Tag Archives: Financial Planning

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.

Charles Wilton – Why It Was Time To Sell Walgreens

Charles Wilton

A new interview with Charles Wilton, Portfolio Manager with the Private Investment Management Group at Raymond James.  In today’s episode, we talk about the recent disposition in his portfolio and why he decided to sell Walgreens.

IRONSHIELD Financial Planning’s “Fly On The Wall” update call.
These calls are recorded by Scott Plaskett and allow you to get a behind-the-scenes look at one of his professional update calls. Watch and listen as a “fly on the wall” and get some of the most valuable information you will find on the Internet.

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.

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Also read:

Retirement Plan

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

Financial Goals VS. Financial Objectives

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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.

The Richest Person In The Nursing Home

Featured in the July 2014 Newsletter of HAHN Investment Stewards. Republished with permission.

By: Scott E. Plaskett, CFP
Senior Financial Planner & CEO, IRONSHIELD Financial Planning, www.ironshield.ca

Is your financial planning putting you on track to be the richest person in the nursing home?

I bet it IS.

How do I know?  For the majority of Canadians, financial planning is based upon the principle of saving as much as possible on an annual basis and trying to earn the best rate of return in the process.

If this sounds like the underpinnings of your financial plan, you’ll want to read on.

First, let me provide you with a little background about how traditional financial planning is causing you to deny yourself today for the hope of wealth tomorrow.

Let’s look at the questions that are typically asked, during the creation of a traditional financial plan.  The questions may look like this:

  1. When do you want to retire?
  2. How much money do you want to live on during retirement?
  3. What level of risk are you comfortable accepting to earn the return on your portfolio?

And these questions, although they sound like intelligent questions to ask, are the wrong questions.

Let’s look at the first question.  It revolves around the word “retire” or “retirement”, which is a really bad word.

Don’t believe me?  Just take a look at this list of synonyms for the word retire (Synonym: a word or phrase that means exactly or nearly the same thing):

  • withdraw
  • retreat
  • expire
  • terminate
  • disengage
  • death

If you ask me, I don’t want to experience any of these things, yet most financial planning is based upon the concept of choosing a date in the future for your “retirement”.  And the focus becomes, what can/should you deny yourself today, so that you can save as much as possible for tomorrow?

Now for the second question.  If you asked me how much money I’d want to live on during retirement, my answer would be, “As much as possible…”  In other words, most people really have no idea of what their cash flow requirements are going to be when they cease to generate employment income, so putting an actual dollar amount on that today, is next to impossible.

As for the question about your comfort level with investment risk.  This is such a loaded question I don’t even know where to begin.  The concept of risk makes me think of gambling and believe me, I don’t want to gamble with my money.  Why would I want to accept ANY “risk”?  The reality is, we should be focusing on our ability to create the highest probability of success.  Projections alone – as in a traditional financial plan – won’t do that.  Finding the minimum rate of return that will allow your financial plan to succeed is where the focus should be.

So, being asked and answering these questions really doesn’t accomplish much – other than fill an hour of time with a conversation that feels important but really doesn’t get any closer to what’s truly important.

So, how should the financial planning conversation go?

I have found, that the better financial planning questions are the ones you should be asking, but just don’t know it.

  • What after-tax income am I on track for?
  • What is my financial independence day, or let’s call it “freedom age”?
  • What is my required rate of return?

Once answered, these questions will provide you with a tremendous amount of insight into what you need to do to be successful with your financial planning.  This type of clarity is what will allow you to make better decisions, knowing that your subsequent decisions will either enhance or detract from your ability to accomplish your goals.

Following this financial planning approach yields your Financial Minimum Effective Dose (MED), thus allowing you to spend on your lifestyle today, without guilt.

The concept of minimum effective dose comes from the world of science.  For example, in science class I learned that water boils at 100⁰C at standard air pressure.  Water is not “more boiled” if you add more heat.  Adding more heat is simply wasteful.

So, your Financial Minimum Effective Dose is the minimum amount of savings required for you to accomplish your financial goals.  Saving more money can be considered just as “wasteful” and may not support your lifestyle goals for today – just as important as tomorrow.

You see, in today’s world, retirement is an outdated concept.  People don’t want to “retire”, they want to be engaged in life, for life.  The problem is, that without a financial plan that assists you in figuring out what your Financial MED is, life is full of denying yourself today – out of fear – in the hopes of having more in the future.  The problem is, what happens if you don’t make it to tomorrow?  Will you have enjoyed your experience along the way?

Determining what your Financial MED is, will not only provide you with the confidence that you are on track to be financially free on your terms, it will also provide you with the permission to enjoy what’s important to your lifestyle today, without feeling like you are spending tomorrow’s money too soon.

You may still be the richest person in the nursing home, but it won’t be measured by your bank balance alone, but by the richness of the life you’ve lived.

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.

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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)

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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.

Charles Wilton – Why Buy Everest Reinsurance

Charles WiltonIn today’s episode, I chat with Charles Wilton, Portfolio Manager with the Private Investment Management Group at Raymond James.  We talk about the recent changes in his portfolio and why he decided to buy Everest Reinsurance.

IRONSHIELD Financial Planning’s “Fly On The Wall” update call.
These calls are recorded by Scott Plaskett and allow you to get a behind-the-scenes look at one of his professional update calls. Watch and listen as a “fly on the wall” and get some of the most valuable information you will find on the Internet.

Charles Wilton – Selling Position of CR Bard

Charles WiltonIn today’s episode, I have an in-depth discussion with Charles Wilton, Portfolio Manager with the Private Investment Management Group at Raymond James.

We go into detail about a recent deposition or exist position that took place in Charles’ portfolio.  Remember, investing is not just about the right time to buy and buying at the right price, but selling at the right price and knowing when to sell…

IRONSHIELD Financial Planning’s “Fly On The Wall” update call.
These calls are recorded by Scott Plaskett and allow you to get a behind-the-scenes look at one of his professional update calls. Watch and listen as a “fly on the wall” and get some of the most valuable information you will find on the Internet.

9 Things You Need To Know Before You Can Retire Comfortably

For many people, long gone are the days when you can retire from your job with the pension that your employer provides. Today it is important to have your own plan. It is all about taking control of your financial future and there a few steps you should take to help you achieve your retirement goals.

Here are nine things I think you need to know before you can retire comfortably.

1. What is your net worth today?
This is really the foundation of all financial planning. You need to understand your net worth in order to move forward. I suggest you make a list on one page everything you own; houses, cars, investment accounts, retirement accounts and education plans. Then take a look at your expenses or your liabilities; what do you owe? Now take your assets and subtract your liabilities and that gives you your net worth.

2. Where is all your money going to come from?
I want you to make another list here of where your retirement income is going to come from; retirement accounts, pension plans, government pensions and inheritances. We don’t need to know what the income is going to be only what the sources are.

3. What are your retirement expenses going to be?
You want to get very clear about what your expenses are now and what they are going to be moving forward.

4. What is your debt management plan?
So if you’re going into retirement and you’re going to be carrying debts, you really want to get a clear plan in place to get rid of those debts.

5. What does your base plan look like?
A base plan is a plan that lays out all of your information (your assets, your liabilities, your retirement income, your retirement expenses) and puts it into a system so you can get a clear picture of where you are today. This step helps answer the most important question can I retire with the lifestyle I’ve become used to?

6. What if scenarios.
I want you to think about and prepare for all eventualities in this step. For example, what if I really don’t like my job and I really want to retire five years earlier? Or what if we decide to downsize and maybe buy a summer home somewhere? All of these variables need to be worked into the plan.

7. What kind of planning are you doing?
There are two types of planning to consider here; goals based planning or cash flow based planning. Goals based planning provide you a clear idea of what you need to do to retire at a certain age within a certain level of income. Cash flow based plans do a much better job of mimicking your actual retirement income and the taxes associated the cash from your plan.

8. What about risk management?
This is important because when you are talking about financial planning there are three eventualities to consider. The first is you’re going to live a long healthy life. The second eventuality is you are going to live a long, unhealthy life. The third is you are going to die prematurely. We want to make sure all of our plans can sustain the level of income we will need to deal with all the eventualities.

9. Estate Planning
So what is going to happen to your family’s wealth when you die? What happens if both spouses die? Are you planning on leaving your wealth and assets to your children? We really want to be focusing on the efficient transfer of wealth from one generation to the next. If you want more information on estate planning, check out my recent post Keeping Your Cottage In The Family – Mistakes To Avoid.

Being able to retire comfortably takes planning. There is no doubt there is a lot to think about. A good financial planner can help you go through the steps so you can get clear on what you need to do to retire the way you want to. For more information on planning your retirement, check out my post Make Retirement The Time of Your Life: Ask Yourself Three Questions

If you are not sure where to turn, the team at IRONSHIELD Financial Planning can help. And of course take a look at this comprehensive and free Consumer Awareness Guide I wrote How to Choose and Work With a Financial Planner You Can Trust.