The financial industry is relentless in encouraging Canadians to “plan for the unexpected” – and highlighting how anything can happen. You could lose your job, become disabled, lose your home to a fire, lose a loved one – the list of possible bad news seems endless.
The solutions that the industry is pushing – emergency funds, insurance, retirement savings – are all smart choices, and it’s important to have protections against bad news in place. But what about the good news? Do we need a plan of action when happy financial events occur?
The answer is absolutely. But luckily, your actions can take place after the good news. Unlike the bad news event, no advance planning is required.
Unexpected good financial news can come in many forms: an inheritance, large gift, work bonus or promotion, or a rapid rise in the value of shares that you own. And if you experience financial good fortune, it’s important to integrate the unexpected additional assets into your financial plan.
For example, with a more secure financial base, you may be more comfortable with investment risk, and more willing to adopt a more aggressive investment strategy to enhance your long-term returns. Conversely, if your savings are already aggressively invested to achieve your retirement goals, the additional wealth may allow you to structure a more moderate risk portfolio.
If you are currently retired, financial good fortune can also affect your retirement income strategy. If you draw on your new funds to meet your immediate cashflow needs, you’ll be able to withdraw less taxable income from your registered plans – and this could significantly lower the taxes you pay.
Of course, the most unexpected – and most unlikely – piece of good financial news is what nine Montreal co-workers received around Christmas: a $60 million lottery win, representing nearly $7 million each. The group seemed surprisingly tight-lipped in the press reports, not even disclosing where they worked. But you definitely get a sense that this is a savvy group who will plan well.
And while the article below contains advice for a lottery win, it really applies to any financial windfall.
Enough of the bad news – here’s to good financial fortune for you in 2018.
Thank you for reading,
There are a few holdovers from the Mad Men era of 50 or 60 years ago, when men were the primary breadwinners and wealth managers – and women looked after the home and family.
On the home front, even though almost four out of five women work outside the home, they still do more housework than men. Yes, men are getting better, but as Maclean’s magazine puts it, this evolution is happening “at a glacial pace”:
Perhaps more importantly, the money management part of the 1950s has also been slow to change – with some significant differences in financial literacy and financial confidence between men and women. According to research from Sun Life Financial: https://www.sunlife.ca/static/canada/GRS%20matters/GRS%20matters%20articles/2015/Bright%20Papers/Mind%20the%20retirement%20Gap_Unretirement%20Paper_E%2006-15_June%2011.pdf:
- 46% of women say they lack sufficient knowledge about how much retirement income they would need, versus 37% for men
- 35% of women say they lack sufficient knowledge about how to select investments, versus 26% for men; and
- 32% of women say they lack sufficient knowledge about government programs (such as CPP/QPP, Old Age Security), versus 24% for men.
RBC has also studied the issue and reached a similar conclusion, with only 48% of women feeling confident in their knowledge of wealth and money topics, versus 65% of men: https://www.rbcwealthmanagement.com/ca/en/research-insights/gaining-perspective-on-women-in-wealth-transfer-and-overall-wealth-planning/detail/.
Too often, this lack of knowledge and confidence means that in a male/female relationship, investment, wealth and estate planning falls to the male, with the female less involved. And that’s problematic. With high marital breakdown rates and a longer female lifespan, 90% of women will be solely responsible for their finances at some point in their life. And many women will inherit money twice – once from their parents and once from their spouse. Inheritances are major financial events that can involve a number of decisions and planning changes – and knowledge and good advice is critical.
A couple of changes are needed:
- Get involved – sooner not later. Women not currently active in long-term wealth planning for themselves and their families need to get involved. It’s their future, and, at some point, it’s likely to be a future on their own. Now is the time to get involved to ensure it’s a secure one.
- Get a financial advisor who truly meets your needs. Wealth advisors historically have not been good at catering to the advice and planning needs of women. Studies have shown that in the U.S., 70% of women change financial advisors after their spouse has died. In Canada, the number is 80%. Clearly, many women are not happy with the advice they’re getting. If you’re involved with your finances, and your current advisor is catering to your male partner and not to your concerns, don’t wait until there’s a death in the family to take action.
This article in the Globe and Mail spells out the issues well. It’s worth a read: https://www.theglobeandmail.com/globe-investor/investment-ideas/financial-advisers-have-trouble-talking-to-women/article22726458/.
Thank you for reading!
A lot can change in 100 years. In 1920, the life expectancy at birth for the average Canadian male was 59 years – and only 61 years for women. Fast forward to today and the numbers are remarkably different – nearly 80 years for men and 84 years for women.
And those are just averages. According to the federal government, a 50-year-old man today has a 37.5% chance of living to age 90, and a 50-year-old woman has a 48.8% chance, nearly one in two. Want to know your odds of living to 100? Check out Table 16 here: http://www.osfi-bsif.gc.ca/Eng/oca-bac/as-ea/Pages/mpsspc.aspx#TBL14.
What does it all mean? Well, you could live long enough to see the Toronto Maple Leafs win the cup after all; but, more importantly, it means you need to plan your finances to last a much longer time than generations past. Here are four tips to consider as you make your plans:
- Don’t save it all in one basket: While it can be cost-efficient and convenient to deal with one financial institution, within that one institution, aim to have a mix of investment accounts. Ideally, you’ll have a combination – registered retirement savings plan (RRSP), tax-free savings account (TFSA) and a non-registered account. Because tax and withdrawal rules differ between account types, the mix gives you maximum planning flexibility to manage your income distribution in retirement.
- Invest for growth: Many people will now spend more years in retirement than they did in their careers. With many retirements now spanning 30 years or longer, the need for equity investments in a retirement portfolio can be more important than ever. Yes, equities carry substantially short-term risks, but the higher long-term returns they generate can extend the life of a portfolio and help offset the impact of inflation.
- Consider alternative products: In addition to your investment savings, it pays to explore other products that can help you achieve your financial goals for retirement. For example, permanent life insurance has a cash value that can supplement retirement income and provide a legacy for family members, or cover estate tax liabilities. And life annuities – while not providing income flexibility – offer the benefit that those living into their 90s and beyond love: guaranteed income for as long as you live. Both products are worth discussing with your financial advisor.
- Delay the start of your government benefits: Government benefits – like those from the Canada/Quebec pension plan and Old Age Security (which is only paid in whole or part to those with annual incomes below about $120,000) – are both inflation-protected and, more importantly, paid for life. And if you can afford to delay receiving these benefits until age 70, you’ll get a much bigger payout.
For example, if you start receiving your CPP retirement pension at the age of 70, your pension amount will be 42% more than it would have been if you had taken it at 65. And if you delay receiving your Old Age Security pension to age 70, your monthly pension payment will be 36% more than it would have been at age 65. While these two benefits may not represent huge payouts in the early years of your retirement, they can be an important guaranteed income stream in your later years, when other assets may have been depleted but the need for income remains.
And if you want to make age 100 your goal, BMO outlines some strategies to get you there: https://www.bmo.com/assets/pdfs/gam/BMO-Report-Living-to-100-en.pdf.
Happy living, and thank you for reading!