Today’s letter includes insights for both younger and older investors … and anyone with family who are younger or older. What are some challenges and successes as younger people invest today for their future? And then for their parents or grandparents, how do we answer the vital questions of how much to save, and how long will it support the lifestyle you want to enjoy? A bonus section today offers two cautions for your family estate, touching heirs and executors, and reducing tax. Naturally with such issues we focus on the solutions so stay with me here, let’s dive in.
Millennial Investing … X and Y too.
Millennials are the “echo” of the baby boom generation which was the largest age-cohort in western history. Asking millennials about money and investing will illuminate their unique needs and formative insights.
- Many have already been investing because they want to avoid or reduce financial stress they’ve seen in their parents. They also realized, younger generations won’t have the supports and pension plans that helped their parents. Millenials have probably started investing earlier than any other generation in history.
- The “Gig-Economy” means having to piece together work and career by holding several jobs, in sequence or at the same time. Some have two or three jobs to pay the bills and build a cushion of safety. Unlike their parents, many younger people don’t get five or ten solid years with any employer while building a career. Six-month contracts don’t offer much peace of mind when rentals go by the year and other costs keep rising.
- Debt: some got hooked by the jaw with credit cards at a young age. Burned on this, they’ve been doing what it takes to clear off debts.
- Social-media pressures want us to fit the picture of how others are having fun. Instagram envy raises a major barrier to investing in solid financial goals such as house, family, education.
- Saving for tomorrow too easily gets disconnected from feeling good today. When this connection fails, saving for the future has the emotional zest of emptying your purse for a stranger. I’ve mentioned this before. Everyone wants rewards today, but only some people can suspend or delay gratification in order to gain a bigger and happier future. Scrolling through pictures of friends in Vegas or Cancun may be hazardous to your wealth if we decide to copy our friends’ greatest adventures. SO if you have $5000 in savings do you book the trip or invest that money for increasing future rewards?
Investing requires some magic (or personal discipline) to consciously connect our present and future self. We should realize we are exactly the same person but at two different times. Imagine you spend $1500 a month on entertainment and travel today. Or you can take a good part of that to build $250,000 over the next ten years. So reflect on this choice: when your birthday cake has ten more candles, would you like an empty pocket with faint memories, or a collection of dear memories plus a quarter-million-dollars! Choose wisely to enjoy the life and wellbeing you are always going to want for yourself. So there’s a decision here: ready for the plan? Go for both – memories and money!
We help you enjoy life now plus build wealth for your future. Let’s discuss how this can work for you … and for anyone you know who could use our help!
So Soon the Years Pass …
Well there are several concerns that arise with aging. Like any age group it includes “FOMO” – meaning the “fear-of-missing-out”. Long before Facebook, baby-boomers were overspending to keep up with friends or neighbours. It even happened when mortgages were soaring at 10 and 15%, leaving precious little to invest in those years. With time, concerns of physical decline will arise (though it starts later and spreads over more years). Eventually some struggle with loneliness, illness, and wishing we had accomplished more. So there’s still time – today and tomorrow – lots of tomorrows to still count as the best days of our lives.
Among the greatest fears is running out of money. A recent study by the World Economic Forum says that Canadians at 65 (same in the US, UK, France, and other developed nations) will outlive our savings by an average of ten years. That’s an empty pocket – empty accounts – with ten more years to live on just federal CPP & OAS. Women live longer, so their need is even greater. Bloomberg reported, “Retirees risk running out of money a decade before death.” I’ve previously told the story of “Trudy” who literally worried herself to death at the age of 83, because the money was gone. This is something we’ll never let happen among our clients.
The 2018 Canadian Guaranteed Lifetime Income Study showed that 45% feel confident in maintaining their desired lifestyle in retirement. Some of that may be false confidence. 30% already know they’re short, which spawns some sketchy humour on the subject. Many who felt confident in their 60s have found new costs and inflation erased their savings by their 70s. Causes? … under-saving, over-spending, unforeseen illness, unanticipated family dependencies (eg. kids’ divorces and job-losses), or results of fraud or high-risk schemes.
For our clients we are steadily monitoring, evaluating, preparing for the future so you have wealth for all of life’s seasons. Many around us, however — neighbours and friends — have lacked such guidance so as years pass and savings diminish they fall victim to so many risks that can steal their dreams and safety.
Incredibly, among Canadians age 55-75, two-thirds have never discussed retirement income strategies with a financial advisor. Even half who have advisors of some sort, have never discussed how to sustain retirement income for the life they want. Their concerns, confusion, and setbacks mark a lonely journey as they conclude there’s no advisor who would be able or willing to help them. I get very passionate about this because as you know our firm is completely devoted to protecting life and income for YOU and anyone you choose to introduce to us.
We do the full financial planning to ensure you have wealth for the lifestyle you choose. We build income plans to age 95 and beyond … for life and for your family estate. Let’s take a further moment on that now.
Two Cautions on Wills and Inheritances.
Briefly here are a couple of ideas that will help some readers (or perhaps lead to stimulating conversation at a summer BBQ). One is about the US-resident child as heir &/or executor. The other idea relates to decisions an executor can make to reduce taxes at death. Take note of the great value of questions that can lead to gaining experienced guidance from relevant advisors, lawyers and accountants in managing an estate.
Let’s say Sally now lives permanently in the U.S. but you’ve named her as an executor, also as an heir in your estate. Think carefully if you’re in this situation. As an heir, Sally’s portion of the inheritance can be exposed to U.S. estate tax, and other potential claims such as creditors or divorce court. If that sounds bad enough, being a foreign executor may require Sally to post bond at twice the value of the total estate until it clears CRA and is fully settled. Meanwhile as executor she is liable for suitable investment of all assets but as non-resident she cannot instruct on any financial accounts. Adding further insult, Sally would need to file tax returns for the estate trust in both Canada and the U.S. Costly, stressful, time consuming! There are solutions to discuss, and they don’t include having foreign residents acting as executor.
Now about reducing tax on the family estate. Jim and Mary have been married together and built some nice assets and properties over their years – owned jointly. Normally the estate may “roll over” all assets into Mary’s name to avoid a hefty tax bill on Jim’s estate. (That would be option “A”.) Consider though, at Jim’s age he wasn’t paying much tax, and at Mary’s age it’s inevitable, all the accumulated assets will eventually be taxed at the highest level in her estate. A possible solution (option “B”) therefore is electing with CRA to trigger Jim’s tax at fair-market value when he dies. Part of his tax will benefit from lower rates, and the entire gain that was taxed to Jim will not be taxed to Mary. A simple example could help: eg. property bought at $100,000 that has grown to $600,000 would be taxed differently in options A or B. “A” effectively delays Jim’s tax until it all hits Mary’s estate at the highest tax rate, let’s simply say $125,000. Option “B” uses Jim’s lower tax rate, and better optimizes Mary’s rates, to potentially save $40,000 or more. Most important here is the principle: when a spouse dies owning joint-assets, don’t just do the roll-over but ask the accountant to review all aspects of reducing the total tax liability.
This letter was delayed due to some travel to see clients and family (Alberta, BC, Sudbury). We’re all happy with significant growth in accounts this year: month of May paused to catch a breath but June is moving forward very well. Forecasts are positive for the second-half of this year with further stimulus on interest rates, and likely reduced friction on world trade, perhaps even between the U.S. and China. There’s no crystal ball so we wait and see. Yet always, in all times and seasons our underlying and consistent focus is your Certified Financial Plan … aligning income and wealth for the Life You Choose.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Author: A Lifetime Of Wealth — And How Not To Lose It (2013). Protecting Life, Loved Ones, and Future Dreams (2013). Your Business, Your Retirement: Halton Retirement Study (2015).
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.