bout de papier, Vol. 5, No. 3 (1987) — Fall 1987 // Automne 1987, pp. 42–43
Financial Planning — a buzz word to many, of interest to most and a profession to a few.
The old phrase “people don’t plan to fail, rather they simply fail to plan” has significant meaning when it comes to the world of finance. Financial planning is not simply the maneuvering of dollar bills but the preservation of your money from the impact of items ranging from impulsive purchases to economic change through bull and bear markets, tax impact and inflation.
A few people are able in their spare time to develop a method which proves successful in terms of managing not only their own money on a day to day cash flow basis, but accumulating it as well in the most tax and economically effective manner. If you are one of these people, then consider yourself blessed for you are indeed a rare creature. Most people, after spending a full day at their chosen profession, particularly yours in the far flung reaches of the world, find it of little interest to actually sit down and balance their cheque books, review their revenue and expense statements, analyse their stock holdings, compute their estate situation, calculate the outstanding tax and explore market and investment opportunities with the few minutes of their day that remains. On the contrary, we find that most successful people are extremely busy in their profession, and at the end of the day, seek some relaxation which generally does not mean a painstaking review of one’s financial circumstances.
If you are one of the many who simply do not list high on your priority list any of the aforementioned financial subjects, but nevertheless wish to minimize your tax and maximize the capital which you accumulate while enjoying your current lifestyle and, at the same time, being able to sleep well at night, then the subject of financial counselling and/or planning may well be for you.
Just as you have likely formed a good working professional relationship with your general practitioner who upon completing your annual medical will refer you to medical specialists as your physical health determines, a good financial counsellor is charged with the responsibility of referring you to financial specialists as your financial health dictates. For instance, if you require tax or legal assistance then you should be referred to tax and legal specialists who, just as a cardiologist or urologist will help you with their medical specialty, are able to help you with your financial planning.
Rather than putting you in the position of being your own physician, a good financial counsellor will direct you through the maze of financial options, opportunities and obstacles. What are some of the obstacles and opportunities?
Cash Flow Management How is yours?
Are you constantly running an overdraft?
Is your cash flow adequate to support your lifestyle!
Are you saving off the top or spending it all and trying to save what is left over?
Do you know everyday of the week where you stand in terms of your budgeted spending, how much you spend for entertainment, clothes, transportation relative to what your budget really is?
In fact, do you have a budget and if you do, do you stick to it and how do you measure it?
These are some general questions to which if your response indicates that there is some room for improvement, you may well want the assistance of a counsellor with whom to sit down and/or at least correspond in order to ascertain whether or not, subject to your lifestyle and cash flows, you can afford to live on your current income or are you actually living on “ifcome” or “whencome”?
Income taxes, of course, have to be paid and paid generally on time; however, with the proposed June 18th rules of Mr. Wilson, we have a situation developing where potentially lower income tax brackets will apply in 1988 as opposed to 1987. Thus, any deferrals which can be made from now through until 1988 of income, bonuses, or the receipt of other income, obviously will prove to be net cash effective as they will be subject to lower personal rates in 1988.
If your spouse is engaged in an income generating activity, have you minimized the tax impact on your joint incomes and, in fact, are you aware of what the June 18th proposals may well mean to you upon return to Canada?
Capital accumulation and taxes What are you currently doing with your savings dollars and do you feel that you are taking advantage of all that you can with regard to the minimization of tax on the compounding of interest? As Albert Einstein said, the magic of compound interest is one of the greatest discoveries of the 20th Century and many mutual funds have proudly boasted of their 18 to 20% net compound return for investors over the past 10 years or more. The inside buildup of capital receives preferential tax treatment in a mutual fund because it is not taxable until the fund is sold. Notice the interest accumulation as part of the mutual fund unit.
Whether or not you are able to participate in fund accumulation will really depend upon what your cash accumulation and savings habits have evolved to at this point in time. Do you save 10% of your income off the top or are you spending first and trying to save what is left over? There rarely is anything left over unless you plan on it and then work your plan. The beauty of mutual fund capital accumulation is that, while exposing your dollars to risk, you are averaging up and averaging down your buying units in a professionally managed fund which spreads your risk through bear and bull markets and throughout a variety of different equities. One is able to ascertain from the past performance over a 10, 15, 20 year period, how well a fund has performed through various economic cycles and markets and plan accordingly.
Registered retirement savings vehicles and defined benefit pension plans are two other options. A defined benefit pension plan has a maximum of $60,000 per annum which a corporation or pension plan itself can pay to a retiree. A defined contribution pension plan, one that defines the amount of money paid into the plan, but not paid out of plan, contains no such maximum as the ultimate pension payout is not guaranteed and therefore does not contain a maximum. Mr. Wilson in his June 18th proposals has extended his tax equalization approach to defined contribution plans by attempting to structure the contributions in such a way that the end result will approximate $60,000 a year pension. The key here is, what are you doing with regard to your pension benefits and do you understand exactly how your pension benefits work?
If you do, have you forecast the ultimate pension you will receive as a percentage of your then earned income.
The Stanford Research Institute has stated for some time that in order to maintain one’s lifestyle the 75% formula should apply. Namely, that at one’s retirement, disability or, in fact, death, 75% of income should be replaced on an annual cash flow basis with an offset for inflation in order to allow oneself and/or one’s family to continue to live in the world to which they have grown accustomed. Will your pension and/or cash flow pay out to your family at retirement, disability and/or death allow for a cash flow stream of 75% or close to it?
From an estate planning perspective, are you familiar with the survivors income benefits that are paid to your family and/or to yourself if you are disabled or die today?
Since cash flow, in many cases, dictates lifestyle the coordination of your government benefits with your own personal objectives should form the foundation of your financial plan with regard to the addressing of the three risks which can stop your cash flow, ie. retirement, disability or death. Once you have guaranteed that these three factors have been addressed in sufficient income terms to meet your families and your own personal requirements, then you have earned the right to talk about capital accumulation subject to your risk comfort profile.
All of these factors, combined with your absence from Canada, should prompt thought to the value of having a professional coordinate your objectives and match them to your balance sheet net bottom line. If your assets exceed your liabilities and the resulting equity is properly managed, what will it grow to and in what vehicles, with what tax treatment, and what effect will it ultimately have upon your ability to enjoy a comfortable retirement and/or lifestyle prior to that.
Since the vast majority of Canadians will at 65 have less than adequate capital and/or cash flow to maintain their lifestyle, it is imperative that planning take place for if you don’t plan on reaching a goal, how do you know if you have ever arrived at the proner destination?
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Originally published in bout de papier, Vol. 5, No. 3 (1987) — Fall 1987 // Automne 1987, pp. 42–43. Read the rest of this issue →
