Best Retirement Strategy with Individual Pension Plans (IPPs)

Individual Pension Plans (IPP’s) for Incorporated Businesses

An IPP is a registered and defined-benefit (DB) pension plan which is usually set up for one person. It provides an added benefit for high-level executives and incorporated business owners. IPP’s are approved by the Canada Revenue Agency (CRA) and offer great savings solutions for individuals who are 40 years or older, have a T4 income of more than $100,000 and have factually maximized their pension and RRSP contributions. You can think of an IPP as an RRSP upgrade. It is designed to cater to high-income earners who are looking for tailor made packages because their requirements are not met by the RRSP setup.  Comparison of RRSP and IPP: Suppose you’re a 45 year-old executive who has worked for the same organization since 1991 and have an average T4 income of $100,000 per year. If you have an IPP along with an RRSP and you decide to max-out both, assuming a yearly rate of return of 7.5%, then at retirement you will have $4,796,518 in registered retirement savings. Using this tax solution, you will have a yearly benefit of $362,549 when you’re 69 years old which is fully indexed to the consumer price index. Now, if you just used an RRSP for the same time period i.e. from age 45 to 69 than you would only save $ 3,226,413 in tax-sheltered retirement assets.

Introduced by the Federal Government in 1991, the IPP is a tax-avoidance structure with annual contributions fully deductible by the IPP sponsors or corporations. These contributions are also a non-taxable benefit for the beneficiaries until money is withdrawn from the plan. If you’re running an incorporated business, an IPP will let you invest hundreds of thousands of tax-deferred income dollars from your business into the IPP structure. This will ultimately give you non-taxable interest which will compound until you retire.  Annually, this nest egg would give you a retirement income of $243,871 from age 69 onwards. This makes it very clear that an IPP implemented with an RRSP provides an additional $118,678 in annual income as compared to only utilizing the RRSP.

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Family meetings emerging as a new facet of financial planning

Five years ago, when Stephen Tait lost his mother, Muriel, to cancer, the family was left reeling from a loss they weren’t prepared for. Stephen, his sister, Jackie, and their father, Neil, expected that their mother and wife would be able to beat the disease she had spent the previous four years fighting.

“When my mother passed, she had the required will, but she wasn’t ready to go mentally. She had plans that she was going to fight this cancer, like we all did,” said Stephen Tait, a 53-year-old financial services executive in Toronto. “When she did pass, it was a bit of an eye-opener because there were a lot of things that we weren’t necessarily prepared for.”

Now, with his father approaching his 81st birthday, Stephen wasn’t surprised when he and his sister were asked to join his father’s financial adviser to have a family meeting about his father’s financial expectations in case anything were to happen.

“I wanted them to have a thorough understanding of my affairs and to know exactly what my assets were and how they are distributed so there will be no surprises when the time comes,” Neil Tait, a retired bank executive, said. “It wasn’t just a review, but it was an open discussion where if they had any observations or a suggestion that they liked to do things differently or change, then this was an opportunity for them to bring it up.”

Such family meetings are becoming a bigger part of the financial-planning process as Canadians are now living longer and many retirement plans are being extended to the age of 100, says Susan Latremoille, director of wealth management with the Latremoille Begg Group at Richardson GMP in Toronto.

“Those of us who have embraced this holistic perspective can see the linkages and help people with those turning points in their lives," says Ms. Latremoille, who conducted the Tait family meeting. “We provide way more services than we used to. It is no longer just an investment role. Today, there is nothing that is off the table. As people age, cognitive health becomes a bigger issue, educating children about money and leaving an estate, sickness and disease and the implications that come with that. “

And the importance of that role is growing. Canada’s wealth-management industry is in the midst of the biggest intergenerational wealth transfer to date. Approximately $1-trillion will pass from one generation to the next in Canada between 2016 and 2026, according to data from Strategic Insight. Not addressing plans can lead to misunderstandings, unpleasant surprises, possible legal complications and, in turn, family conflict.

Among Canadians with at least $500,000 in investable assets, 58 per cent have not discussed instructions for their estate with their heirs, according to a recent poll conducted by Investment Planning Counsel Inc.

Of those, 46 per cent said they intended to have a discussion at some point in the future, but 12 per cent said they had no intention of ever discussing inheritance plans with their beneficiaries.

“A lot of people don’t want to talk about it because they are afraid to upset family members, but the lack of communication could be leaving inheritors in the dark," says Sam Febbraro, executive vice-president at Investment Planning Council Inc. (IPC). Mr. Febbraro suggests financial advisers be introduced to family members as a first step. “Parents should explain their objectives and make sure there is clarity in the decisions they have made.”

In addition to investment portfolios, supplementary information that should be shared in a family meeting includes physical items, vacation homes and cottages, charitable donations and medical information, he says. Many people also don’t anticipate the size of the digital footprint they will be leaving behind, Mr. Febbraro adds. They need to provide details and passwords for financial, e-mail and social-media accounts and for any professional contacts such as lawyers and accountants.

Family meetings aren’t top of mind until there is a catalyst, says Darren Coleman, a portfolio manager with Raymond James Ltd., who has increased the number of family meetings with his clients.

“They can be tricky to set up because most people want to maintain their privacy, especially around close family,” Mr. Coleman says. “Money for many families is a taboo topic. It’s not something they are used to talking about, and want to keep very private."

“There are many clients who then realize how complicated it can be and they say they didn’t realize what went into it," Mr. Coleman says. “They don’t know how difficult it is for the survivors to cope with things."

For Neil Tait, he didn’t want to leave anything open for interpretation and plans to conduct a family meeting once every five years and will eventually incorporate his grandchildren into the discussion. Neil, who now spends his winters in Florida, has worked with Ms. Latremoille for more than 25 years and is confident that when the times comes, his affairs will run smoothly.

“My children had a pretty good idea of what my total investments were, but I had never broken it all down for them, “ he says. “This is something Susan laid out for them. While the total number wasn’t a surprise, the breakdown allowed them to see what is in the U.S, in Canada and what is held internationally – why we have it there and what the return is in each segment.”

As well, Neil spent a lot of time travelling abroad to Asia during his career and has continued to donate to the Chinese community in Toronto. Both his children know that’s something he holds dear to his heart, as well as the hospital that took such great care of their mother during her illness – Toronto’s Princess Margaret Hospital.

“I appreciated the opportunity – for both my sister and I – to actually be able to listen to my father’s plans for himself and speak with the person who will be executing on those plans,” Stephen Tait said. “The ability to talk about his final wishes and for him to know we will be able to follow through with them."

More Canadians need to start engaging family members in their wealth-transfer conversation, IPC’s Sam Febbraro says. He suggests the following steps to help ensure a smooth transition and prevent family conflicts.

* Introduce your family to your financial adviser: Set up a meeting with your children and your financial adviser – even if your adult children have their own adviser, it will be beneficial for them to have made the connection;

* Make decisions in a low-stress environment: Hold a family meeting when you are healthy and not under pressure to make decisions quickly;

* Explain your objectives: Share the reasons for the decisions you are making, your objectives and how they align with your values;

* Create an estate directory: This directory will detail essential items such as bank accounts, investments, insurance policies, wills and power of attorney and how to access them when needed;

* Include your executors: Introduce your executor to your financial adviser. Inform and educate your executor on your intent and wishes, where to find the will and if they need to contact any third parties;

* Educate your heirs: Educate and prepare your heirs to take over and manage your wealth.

Marta Iwanek/The Globe and Mail

 Please Visit: https://moneyvalue.ca

Planning for Long-Term Care: Tips for Seniors

 Photo via Pixabay by Rawpixel

Many seniors these days are looking for ways to extend their post-retirement income, especially when thinking about their future health. It’s impossible to know what life will throw your way, and planning ahead can be tricky. Medicare is an invaluable resource for most seniors, but it doesn’t cover everything, and the thought of requiring long-term care or a stay in the hospital one day down the road can be stressful.

Fortunately, there are several ways you can start preparing for your needs no matter what they may be three or five years from now. Figuring out whether you and your loved one want to remain in your current home or whether it will be safer -- and more cost efficient -- to downsize will be crucial during this process, as will thinking about what your family history is like. If there are certain illnesses or diseases that you’re predisposed for, it’s a good idea to talk to your doctor and find out how to prevent and manage them.

Keep reading for some great tips on how to plan for your long-term care.

Take a Look at Your Insurance

Some health, disability, and life insurance policies will cover long-term care, such as a stay in an assisted living facility or under a nurse’s care, but the terms are usually strict, and not all policies are the same. Take a look at all your insurance policies to get a feel for what they’ll cover, and don’t hesitate to call your rep if you have questions. You can start here for some great resources.

Downsize

Downsizing can be an option for seniors who are worried about their ability to stay safe in their current home. This can prevent a stay in a nursing home or assisted living facility due to injury, but it’s not the right option for everyone. Making a move is a big job, and it will likely require you to sell, donate, and throw away many belongings because there won’t be room for them all in a smaller home. If your current home has stairs, a large yard to take care of, narrow doorways, and small rooms that won’t facilitate a wheelchair or other medical equipment, it might be time to think about a downsize.

Plan for Staying at Home

There are other options besides moving into a nursing home or assisted living facility after an injury or illness. If you or your spouse need care at any point, you can take advantage of the many services available to seniors, such as home health aides, senior centers, and adult day care centers. These services will help you stay independent and won’t require as much money out-of-pocket as a long-term stay in a facility.

Put It in Writing

Whether you want to make sure your family is taken care of in the event that you are incapacitated by an illness or you want to plan for your ability to seek long-term care in the event that you need it, it’s imperative to put it all in writing and have it notarized. Making out a living will can help give you peace of mind and will leave no doubt as to your wishes should you be unable in the future to vocalize them.

Planning for your future can be an emotional time, leaving you feeling drained and stressed, so it’s important to take care of yourself. Eat a balanced diet, exercise daily, get enough rest, and reduce stress as much as possible. Thinking about what your needs will be in the future can give you peace of mind and will allow you to focus on what really matters.

Hazel Bridges
AgingWellness

 

Mom, Dad, and Money 101: Financial Planning for Parents

According to Kerri Anne Renzulli at Money, Americans under 35 carry a total debt of $67,400. Between ages 34 and 44, however, that figure nearly doubles! What happens? A number of things: couples start having more children, education expenses increase, they move into a larger house and probably get newer cars, credit card debt grows, and more. In the midst of all of that, parents too often forget the necessity of basic financial planning: creating a family budget, becoming disciplined about spending, paying down consumer debt, and finding ways to cut costs on everything from utilities to family entertainment.

Finances are often a stress point for many families, but parents can minimize that stress with a financial plan that includes determining their current net worth and following a strict budget. Here are four things parents should consider when making a financial plan.

Determine Your Net Worth

Net worth is the difference between what you own and what you owe. You first list your assets,  the value of everything you own, including the cash you currently have on hand (and any in savings or retirement accounts), your cars, the current market value of your home, any personal property such as jewelry, and the cash value of any whole life insurance policies you have. Then, list your liabilities, the balances (what you owe) on your mortgage, car loans, student loans, credit card and other consumer loans, and other money you might owe. Subtract the liabilities from assets. The result is your net worth. The key to improving your finances is to increase your assets and decrease the liabilities. And for that, you need a family budget.

Create a Family Budget

For some parents, actually seeing where the money goes can be a huge reality check -- but that’s the whole point. You need to become realistic about what happens to your money if you want to increase your net worth. Financial expert Dave Ramsey suggests you set what’s called a “zero-sum” family budget, where you list your total income (both spouses and any extra money that comes in), all of your monthly expenses, and then subtract expenses from income. The result should be zero. Following this kind of budget makes you and your family accountable for every dollar spent. Regardless of the type of household budget you create, it takes plenty of discipline to follow it. Tim Herrera of The New York Times says the best budget is the one that you’ll stick with. And that involves making sacrifices and looking for ways to save money.

Live the Plan

That hard look you’ll take at your monthly expenses will reveal plenty of places where you can save money. Look for a less-expensive cell phone plan, one that involves a discounted family rate. Also, aim for a less expensive cable or satellite TV plan, or consider eliminating them altogether. Look for ways to cut back on your utilities, or take advantage of their budget plans. You can easily blow your budget by eating out a lot, so cook at home more often. If your family has a dedicated pizza night, for example, don’t order out. Stock up on frozen pizzas instead, or learn to make your own! Brown bag your lunch for work, and use mass transit to get to and from work, if it is convenient. All in all, every single penny you can save, and every one you can account for, goes toward increasing your net worth and saving you money.

Managing money can definitely become less stressful once a plan is in place. The trick is, of course, getting started. But with some discipline and a willingness to take a hard look at where money comes in and where it goes, parents can get their household finances in good shape. 

By Sara Bailey

Photo Credit: Pixabay.com

8 great financial lessons I learned from my father

• The Financial Industry Regulatory Authority Foundation estimates nearly two-thirds of Americans can't pass a basic financial literacy test.
• Schools aren't instilling financial literacy along with ABCs and the three R's, but parents can educate kids about money.
• Encourage hard work, saving and planning; teach kids about investing, budgets and giving; warn them about debt — and don't fix all their mistakes.My father emigrated from Taiwan in the 1960s with only $17 to his name and the clothes on his back. Though he was poor in a material and financial sense, he never considered himself poor. His mantra was that financial wealth alone does not represent one's "true wealth."
  My dad taught me not to define myself by how much I had, but by what I did with what I had. I learned early on not to let money be the sole determining factor for the decisions I made in life, but I also learned that, although money couldn't buy happiness, it could provide peace of mind, freedom and flexibility. I am thankful for the values my father instilled in me about "true wealth," but I am also grateful that he taught me about finances. My dad understood the importance of financial literacy and has left me a legacy that I am now passing on to my own three children.
  Financial literacy is having the knowledge necessary to manage personal finances efficiently. Financially literate people know how to achieve long-term goals and make healthy financial decisions.
  On the other hand, those who are not financially literate have difficulty applying financial decision-making skills to real-life situations. Not only do they tend to make unhealthy money decisions that create financial problems, they have trouble reaching financial milestones. In America today, financial illiteracy has become an epidemic. A study done by the Financial Industry Regulatory Authority Foundation estimated that nearly two-thirds of Americans can't pass a basic financial literacy test. That's a problem.
  Whereas basic literacy is a priority for public educators, financial literacy is not.
  Educators and pundits are still debating the part public schools and universities should play in promoting financial literacy — and clearly, it should be more than it is. Parents, however, do not have to wait to begin fostering financial independence in their children at home.
  Here are some things you can be doing right now to raise financially literate children.
  
  1. Teach your children to work hard. Children need to understand the correlation between work and earnings from a young age. If your kids are actually doing the work they're getting paid for, don't be apprehensive about paying them to work. Rewards motivate children, and money is an attractive reward. Allowing them to take on chores that they can get paid for not only teaches them the value of hard work but helps them learn how to manage their money. If they don't do their work, don't pay them.
  You can also cultivate their entrepreneurial spirit by encouraging them to offer babysitting, pet care and yard work or housecleaning services to friends, neighbors or relatives. Kids who work for pay can learn the cost in labor of an impulse buy without monumental consequences. They can also learn the satisfaction of working hard to build savings and achieve goals.
  Children who understand the value of hard work learn to be responsible for what they produce.
  2. Give your children vision. Financial planning is about defining your personal goals and creating a realistic plan to accomplish them. Discuss your family's financial objectives with your children and let them see what you do to achieve them. Encourage them to explore their own ambitions and aspirations for the future and set personal financial goals.
  Their plans and objectives can and probably will change, but learning to implement both long- and short-term goals allows them to taste success and enjoy the fruit of good planning.
  3. Help them learn to save. Helping your children learn the value of regular and disciplined savings is a gift. As soon as they are old enough to start filling up a piggy bank, they can begin saving. When the piggy bank is full, set up a savings account and let them manage their records so they can see how much they are saving over time. This will be a valuable lesson during their teen years, when they're tempted to spend savings meant for a car or college on food, clothing and friends.
  Children learn by doing. Help them create a workable budget that prioritizes savings but develops self-control. Then teach them to save regularly and systematically by establishing a timeline to reach specific goals. As they begin to experience the benefits of savings firsthand, they will start saving on their own.
  4. Talk to them about investing. Teaching your child the fundamentals of investing early is a worthy investment in their financial literacy. It does not need to be complicated. Even very young children can plant a seed and watch it grow over time. Board games that teach about money provide excellent opportunities to show children how investing works. Kids can also see how compound interest works with a compound-interest calculator, which allows them to calculate how much even a small investment now can yield in profits over time.
  
  
  You can introduce your kids to basic but important concepts such as inflation, interest rates and investing in companies they respect by merely talking with them about what's happening in the economy.
  5. Teach them to give. Children need to learn to share, because they need to learn their stuff isn't what's most important. Learning to give from what they earn not only teaches the value of generosity but helps them see that making money is not the most important thing in life.
  Organizations such as World Vision offer a gift-giving catalog that allows children to choose practical gifts such as chickens, goats and clean water for children and families in other parts of the world. Giving a portion of their allowance to the children's hospital collection in the checkout line or donating to the Salvation Army at Christmas provide opportunities for kids to discover what they value most and support it in tangible ways.
  
  
  6. Show them how to budget. Teach your children that no matter how hard they work, it's unlikely they will be able to save, invest or give without budgeting. Even young children can learn to budget by distributing their allowance in jars designated for long-term savings, short-term savings, giving and spending. Older children can transition into a more detailed envelope system and a written budget and eventually manage their budget through an app.
  Budgeting helps kids learn how to save for what they want and need without going into debt. The principles of budgeting can be taught from a young age and sustained as a child grows into adolescence and adulthood.
  7. Warn them about debt. We live in a consumer-driven culture. Even with a sound budget, debt can be hard to avoid. Children need to understand the costs and implications associated with debt so they can develop the self-control necessary to avoid bad debt and use good debt wisely. Satisfying your child's impulse by buying them what they want and justifying it by making them pay it back later is not teaching them to handle debt; it's encouraging impulse buying.
  Bad debt is anything that depreciates. Open credit card balances and car payments are bad debt. Traditionally, good debt is something that brings returns. Borrowing to finance a home or college degree has long been considered good debt, but times have changed. Americans currently owe more than $1.48 trillion in student-loan debt spread out over 44 million borrowers. We are just now beginning to recover from the sub-prime mortgage crisis that caused the 2008 financial crisis and subsequent Great Recession. Make sure your children understand that even good debt costs. Help them learn to count the cost and understand the obligations associated with debt.
  8. Don't solve their problems for them. Parents like to fix things for their kids. We don't like to see our children suffer. Unfortunately, alleviating the pain associated with bad financial decisions fosters financial ignorance, even if it's as simple as fronting the money to your 10-year-old to buy the latest video game after he nickeled-and-dimed away his allowance. Financially literate children understand that poor spending habits have consequences.
  
  Of course, to raise financially literate children, you need to endeavor to be financially literate yourself. Your willingness to raise your own financial IQ will not only set an example for your kids but will most likely improve your own financial situation.
  
  
  
  Marguerita Cheng
  CNBC contributor and CEO and cofounder of Blue Ocean Global Wealth
  
  
  Please Visit: https://moneyvalue.ca
  
  
  
  
  
  

Preparing finances now for possible cognitive decline is just plain smart.

Most investors try to stay on top of their accounts and follow the rules of prudent money management. But as the mind slows with age, decision making may be impaired, and experts warn that dementia and even Alzheimer’s disease can leave you incapable of managing your affairs.

“As we age, our personalities change and it’s undeniable that our cognitive abilities do, too,” says Marshall McAlister, a private wealth counsellor and principal at Pavilion Investment House in Edmonton.

Putting controls in place for the decline to come is becoming top of mind for many people, he says. They fear they might fall prey to fraud, for example, or begin to make mistakes with electronic banking. The wealthy are particularly at risk, as they have more to lose.

“We require older people to pass a driver’s test in Canada, but that’s not required for managing your finances,” he says.

Open this photo in gallery Older people need to prepare for the time when the optimal strategy is to let someone take over.

A 2016 study by Texas Tech University and the University of Michigan showed that financial literacy drops significantly as people age, matching the erosion of memory and problem-solving abilities later in life. Respondents to basic financial questions saw their test scores fall 1 percentage point each year above age 60.

At the same time, however, older people didn’t report a loss of confidence in their capacity to make financial decisions, the researchers found, because the decline happened gradually and they were not aware that their abilities were degrading.

“It’s not going to be optimal if you can’t remember if you rebalanced [your investments] and you can’t keep up with your records,” says Sandi Martin, a fee-for-service financial planner at Spring Financial Planning in Gravenhurst, Ont. It makes sense for older people to designate others who can pick up the baton long before that day arrives, she says.

“We all have to prepare for the time when the optimal strategy is to let someone take over,” she says. Choosing someone to take over for you can be difficult, she notes, as that person may ultimately face your feelings of paranoia, stress and worry that can come with Alzheimer’s.

Everyone, especially high-net-worth individuals, must plan for incapacity, says Philip Renaud, a trust and estates lawyer and partner at Duncan Craig LLP. His clients are urged to make out wills, create enduring powers of attorney and personal directives for health care. These latter documents can vary by jurisdiction and be tailored to suit the individual or couple, for example covering specialized assets such as a family business or vacation property.

Here are steps to consider for financial planning in cognitive decline.

Form a relationship with a trusted person or people who will carry out your wishes.

Find someone in your family, or an accountant or professional adviser or lawyer who knows you and what your intentions are, who will manage your personal affairs and be your backstop, says Mr. McAlister. Many people choose their spouse for the role, he says, but a spouse can often have the same cognition decline or not be up to the job.

Mr. Renaud notes that in picking the right executor, trustee or attorney (the title given to someone who has power of attorney), beware of tension among family members. A legal representative may need specialized knowledge to deal with assets such as the family business or vacation property.

Some people hire a professional to be their executor or attorney, someone who has the right skills, is accountable and is a good record-keeper. This person could also be paired with a family member or personal friend, say, to get “the best of both worlds,” he says.

Draw up an investment policy statement and set markers for determining your competence.

This will ensure that your affairs can be picked up seamlessly and managed according to a program when the time comes.

Mr. McAlister says there are people with assets of $5-million or more who have no kind of financial plan in place and who also have outdated wills, powers of attorney and personal directives. “We have to know how all that money is going to be managed before we have to guess what your intentions are,” he says.

Setting rules up front is essential, Ms. Martin suggests. “The more that’s agreed upon ahead of time, when everybody’s thinking rationally and at their full capability, the easier it is later on.”

It’s essential to have a “test for capacity” in your power of attorney, Mr. Renaud notes. For example, the determination can be made by a doctor, a spouse or your children, although he warns that family members can have difficulty or conflicts in making such a determination.

Draw up a power of attorney that covers incapacity and ensure its rules and conditions work with your situation.

Most provinces allow for an immediate power of attorney, which applies instantly, as its name implies, and a “springing” power of attorney that can be invoked “if your memory starts to go,” Mr. Renaud says. “You’re still the boss and you call the shots as long as you’re still capable, but this enables your attorney to step in and help you manage, and, if necessary, take over.”

The wording of the power of attorney must cover special situations, he says, such as use of the family cottage or whether you want to keep donating to a charity. An attorney is typically bound by a “prudent investor rule” that might not suit a high-net-worth investor who prefers a riskier asset mix, say, or who owns a business, Mr. Renaud notes. “You can change the rules.”

Consider forming a trust that will allow you, or you and your spouse, to have your affairs managed competently by a trustee.

If you’re older than 65, turning all of your assets over to an alter ego trust will allow you to remain the beneficiary of all capital and income if you become incapacitated. A spousal trust works much the same way, says Mr. Renaud, noting that most people opt for trusts to avoid probate in the settlement of estates. He recommends that individuals consult with their lawyers about the advantages and disadvantages of powers of attorney and trusts in their situations.

“Think about potential problems and put in rules and systems,” he says. “This will take pressure off your executor or trustee – and ensure that your wishes and family order are maintained.”

Hold family meetings to disclose and discuss how your investments, banking and other affairs are being managed – and should be in the future.

“I’m a big believer that if moms and dads tell their kids what’s going on, that can allow a greater experience for everybody involved,” says Mr. McAlister.

Family members who are going to be responsible for managing your affairs through a power of attorney should be told your financial and investment wishes well ahead of time, Ms. Martin says, before cognitive decline brings on feelings of mistrust.

“You need to have a good, long, honest discussion so they’re not just entering into it blindly,” she says. “You have to say, ‘Here are my wishes now, you just do the best job, and don’t worry whether me in 20 years thinks you’re doing a good job.’”

Mary Gooderham

Special to The Globe and Mail

Published June 1, 2018 Updated June 5, 2018