it surprise you to hear me say, “make a plan”? A recent report also shows that 95% of Canadians will retire poor. It’s sad then this doesn’t have to be the case. Canadians are financially illiterate. We pass down our financial habits from parents to children, good and bad. Most of our parents had few options available as the financial system aka Banks, focus their expertise and service on people who are wealthy. My role as a financial educator is to help every Canadian become informed and empowered; to give them the tools they need to build a financial future for themselves where they never have to worry about finances. The key is to start early, which is the hardest part of the conversation. Most people can find $50 or $100 per month in their budget to start a plan. It will take a few months to adjust, but it’s doable.

Once we can create a habit of saving, then we can learn how to put that money to work for us. Money works much harder than we do, Sue. It works for us 24/7. Let’s get together and map out a plan.

My young adult is just starting out with her first bank account.  What would be your advice to her?

Pay yourself first. A little bit of every paycheck into your Tax Free Savings account is a great place to start. Start with 10%. Build a habit of savings at the beginning. Its way easier that creating one when you are in your 30’s or 40’s. Get informed. Seek knowledge and advice.

Lastly, resist the urge to use your credit card for purchases you don’t have the cash for. Credit is easy to get and using it can be very addictive. Resisting the temptation and living within your means is the best strategy around.

Should I pull out my government pension and invest it with you and why?

First thing, for some people this is an option. Typically if you are under the age of 55 you can consider this. However, there are no easy answers with this questions. There are pros and cons that have to be weighed. There are tax issues that need to be considered in the year that you were to do this. Your age, current financial situation and assets will impact the decision. What are you work goals, when do you want to stop working? How long do you expect to live for? Are you in good health? What about your partner and family? It think this is a great question that has to be asked. It’s a question that an informed person should ask.

Government pensions are easy and safe. Are they the best options, for some, absolutely, for others? It’s worth the conversation. There are some many options that I can help people explore. I help people create a personalized plan that considers all the options and then present you with a recommendation on what approach will help you to achieve your goals.

Thanks to John, for this valuable advice.

If you want to talk more about this, let me know at differentpath17@gmail.com.