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T.E. Financial Consultants © 2002 PLANNING FOR THE FUTURE Presentation for McGill University Manager’s Meeting
T.E. Financial Consultants © 2002 T.E. Financial Consultants Ltd Established in 1972 in Montreal by Tim Egan Complete and objective financial planning services FEE ONLY TM counselling Recognized leader in Canada with offices in Halifax, Quebec, Montreal, Oakville, Toronto, Calgary, Edmonton and Vancouver Qualified advisors holding professional designations andlong term experience. No sales of any investment products
T.E. Financial Consultants © 2002 Agenda Planning for the Future –The Purpose of Planning –Planning…Planning…Why ? –The Process Planning #1 - Net Worth & Budget Planning #2 - Savings & Investments Planning #3 - Risk & Insurance Planning Planning #4 - Tax Planning Planning #5 - Estate Planning The Next Step
T.E. Financial Consultants © 2002 Planning for the Future... We plan…We plan…We plan for just about everything these days... How about taking the time to plan for our own future !
T.E. Financial Consultants © 2002 The Purpose of Planning Consider your finances just as important as your health…The small things you do today can and will have an impact on your quality of life. Whether it ’s financially or physically, being healthy can make a tremendous difference...now and for the future !
T.E. Financial Consultants © 2002 Planning…Planning…Why ?? For retirement... åProvide annual retirement income. åFind out how much you need to maintain your lifestyle. Estate planning... åProvide income and liquidity for their heirs after death. åDetermine the impacts of what a will and a mandate can have on the protection of your patrimony and your family. Education planning… åProvide funds to be used towards education costs. åDetermine how much is needed and how much time you have to accumulate what’s needed.
T.E. Financial Consultants © 2002 Planning…Planning…Why ?? Investment planning åDetermine what type of investor YOU are! åDetermine how much is needed to meet your needs and objectives Tax planning åPay less taxes…That’s why !! Risk management åDetermine what needs to be covered by insurances in cases of unpredictable events ( accident, death, loss of job…) åEstablish cash reserves for emergencies
T.E. Financial Consultants © 2002 Planning for the Future - The Process Your Goals and Objectives Your Current situation Analysis and Projection Solutions / Alternatives Decisions / Choices Follow-up / Periodic review To plan for the future, you must have...
T.E. Financial Consultants © 2002 Before You Start... ã3 important things to remember: –Know yourself… –Set attainable objectives –Make decisions based upon YOUR situation REMEMBER THAT YOUR BROTHER-IN-LAW, YOUR NEIGHBOUR OR YOUR COLLEGUE’S SOLUTIONS MAY NOT BE THE ONES FOR YOU!
T.E. Financial Consultants © 2002 PLANNING, PART # 1 NET WORTH & BUDGET
T.E. Financial Consultants © 2002 Net Worth & Budget Household cash management is a basic concept that almost everyone has trouble with, regardless of income. … Managing our cash flow is simply the process of laying out an ideal - a planned method of spending - and then keeping close track of how we follow that plan.. For most people, wealth accumulates from their pay check, so handling the cash management process has a significant impact. The key is… Stay in charge of the situation !
T.E. Financial Consultants © 2002 The Net Worth Statement The net worth statement is an individual’s snapshot of his/her financial situation at a specific time. This snapshot is based upon three components: – Assets – Liabilities – Net worth
T.E. Financial Consultants © 2002 Net Worth Statement ãOnce you have created your net worth statement, ask yourself these questions: 4Is my net worth concentrated into only one asset (i.e. house)? 4Is most of my net worth concentrated into types of assets that are depreciating over time, ex: cars? 4On a tax point of view, are my assets invested in the most “tax efficient” way? 4Is part of my assets appreciating in order to compensate the impact of inflation over time? 4How much insurance coverage do I need to protect my net worth?
T.E. Financial Consultants © 2002 Budget Management Identification of current expenses Establishment of an ideal expenses model –An effective budgeting process demands that certain fundamental rules be followed. Monitoring process –We have identify eight simple rules for an effective budgeting
T.E. Financial Consultants © Simple Rules About Efficient Budgeting 1 Make a detailed list of all income and expenses, at least once a year, if not once a month. If yearly, maintain the same date for your annual review. 2 Make a plan for expenditures that you expect to have for the next year. If you don’t think of any, take a look at last year’s expenses, that should help you …! 3 Set aside between 5 to 10% of after-tax income as savings before all other expenditures are calculated. 4 Plan non-discretionary expenditures first (such as food, housing, clothing, transportation and health care).
T.E. Financial Consultants © Simple Rules About Efficient Budgeting 5 Set goals for discretionary expenditures ( set reasonable goals) 6 Avoid planning any future debt and make the payment of existing debt a top priority for your discretionary expenditures. 7 Don’t be impatient about achieving results, or worse, guilt-ridden if goals aren’t achieved quickly. Changing personal spending and budgeting habits takes times and perseverance. 8 Ensure a system is in place whereby records are adequate enough to monitor process against the planned budget.
T.E. Financial Consultants © 2002 PLANNING, PART # 2 Savings & Investments
T.E. Financial Consultants © 2002 The Five Dimensions of Investment Planning There are five main steps in selecting investments to ensure they meet your objectives Step 5 Portfolio Records & Monitoring Step 4 Investment decision Step 1 Investor Profile Step 2 Investment goals Step 3 Asset Allocation Model
T.E. Financial Consultants © 2002 Step 1 - Understand Your Risk Tolerance There is a direct relationship between expected return and risk: –The higher the expected payback from your investment, the higher the risk !! Your risk tolerance can be affected by : –Time horizon –Cash requirements –Emotional factors You should never feel obliged or pressured to take more investment risk than you are comfortable with. And, there is no such thing as a « high-return risk- free investment »…
T.E. Financial Consultants © 2002 Step 2 - Set Your Investment Goals What do you want to achieve through investing ? Do you want to buy a house in 10 years ? A car in five years ? Save for your newborn’s university education ? Put away enough money to travel the world when you retire ? You need to determine how much money you are going to need to achieve your goal and how much risk you are willing to take to reach them.
T.E. Financial Consultants © 2002 Step 3 - Choose The Right Asset Mix When you begin to implement your personal investment strategy, the first thing you must decide on is your asset mix. The overall asset mix has the biggest impact on long- term results…not the performance of each asset !! There are three basic categories of investment products or assets : Cash equivalent Debt investments Equity investments
T.E. Financial Consultants © 2002 Sample Balanced Portfolio Asset Allocation Strategy: 40/60 Asset mix is a long term strategy. Consult a professional. (including 3% Emerging Markets) (including 4% Small Cap)
T.E. Financial Consultants © 2002 Sample Conservative Balanced Portfolio Asset Allocation Strategy: 60/40 (including 2% Small Cap)
T.E. Financial Consultants © 2002 Step 4 - Make Your Decisions ÖEstablish clear and reasonable investment goals before you invest; ÖSelect your adviser carefully. Ensure they have the qualifications and experience required, that they are properly registered in your jurisdiction and that they can provide the services you need. ÖDiversify your investment portfolio to decrease your overall risk by selecting the appropriate asset mix of cash, debt and equity investments ÖAvoid investments you don’t understand. Be sure you know what you are investing in and what impact it will have on the risk, potential returns and marketability of your portfolio
T.E. Financial Consultants © 2002 ÖDON’T take risks you can’t afford or aren’t comfortable with. ÖDON’T invest on basis of hot tips and rumors. They are seldom right. Besides, trading on inside information IS ILLEGAL !!! ÖDON’T blindly follow investment advice that you don’t understand…just because a « professional » told you so !! ÖDON’T forget that the only person who is responsible of your investments IS YOU! So, don’t forget to monitor your portfolios over time and to adjust accordingly. Step 5 - Do Your Homework
T.E. Financial Consultants © 2002 PLANNING, PART # 3 RISK & INSURANCE PLANNING
T.E. Financial Consultants © 2002 Why Buy Insurance ? Exposure to personal risk Losing income due to premature death Losing income due to disability, accidents, illness Risk of losing personal assets House Car Personal belongings Risk related to civil suits
T.E. Financial Consultants © 2002 Evaluate Your Needs Your needs change over time Your needs /obligations will increase substantially between age 20 and 35, to stabilize after Do not forget that your investments grow over time
T.E. Financial Consultants © 2002 Evaluate Your Needs Your needs change over time Amount of Insurance coverage Age Logically, your insurance coverage should evolve according to your needs/obligations
T.E. Financial Consultants © 2002 Types of insurance Life –Temporary –Permanent ( whole life ) –Universal Life Disability –Severe illness Civil responsibility –Car –House –Personal belongings
T.E. Financial Consultants © 2002 Evaluate your needs : Life Insurance It is important to evaluate your need for additional life insurance, for each spouse, in case of death. Establish the value of your estate –Assets - liabilities – owed taxes = net value of estate Make an estimate of the surviving spouse’ income and expenses Evaluate if the net value of your estate will be able to create enough income for the survivors Take necessary actions
T.E. Financial Consultants © 2002 Evaluate your needs : Disability insurance Important questions regarding your coverage… What is your maximum coverage ? If a worker is covered by the employer’s group plan, can he stay within the plan if he leaves his job? Can his coverage be transferred into an individual policy? Are your indemnities indexed by the inflation rate? What are the criterias determining partial or permanent disabilities? If a worker cannot go back to his previous job, but is capable of attending a new position, will the disability benefits continue? We should be able to answer all these questions in order to properly set the level of protection that is needed.
T.E. Financial Consultants © 2002 Evaluate your needs : Home coverage Make sure to have your coverage indexed by the inflation rate. Home replacement value (replacement cost) 8Make sure your house is not under-valued Separate private expenses (about 10% of replacement cost) Furniture and other goods (about 60% of replacement cost) 8Review your coverage every year in order to consider new purchases 8Get additional coverage for special items (ex : jewellery & art) Additional living allowance (about 20% of replacement cost)
T.E. Financial Consultants © 2002 PLANNING, PART # 4 TAX PLANNING
T.E. Financial Consultants © 2002 Step 1 - Invest in RRSP Contract created with the government of Canada that allows you to save for retirement on a tax deferred basis. Annual contribution limit has been raised to 18% of earned income or the lesser of: $14,500 minus P.A $15,500 minus P.A $16,500 minus P.A $18,000 minus P.A $18,000 plus annual variation of price index minus P.A. Immediate tax savings Foreign content maximum 30% Expires at age 69
T.E. Financial Consultants © 2002 Step 2 - Prepare for Income Splitting SPOUSAL RRSP LOAN & GIFTS RESP The “legal” tools that allow income splitting InterestDividendsCapital gains Certain rules and limits apply SPLITTING QPP
T.E. Financial Consultants © 2002 Step 2 - Prepare for Income Splitting ãExample Income $ Taxes $ Shared income $30 000$ Taxes $6 152 $6 152 Total taxes $ Tax Savings $5 539
T.E. Financial Consultants © 2002 Step 2 - Prepare for Income Splitting ãAttribution Rules SpouseGift - income attributed back to you Adult childGift - no attribution Interests - attributed back to parents Minor childDividends - attributed back to parents Capital gains - no attribution
T.E. Financial Consultants © 2002 Step 3 - Know About Tax Preferred Income How much do you keep ? Taxable Capital Incomegains Dividends Interests $75,000$77.10 $70.31 $54.29 $45,000$80.80 $79.49 $61.60 $20,000$85.32 $90.80 $70.60 Table: 2003 Investments create three types of earnings…
T.E. Financial Consultants © 2002 Step 4 - Maximize your Deductions & Credits Moving expenses Carrying charges RRSP Charitable donations Medical expenses in excess of 3% of your net income ( max $1,637 ) Union dues Contribution to employment insurance Contribution to CPP Tuition fees Interest on student loans CREDIT = TAX SAVINGS DEDUCTION = OWERING TAXABLE INCOME
T.E. Financial Consultants © 2002 PLANNING, PART # 5 ESTATE PLANNING
T.E. Financial Consultants © 2002 Wills…Who, How and which one ??? Select the type of will –Holograph, formal or notarized Determine your assets, to whom they will be bequest and how –Parents, spouse, children –Estate trusts Choose the guardian for your children Designate your beneficiaries *Pension plans *RRSP *Life-insurance Think of your administrator –Prepare a file to his/her attention
T.E. Financial Consultants © 2002 Intestate (i.e. without a will) Without a named guardian, courts assume custody of surviving children Assets frozen until an administrator is appointed Higher administration costs Courts appoint someone to oversee your assets Certain estate property and investments liquidated (may not be the best time) Spouse does not automatically inherit all the wealth
T.E. Financial Consultants © 2002 Power of Attorney or Mandate Permits another person to do anything that you do Allow for P.A. to act only if physician provides a letter stating mental, or physical incompetence Provide for an alternate attorney Allow for power of attorney to be exercised during any subsequent legal incapacity Prevention of public trustee from taking over
T.E. Financial Consultants © 2002 PLANNING FOR THE FUTURE THE NEXT STEP
T.E. Financial Consultants © 2002 Planning for the future - Now What ? Rule # 1 - Take back the control of your financial health òBudget - Goals & Objectives - Time òInvestments - Insurances òTaxes Rule # 2 - Take the time to monitor your financial health òAnnual review òTools to help you monitor Rule # 3 - Enjoy…After all, it ’s your
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