Tag Archives: Financial Planning

Your investment income and the risk of time

Is creating your own income that’s guaranteed for the rest of your life important?

If you expect to use some of your investment savings to finance your retirement or other longer term needs, would you feel better if your savings are 100% guaranteed to provide you with income for life? Do your current investments offer that option?

With interest rates stubbornly stuck at historic lows, many savers and investors find themselves caught in a Catch-22 situation with investment choices that on the one hand offer either poor results, or on the other hand offer uncertain results.

For safety and short term needs many people leave money in bank accounts, and invest in GICs and term-deposits. Savings in these types of savings is safe, but growing at a rate that is barely keeping up with inflation. In many cases savings may not be growing fast enough to meet their longer – term financial goals.

Others place hope for better growth on their investments in volatile markets that don’t guarantee gains, and may actually lose value by the time they need the money. Many people hedge their bets and do both.

It’s not that market risk or volatile markets are necessarily bad. In fact, higher risk tends to bring higher rewards with some investments. In fact it is technically correct that over time, securities markets outperform many other investment savings choices. But these rewards are typically gained over long and uncertain periods of time. As an example, the Toronto Stock Exchange is at about the same level today as it was 8 years ago.

So time is a very important factor, particularly for savings that are earmarked to provide you with an income the you’ll need to use at a specific time such as at or during retirement.

Obviously the closer you get to retirement the sooner you may wish to reduce some risk and put guarantees on your savings you’ll use for income. For many people, the simple fact of knowing that they’ll never outlive their savings is a far more important part of the investment process than hoping for out-sized gains in the markets or running the risks of having to hope for markets to ‘come back’ and make some money eventually.

Thankfully there are a variety of guaranteed investments – no matter the size of your nest egg – that take the risk of time out of your future financial plans.

To discover whether these guaranteed investment options meet your unique circumstances, good questions to ask a certified financial planner or advisor are:

  • Can our lifetime expenses be covered by our current pensions and government retirement benefits?
  • How do we finance our future travel plans and other bucket list items?
  • If we want to convert some of the equity from the sale of the family home or from other nest eggs into a guaranteed-for-life income stream, what are the best available options?
  • Can we afford to support our dependents?
  • How will we cover our long-term care needs?
  • After we’re gone, will we have enough to cover the needs of our survivors, bequests and the charitable legacies that we wish to leave behind?

Here’s a very basic example of a guaranteed income solution.

Many of us feel most comfortable when we know that at a minimum we’ll always have an income for life that will pay rent, taxes, heat, light, power and keep food on the table. Often in these cases there’s an easy-to-implement solution, which is to convert the properly calculated amount of nest-egg savings into the equivalent of a 100% guaranteed-for-life personal income plan that will cover these needs.

Some guaranteed income plans may also offer you additional benefits to suit your circumstances such as:

  • Guaranteed future income growth during savings years.
  • Plans that allow you to participate in the upside of the markets while also guaranteeing an income for life.
  • Guaranteed income payments that won’t go down over your lifetime.
  • Minimum guarantees. What you put in is what you can take out, even if the market value goes lower than your initial deposits.
  • Control over your investments.
  • Joint accounts, for the purpose of guaranteed income continuation for a surviving spouse.
  • Avoid probate taxes and maintain control over savings. Note: in most Canadian provinces, it is unnecessary to set up joint accounts on guaranteed investments if your wish is to avoid probate taxes and dramatically ease the distribution of the residual values to your beneficiaries.
  • Transfer of residual proceeds to your beneficiaries can be delivered as incremental payments over time and/or as lump sums, as you see fit.

As an independent Certified Financial Planner and an expert on guaranteed-for-life income solutions, I have personally invested them since they are a perfect fit for my circumstances.

If you’d like to learn more about taking the risk of time out of your investment savings, I invite you to contact me to help you discover if guaranteed investments are the right fit for you today.

Jack Bergmans CFP

Certified Financial Planner/ Founding Partner

Life Insurance & Estate Consultant

jack@bequestinsurance.ca
Phone: (416) 356-4511
Toll free: (888) 708-3134 Ext. 2
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Financing My Retirement Part 3

Financing my retirement – Part three

Transitioning from retirement to retirement home

Do you have plans to downscale and move into retirement home, and use the proceeds from the sale of your home as your nest egg?

If so, here are some ideas on how to maintain control over your funds, make the most of them, and even set some aside to act as a meaningful legacy.

Most people often consider retirement planning in three separate stages:

1)    Putting aside savings during working years;

2)    Planning the transition from working life to retirement;

3)    Simplifying life by moving from a larger home to a retirement home.

Saving during working years can be tough for people who are self-employed, or who don’t have pension plans that will result in a tidy pension. If you use mutual funds as your saving plan, your savings are at risk due to the unknown timing of the ups and downs of the stock market. Also low interest rates are great for borrowers but terrible for savers, since the low rates are not keeping up with the rising cost of living. If you’re still working, you do have the advantage of time and may be able to wait for markets to recover or interest rates to rise.

But if you are nearing retirement, time isn’t on your side. Fluctuating markets become a major concern when you need to access your money to fund your retirement and your retirement needs. And when you are selling your home to fund your retirement, freed-up cash may look like a lot initially, but retirement living can be expensive and it’s all too easy to burn through funds if they’re in low-interest or risky investment vehicles.

You’ve also got to consider that you may well need funds set aside for increasing healthcare costs. When you are emotional about changes in the health of yourself or your spouse, this is a poor time to make important financial decisions.

Planning in advance will allow you to maintain control over your hard-earned savings, and breathe easier about financing your future.

An understanding, impartial retirement planning professional can help you with your plan. He or she should engage in discussions between you and your loved ones about your vision for your retirement, and how you want to be remembered through legacy planning. Involving your family in your plans can alleviate future tensions or misunderstandings.

By choosing an independent broker to help you with your plan, you will have access to a wealth of financial planning options that aren’t offered through bank products. You should investigate no-risk financial solutions that allow you to stay in control of your assets while providing you with guaranteed income to live comfortably.

Here are some of the key points to discuss when creating your plan.

1)    How much is enough to carry you through your retirement years? What are your lifestyle expectations and what will they cost? What are your current needs and what should you be keeping aside to cover possible future needs?

2)    What are the best investment options to allow the proceeds of the sale of property to fund your retirement? No-risk options that will guarantee your desired lifestyle and well-being for life should be considered first. Typically these options will include such things as annuities and other guaranteed insurance products; they also are attractive since they generally offer a higher guaranteed rate of return.

3)    Do you wish to set aside funds to help support your children or your favourite charitable causes? By switching some of your savings into similar products offered by insurance companies, you will be able to assign beneficiaries to receive any left-over funds. On your passing, the transfer to your beneficiaries occurs outside of your estate and therefore is not subject to probate fees and taxes, and legal expenses, ensuring your beneficiaries receive more. The transfer will also occur in a few weeks, compared to delays of four years or more with non-insurance and bank products.

4)   Do you currently have a disability? Are you taking advantage of all available tax breaks to help ease the costs of retirement living?

5)    Have you assigned someone you trust to be your power of attorney? If you become incapacitated, it can be critical to have a friend or family member in your corner to help make critical life decisions and assist in the management of your finances.

6)    Do you have a valid, up-to-date will? Do you really want the government to be your primary beneficiary if you die without a will? You can remain in control of your assets, even after you pass away, by making decisions now that will allow you to leave behind a memorable and meaningful legacy that will touch lives for years to come.

I am happy to answer any questions you have. Drop me a line at jack@bequestinsurance.ca.

Up next: How you can stay in control of your finances when going from home to retirement home

Financing My Retirement Part 2

Key considerations when financial planning for retirement

There are three primary considerations to take into account when determining whether your savings last through your retirement years: inflation; the timing of returns on your investments; and life expectancy.

1. Inflation

Most of us think of inflation as the ever-increasing cost of goods and services over time. Governments encourage inflation because it provides them with tools to help smooth out the effects of economic cycles. Like it or not, inflation is unlikely to go away.

According to Statistics Canada, Canada’s inflation rate over the past 20 years has been 1.89% per year so a basket of goods that cost you $100 in 1992 will cost you $144.89 today. So if you want to maintain your standard of living, ongoing inflation requires that you have an increasing salary to during your earning years and in retirement, your pensions, savings, and any alternate income streams also need to take inflation into account.

2. The timing of returns on your investments

Many people keep their savings are primarily in bank accounts, GICs, mutual funds or the stock market. During the years you are adding to your savings, you may not worry too much about these investments and what return they will deliver in your retirement years.

Bank accounts and GICs are often considered safe bets, but don’t earn much interest. The value of funds in mutual funds and the stock market fluctuate daily. During savings years, financial advisors often suggest adding to your savings when market values fall, with a general understanding that there will be a market recovery in the future and the returns overall will be higher than bank account interest and GICs. However, it requires a crystal ball to know when markets will recover, which becomes a concern in later years if you are forced to begin drawing upon your savings while their value is still low.

Over the past decade, investing in the markets has generally provided lower rates of return, causing serious financial obstacles for savers and retirees alike, increasing tension levels. For those who are saving, low or no growth puts people years behind in their ability to accumulate enough savings from which to retire on. For retirees withdrawing money from savings that aren’t growing it lead to financial disaster, as dwindling funds make it more and more difficult to keep up with inflation and worse still, the base capital is likely to erode faster than it can be replenished. If this happens to you, you’ll run out of money before you die. That’s pretty scary.

3. Life expectancy

Better health care is allowing Canadians to live longer, and although this can be a reason to celebrate, it is also leading to more worrying about how to finance our retirement years. According to Stats Canada, the life expectancy for Canadian males now aged 65 is 83.5 (an additional 18.5 years); life expectancy for females now aged 65 is 85.2 (another 20.2 years).

The term ‘life expectancy’ is often misunderstood. It expresses an average age, meaning half of all people will die on or before their life expectancy age and half will live past that age. Your lifespan most likely won’t be the exact average but can supply general guidelines when working with your independent financial advisor for financing your retirement.

As a financial planner, I’m always asked, “How far ahead should we plan for our nest egg to last?” Many planners will advise you to use the age 95 as a baseline when planning to self fund your retirement. If you do live longer, that means there is some risk, but 95 is a good place to start, to help you sleep at night.

I recommend that your plans take you well into the future because your financial capacity may change unexpectedly. You have to keep in mind your personal lifestyle needs and wants, and also anticipate changing health care needs which can dramatically increase your cost of living.

When you are in your saving years, you may be able to afford higher risk investments that could possibly deliver higher rates of return. But as you approach retirement, higher risks lead to greater worries and may be inappropriate. This should be a key topic of discussion with your financial advisor. Keep in mind that independent advisors can generally offer you a much broader range of options.

To ensure you won’t run out of money, ensure you are putting money aside on a regular basis. Products like annuities and variable annuities are insurance products that generally offer a greater return than GICs, and offer fixed, guaranteed income for the rest of your life, even if you outlive the capital. This can be a good place to your discussion with your financial advisor to find the best solutions for your situation.

Please feel free comment if you would like to share your experiences, would like to see a specific topic covered in future blogs or have any questions around these issues.

Next:  My home is my nest egg… What do I do now?

Financing My Retirement Part 1

This blog is intended as a general guide that outlines some of the financial pitfalls that we may experience as we go through life and explore some of the solutions. This does not replace personal advice a reader should obtain from their financial advisor. Professional financial advice is available by contacting Bequest Insurance.

Thursday, 4 October 2012

Will I have enough income?
Many of us don’t have a defined benefit plan to rely on when we retire or the plan we have won’t satisfy our financial needs so we require different investment strategies to fulfill our families needs that will last throughout our retirement years.

In addition, low interest rates are making our investment decisions even more challenging because it takes significantly longer for our savings to grow and a much larger savings base from which to pay our expenses. Some people can afford to take more risk by investing in assets like mutual funds that are not secure, but if you are relying on this money to pay your way as you approach retirement is this really a good idea?

The short answer is a qualified maybe. Here’s why.

For years we’ve been told by people who sell riskier investments that taking on a little more risk means a higher return on your investment. They also tell us that when the market goes down it’s a buying opportunity because the markets will recover and and in time we’ll get better over-all returns. The idea is that the longer you are invested, the higher the probability you will end up with above average returns.  In general this is good advice when you have a time horizon of many many years and/or you have invested excess money you don’t depend on.
Otherwise, the problem with risky investments that you need to provide you with an income is that there are no guarantees. Market corrections will occur at various random times when you are withdrawing your money or in your retirement years and these corrections will decrease the value of those riskier investments. As you take money from your savings and your capital erodes at the same time, it becomes a very serious negative compounding problem that can spiral to zero extremely quickly.
In a very basic example, let’s say you’ve just retired and have $100,000 in savings which then grows to $105,000. You then start withdrawing $5,000 a year. The market corrects by 20% and your savings become worth $80,000. Do you stop taking income and wait for the market to recover? How long will that be for? Can you afford or even want to do without this income?  You know that the average return of the TSX over the past 12 years is a little under 5%. If that rate of return continues your savings would grow to somewhere around $78, 500 before you withdraw another $5,000. Leaving you with $73,500.  An so on until the next correction. I’m sure you can see that, unless you stop taking income, it’s unlikely your savings will ever catch up and you’ll run out of money much faster than you’d care to worry about.

If you wish to avoid this kind of risk or this has already happened to you what are some of the more common solutions available?

Like with most things financial, unfortunately there are no one size fits all solutions because everyone’s family, finances, current and future needs and wants are quite different from each other so proper solutions really depend on the outcomes you want and can afford. In general though, if your retirement income is too low for your needs, or you’d prefer a higher after tax income, your independent advisor can explore with you the assets and/or savings that can easily be rearranged to provide a higher income stream without taking on any additional risks.  In my practice, I find with my clients that it always makes sense to explore whether it makes sense to rearrange a part of their savings to create a personal private pension plan that’s guaranteed for life. It costs nothing to set up, guarantees you income for life and provides a core income you can rely on and can effectively plan around.

Next…Financing your retirement living.

Jack Bergmans, Certified Financial Planner/Founding Partner
Bequest Insurance
jack@bequestinsurance.ca

Phone: 416-356-4511
Toll free: (888) 708-3134 ext. 2