What is a Financial Plan?
Think of a financial plan as being similar to a business plan for a company - except it is for you and your family. A business plan is going to include an action plan for every aspect of that company, including projections for growth rates, tax analyses, risk management protocols, what would happen in case of an emergency, etc. Everything is well defined and thought out in advance. Business plans are so important that you cannot get a small business loan from a bank without one. The more well thought out the business plan, the more likely a bank will provide a loan because it views the company as having less risk. A financial plan is really no different.
There are generally 8 main categories that a financial plan will address:
Cash Flow Management
Investment Planning
Retirement Planning
Mortgage Planning
Estate Planning
Tax Planning
Credit and Lending Planning
Insurance Planning
Here are some questions to ask yourself to see what might be addressed in a financial plan:
1. Do you know if you are subject to OAS Clawback in retirement?
(Old Age Security benefits are subject to income testing, which means that if your ‘earned’ income is over a certain amount, the Government will reduce your Old Age Security entitlement. This can be avoided by planning how and when your retirement income is withdrawn.)
2. Do you know how to plan for income splitting opportunities prior to age 65?
Income splitting can reduce taxes tremendously. For example if a household has one person earning $100,000 per year, that person would pay approximately $30,000 in tax. If that income could be shown to be earned by two people at $50,000 per year versus one person at $100,000 per year, then each person is only taxed roughly $10,000 per year, for a household total tax of $20,000 (vs. $30,000). This is a $10,000 annual tax savings.
3. Do you understand the use of Spousal Testamentary Trusts in your Will?
For those who are well versed with the benefits of income splitting, you can potentially maintain this tax-advantageous strategy after the death of one spouse through the use of a spousal testamentary trust. Instead of all assets passing into the hands of the remaining spouse, the assets can pass into a trust which, in the eyes of the Government acts as a separate taxpayer. The trust can pay for certain expenses while being taxed at graduated rates, and your surviving spouse can also be taxed at graduated rates on his or her income. This would maintain the annual tax savings you may have enjoyed as a household prior to one spouse’s death.
4. Should you be looking at using Index ETFs (Exchange Traded Funds) to reduce the cost of your portfolio management?
Numerous studies have shown that simply tracking an index with a low cost (since there is no manager to pay) can outperform almost 90% of Canadian and US equity mutual funds. If you can save 1% per year in investment management fees, this may be similar to earning an extra 1% per year return on your investments. For someone with a $100,000 portfolio the 1% difference between an 8% return and a 9% return can add up to $300,000 lost to fees over this time. Examining your fees is very important.
This is only scratching the surface…
In four questions, we will bet we’ve given you some food for thought about financial planning. Imagine what we can do for you once we actually sit down and learn more about your particular situation…
