Tag Archives: Financial Freedom

Four Mistakes to Avoid When Creating a Retirement Income Plan

Today, I want to talk about the four common mistakes that retirees should avoid making when creating a retirement income plan. These are:

  1. Not factoring in inflation

  2. Not factoring in income taxes

  3. Poor structure of investment management fees

  4. Believing in the myth that your fixed income exposure needs to match your age

First, let’s begin with the mistake of not factoring inflation into your proposed retirement income needs. It is extremely important to consider inflation because how long your money lasts is a direct result of how much it is going to cost you to live your life each year.

For example, you determined that life is going to cost you $5,000 each month. This amount will be used towards food, clothes, etc. But don’t be fooled into thinking that this is the same amount of money that you will need in the future. Things will get increasingly expensive, and your cost today is not going to match your cost tomorrow.

During your working years, it is much easier to anticipate inflation, and most salaries keep pace with the general increase in prices. However, inflation can become a real problem when you are on a fixed income, and your standard of living can be affected if you haven’t properly planned for it. If we factor a Canadian average inflation of 2% a year into the above example of $5,000, it will cost you $7,430 a month to live the same life in the future.

In addition to the effects of inflation, mistake number two is not factoring in income taxes. If you need $5,000 a month to cover living expenses, you will need to withdraw more than that amount in order to have enough to pay the income tax bill as well. Failing to factor income taxes into the retirement plan could exhaust your portfolio before expected.

The third mistake to avoid when creating a retirement income plan is to make sure you are not poorly structuring the investment management fees that are paid to your investment management team. Chances are you’re investing in mutual funds, and will need to pay a fee to the mutual fund company for their services. On average, you would pay 2.5% for this fee. What this means is that if your portfolio generates an 8% gross return, you would only see 5.5% instead.

There is a little trick that I would recommend to reduce the impact of the management fee without changing your portfolio. Instead of having the MER paid before you see your distributions, you can ask your advisor to have the fee unbundled. This means that they will first pay the full 8% gross return generated, and then subsequently charge the management fee. By separating the two, you will be able to earn a tax deduction for the amount that you paid for investment counselling as dictated by the CRA.

Lastly, the final mistake to avoid is thinking that you need to match the percentage of your portfolio allocated to fixed income to your age. For example, it might seem logical to have the majority of your portfolio in bonds at an elder age. However, you will be setting yourself up for a major drop in income due to the low return expectations on fixed income, making it more difficult to counter the combined effects of fees, inflation and taxes that I mentioned earlier.

No matter your age, a sound asset allocation program starts with one’s net worth, expected income needs and risk tolerance. Everyone’s circumstances are different and believing in the myth could lead to underperformance and interfere with you achieving your financial goals.

I strongly invite you all to make sure that you account for these four variables when creating a retirement income plan. Contact your investment advisor to adjust the way you pay your portfolio’s management fee. Make smart choices when planning for your future.

Important Steps To Financial Freedom: Expenses, Debt and Diversification

In order to come up with a solid financial plan that focuses on your financial freedom you need to get clear on where you stand right now so you can determine whether or not your current financial state will support your lifestyle after you leave the work force.

Paying particular close attention to your expenses and your debt levels and gaining clarity on what it will take to clear those debts as quickly as possible is paramount to a successful transition. Transitioning from working to not working with debt can be challenging unless you have a clear plan on how to manage your debt requirements.

You also need to look at what your revenue streams will be during your post-working years and how diversified they are. Taking a look at these items will not only help you transition with confidence but will also protect you by ensuring you are not reliant on a limited number of cash flow sources during your retirement years.

Get clear on your current financial position (your assets and all your liabilities/debts). In my previous post I listed the nine things you need to know before you can experience financial freedom. It is important to go through this list so you can gain a clear understanding of what you need your financial picture to look like.

When you go through this exercise it’s going to allow you to say to yourself one of two things.

You’re either going to say, “yeah, my revenue sources are going to be quite varied and so I’ve got a safer diversified revenue stream”…

Or, you are going to find that your revenue sources are not diversified and all of your revenue is going to come from one or a limited number of sources.

Having limited sources of revenue puts a lot of reliance on those sources to make sure they can keep up with your current and future cash flow needs. (Don’t forget the negative effects of inflation – also known as the “silent killer” to financial plans). Knowing how your revenue streams stand up is important and allows you to take action and make changes if you need to. Your financial advisor can help you with this.

Are you clear on your current financial position? Where does your money go right now? Do you have debts you are making payments on? What are your expenses? You want to get very clear as to what your expenses are now, what they’re going to be going forward and whether or not those expenses are going to continue with you all the way through until after you leave work.

Are you going to be carrying debt into retirement? Having complete financial freedom does not involve debt but if you do have some it is all about getting focused and getting a plan in place.

So here’s the thing. If you have a long time between now and when you leave the workforce, put a plan in place to get those debts paid off by the time you stop working.

I have no doubt there are certain people who will go into retirement with debts and that happens. It really just means that at that point you need to be very, very clear as to what the plan is for getting rid of those debts. Obviously getting those monkeys off your back during retirement would just allow for a much more solid financial footing.

So getting clear on what your expenses are going to be, what your fixed expenses are, what expenses are going to stop is going to allow you to truly live a life that is financial free.

——————————————————————————————-

Also read:

Retirement Plan

Why Your Financial Plan is Missing the Mark (And How You Can Fix It)

Financial Goals VS. Financial Objectives

——————————————————————————————-

Get a retirement income plan in place so you can see what your future holds. This will provide you with a tremendous amount of confidence going into retirement.

In my previous post, I asked the question “What kind of planning you are doing?” to help you gain clarity on what you need to see in your financial plan. Developing a base plan simply tells you whether or not what you’re trying to accomplish is financially doable. This also answers the most important question, which is, can I find financial freedom with the lifestyle I’ve become used to?

Having a financial planner is an important part of your overall plan and finding the right one for you takes time. To help you in this process, I encourage you to read How to Choose and Work with a Financial Planner You Can Trust. This is a free Consumer Awareness Guide that you can download instantly.

What Kind Of Planning Are You Doing For Your Financial Freedom?

In my last blog post I talked about the nine things you need to know before you can retire comfortably. Make sure to check out the link and read that blog post when you get a chance, there is a wealth of information in it. There is a lot to think about when it comes to planning your financial freedom. I just want to quickly run down the list of those nine things here so we’re all on the same page.

 

1. What is your net worth today?
2. Where is all your money going to come from?
3. What are your retirement expenses going to be?
4. What is your debt management plan?
5. What does your base plan look like?
6. What are the “what if” scenarios?
7. What kind of planning are you doing?
8. What about risk management?
9. Are you planning for how your estate will be distributed?

Today I want to go back and take a closer look at number seven on that list above. We want to look at the kind of planning you’re doing.

There are two different types of planning: there’s goals based planning and cash flow based planning. The two types of planning are used at distinctly different times.

GOALS BASED PLAN

So, for example, if you have a long period of time between now and when you plan to stop working, that’s where we would use a goals based plan. It’s basically when you say to yourself, “what do I need to do today so I can stop working at age 65 with a certain level of income?” The goals based plan answers that question.

Goals based financial planning provides you with a clear idea of what you need to do to retire at a certain age with a certain level of income.

——————————————————————————————-

Also read:

9 Things You Need To Know Before You Can Retire Comfortably

Financial Goals Vs. Financial Objectives

Why Your Financial Plan is missing the Mark (And How You Can Fix it)

——————————————————————————————-

Cash Flow Based Plan

A cash flow based plan takes into account a different set of variables and it answers the question, “what type of cash flow can I expect after I leave the work force?” We’re no longer focusing on a long term accumulation goal but focusing on a cash flow goal.

Cash flow based financial plans do a much better job of mimicking your actual income when you reach financial freedom and the taxes associated with the cash flow received from your plans.

One of the biggest differences between the two plans comes down to taxes. If you go ahead and use a goals based solution to answer a cash flow based plan you are going to be way off the mark. The main reason for that is taxation. With goals based planning you’re assuming an average tax rate over the life of the plan but with a cash flow based plan you need to take a look at the tax on the cash flow every given year.

Don’t forget a financial advisor can help if you have any questions about what kind of plan you’re using now or should be using. Remember, the goal of any financial plan is to reach the desired finish, no matter what the finish line is. Only you can decide the finish line that is best for you but a financial advisor can help you along the way, help you decide what questions you need to ask and help you answer those questions. Be sure to check out my guide called “How to Choose and Work with a Financial Planner You Can Trust” to help you find someone who fits with you to help you map your path to financial freedom.

KEY016 | Why Retire When You Can Have So Much Fun Working In Retirement?

Why Retire When You Can Have So Much Fun Working In Retirement?

Podcast: Play in new window | Download

Subscribe: Apple Podcasts | RSS

WELCOME TO THE KEY TO RETIREMENT™ PODCAST!

To subscribe to the podcast, please use the links below:

If you have a chance, please leave me an honest rating and review on iTunes by clicking here. It will help the show and its ranking in iTunes immensely! I appreciate it! Enjoy the show!

IN THIS EPISODE

In this edition of The Key To Retirement™, we ask the question “Why Retire When You Can Have So Much Fun Working In Retirement?”

BONUS SEGMENT

In today’s bonus segment we’ll show you how to use a free piece of software to link you to the most valuable free information on the internet to fuel your desire for great timely content.

And if you’d like to get a jump start on finding the answers to your key financial planning questions, using our proven system, you can book your risk free, no-obligation initial meeting. One of our specifically trained Certified Financial Planners will be pleased to walk you through The KAIZEN Financial Planning Process™.

Visit us online, at www.ironshield.ca, to obtain our contact information, then simply call or email to book your free initial meeting.

Items Mentioned In This Episode

   Subscribe via RSS (non-iTunes feed)

Episode Mind Map

Focus on financial freedom, not financial wealth.

Focus on financial freedom, not financial worth.

At the time I write this, there are advertising agencies and marketing departments of the investment companies poised and ready to release this years marketing message to you.  The marketing message usually has something to do with investing more.  Read the messages, understand them but don’t follow the advice delivered through them.

I’m going to speak to you now from a financial planning perspective.  Quite a different viewpoint than a marketing one.

Believe it or not, some of us overspend every so often.  (Yes, it’s true!)  Here is my message to you that will trump any registered investment:

Pay off your high-interest credit card debt or clear the balances on your overextended lines of credit.

Doing so will allow you to move closer to financial freedom.

Then, once you are free and clear of the shackles of these debts, set yourself up for success and take advantage of at least one of the following plans.

Registered Retirement Savings Plans have always been a friendly way to invest.  For each dollar you put into your RRSP, you get to reduce your taxable employment income by a dollar and the tax you originally paid on that dollar of income comes back to you in the form of a refund.  So, for someone in the 46% tax bracket, putting in $1,000 to your RRSP provides you with tax savings of $460.

But, if you don’t have any taxable employment income or your income is quite low, there is a solution that you can take advantage of.  The Tax Free Savings Account is a solution that brings with it a lot of punch.  If you haven’t contributed to a TFSA before, you can put up to $20,000 into a plan in 2012 (assuming you were at least 18 years old in 2009).  Any money you put into a TFSA is completely tax sheltered as it grows and completely tax free when you withdraw the funds (original investment and all profits) in the future.  For a complete overview of the power of a TFSA, click HERE.

Now, with all government plans, there are some rules you have to follow.

For the 2011 tax year, you have until February 29th, 2012 to make a contribution to an RRSP that you can use on your 2011 tax return.  The maximum all Canadians can contribute to their RRSP is 18% of their previous years income to a limit of $22,450 for 2011.  This amount is reduced for those Canadians who are a member of an employer sponsored Registered Pension Plan.  The reduction is based on your Pension Adjustment that is found on your T4 slip that was issued for your previous year.  Plus, if you have a previous year that you had RRSP contribution room that you did not use, you can add this amount to your annual limit.  If you found this hard to follow, simply find your Notice of Assessment from last year and at the bottom of it is a summary of the amount you are allowed to contribute to an RRSP for the current tax year.

If after reviewing my previous post on TFSA’s you determine that a TFSA contribution is more appropriate for you, here are the contribution rules that you are governed by.

If you were at least 18 years of age in 2009 and have made no contributions to a TFSA then you can contribute up to $20,000 in 2012.  That’s it.  It’s pretty simple.

I do urge you to read my previous post on TFSA’s however because there are a lot of reasons to and reasons not to contribute to a TFSA.

If you’re thinking that all of this sounds great but you don’t have lump sums like this sitting idle in your bank account right now looking for a home in a RRSP or a TFSA, here is a solution for you.

Set up a monthly contribution plan (a.k.a. PAC or Pre-Authorized Chequing) arrangement.

Here are some key monthly contribution amounts that will help you maximize each years contributions:

  • $1,914.17/mth, to a RRSP starting in January 2012 will allow you to hit the annual limit available for your 2012 RRSP of $22,970
  • $416.67/mth, to a TFSA starting in January 2012 will allow you to maximize the annual $5,000 limit

So, focus on Financial Freedom.  Paying off your high-interest debts first will not only be a very smart financial decision but will provide you with the financial freedom needed to make huge strides in increasing your financial wealth.

*UPDATE: Starting January 2013 – the new TFSA annual maximum contribution limit is $5,500.

 

Mike Flux – Investment Review and Update Q2 2011

Hello everybody and welcome to another one of IRONSHIELD Financial Planning’s “Fly On The Wall” webinars.

If this is your first time tuning in to a “Fly On The Wall” recording, let me quickly explain to you what this is.

You are going to experience what it’s like to be a “fly on the wall” during one of my update calls with a member of our Top Guns Network.  This network is my personal network of specialists.

Every so often, I ask a member of my network to touch base with me to bring me up to speed on the latest happenings in their area.  And when they call me, I record the call so you can be a “fly on the wall” for that call.

On today’s episode

I invited Mike Flux, VP of Connor Clark & Lunn Private Capital to summarize for me what has happened in the global markets during the 2nd quarter of 2011.  He not only explains what happened but explains what their strategy is moving forward.

Please click on the video below to watch & listen to the call:

(Duration 26:11)