What are the 3 Secrets to a successful retirement plan? And what do Canadians need to have in place before they decide to retire? That’s what I’m talking about in this week’s blog.
Think about it for a moment. When our parents retired, they typically retired at age 63 or 65, and their life expectancy was maybe 12-15 more years after that. So if they started working at age 25, they worked for 40 years, retired at age 65 and supported themselves in retirement for 15 years.
Fast forward to today: if you’re married, and you and your spouse both retire at age 65, there is at least a 60% chance that one of you will live to age 90; that means that you worked for 40 years, retired at age 65 and now you need to have enough money in place to support yourself for 25 more years… And guess what: we are all living longer! The oldest known person in Canada was Phyllis Ridgway, who died at the spectacular age of 114 in June 2021. So, in her case, if she started working at age 25, she worked for 40 years and retired at age 65. She would have been retired for 49 years, which is nine years longer in retirement than in her working life. Phyllis may be the exception, or not.
Cash Flow is King
The 1st Secret to a successful retirement planis knowing how much Cash Flow you are spending each and every month. You need to calculate how much your current monthly lifestyle is costing you – for perspective, the average business owner I work with today is spending anywhere from $10K per month all the way up to $40K per month. Long gone are the days when you could retire on $1M… It just won’t last, given our lifestyles and our longevity/
If you assume a 5% net rate of return after management fees, your monthly lifestyle expenses are $10K, and you retire at age 65, you will need at least $1.7M in liquid assets to stay secure – and that assumes no inflation or unexpected curveball life might throw at you. On the other end, if you have lifestyle expenses of $40K per month and you retire at age 65, you will need at least $7M in liquid assets.
The 2nd Secret to a successful retirement plan is knowing how to develop your retirement paycheque. It is made up of at least three types of income:
100% taxable income – something like the Canada Pension Plan, a personal RRSP, or a Registered Retirement Income Fund (RRIF);
Tax-preferred income – like Dividends or a Non-Registered plan that is only 50% taxable on the capital gain;
100% tax-free portion, which is created from your Tax-Free Savings Account (TFSA), or from the Cash Value of a Permanent Life Insurance Policy.
Over the years, many experts have agreed to disagree on the ideal mix of your net worth as you enter into retirement. Typically, you would see the following breakdown:
House or Real Estate should make up 30% of your Net Worth Liquid Investments – such as your RRSP; Non-Registered (seen as NR in the pie chart above) or Corporate Money should make up 50% of your Net Worth; and finally, the Cash Value sitting inside a Permanent Insurance policy should make up 20% of your Net Worth.
When we develop a written retirement plan for our clients, we take them through a discovery process to learn more about their retirement and estate planning goals. For example, we inquire about where, and how often, they would like to travel, as well as any hobbies they may have. Then we have our clients complete the “monthly lifestyle expense spreadsheet,” mentioned as Secret #1.
Usually, we would like to start this process about 7 to 10 years prior to retirement – that way, if there are any course corrections that need to be made, we have time to work it out.
The 3rd Secret to a successful retirement plan is having a back-up plan when the markets crash. The markets go through cycles, and when they go down by 25-30%, you need to have a game-plan in place to continue to pay yourself a paycheque.
When most people retire in Canada, they have a two-legged chair, their liquid investments (like an RRSP or Non-Registered investments), and they have their Real Estate (which is typically their home or a vacation property). However, as we experienced in 2001, 2008, and again at the beginning of 2020, most of these two-legged chairs fell over. The markets came crashing down and people still needed to create their retirement paycheque from investments that were now underwater.
Here are some key facts to consider: when the markets go down 40% – say, 10,000 points to 6,000 points – how much do the markets have to go back up to return to the original 10,000 points? The answer is 4,000 points, but that is now a 67% market increase – which is not a recovery that will happen overnight. So, when the markets are down 30-40%, you need a third leg on your chair so that it doesn’t tip over and allow you to tap into another bucket of money, on a tax-free basis, just to create your retirement paycheque. This will allow you to put a pause on your current liquid investments – allowing them time to recover – while you tap into this other bucket… However, less than 10% of Canadians have access to this third leg on the chair that creates this additional bucket of money.
WHY IS THAT?
Because their current Financial Planner or Advisor may or may not be licensed to talk about the third leg on the chair. Worst yet, their current Financial Planner or Advisor is not even aware of the third leg on the chair.
The third leg on the chair is the Cash Value or CSV that is sitting inside of a Permanent Whole Life Policy.
DID YOU KNOW that last year in Canada, money sitting inside of a Permanent Whole Life Policy was receiving a Dividend of approximately 6%? And for the past 25 years, the Dividend has had an average annual rate of return of 8.4%? Here is another key fact: when this Dividend is declared, it is guaranteed in writing from the insurance company, so it cannot go down in value. All of this is a part of the insurance contract, and we always design our policies for maximum cash flow in retirement.
I usually refer to a Whole Life Participating Policy as the Fixed Income Anchor in your overall investment & retirement plan. So, when life throws us a curveball and the markets hit a speed bump, you must have a three-legged chair in retirement. Otherwise, your chair will tip over and then you will be scrambling to create your retirement paycheque from assets that have been hit hard and are perhaps underwater.
If you would like to learn more about how these 3 Secrets can help you to enjoy your retirement, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
What is the #1 risk to you enjoying a comfortable retirement?
In this blog, I’ll be sharing with you what people are most worried about as they plan for retirement and how you can take steps now to avoid this issue.
First, let me ask you a question: what do you think is the #1 issue facing Canadians as they enter into retirement?
Is it the return rate on their investments? If they have decided to downsize their home, do you think they are worried about whether or not they will get the maximum value when they sell?
The #1 issue – which becomes the #1 question I am asked to answer for clients when we develop their written retirement plan – remains: will I run out of money in retirement?
There are so many variables to consider when answering this question. Here’s what we can do:
We can gather all of your documents and review your current risk management strategy (such as Disability and Critical Illness Insurance);
We can have you calculate your monthly lifestyle expenses as you enter into retirement; and
We can extrapolate these expenses against the liquid investments that you currently have to determine if there is a gap – to which we could develop a plan to fill that gap before you retire.
But there is still one variable that we cannot control for lack of a magical crystal ball…
What happens if you are retired, and five years into retirement you have a life event that now requires $10K or $15K a month in health care costs to take care of you… Where is the money coming from?
Sure, we can liquidate all of your assets, sell your home, and you could move into a nursing home. But what happens if you live for another 10 or 15 years?
We all saw what happened in 2020 with Covid-19: over 70% of the deaths in Canada were attributed to nursing and retirement homes.
But what if you didn’t have to sell your house? What if you could stay in your home and have an additional steady stream of tax-free income to help pay for all of your health care needs?
I call it Living Care Insurance – the industry calls it Long Term Care Insurance, or LTC for short.
If you cannot perform two out of the six daily activities of living, you automatically start to receive a tax-free benefit each week for the rest of your life. Best of all, you do not need to move out of your house, you can stay in your home and have the health care services come to you.
When designing a plan like this, you can include other features such as Cost of Living to offset any inflationary factors. You can look at whether or not you want to make only premium payments for the next 25 years – which covers you for life – or if you’d prefer to take a more cost-effective approach, you could continue to pay premiums each year until you tap into the Long-Term Care coverage.
Now, from an underwriting perspective, LTC is one of the toughest insurance policies to qualify for… But if you do qualify for the coverage, and you cannot perform at least two of the six daily activities of living, then tax-free money is available to you to pay for your health care costs. Up to $2,000/week or $104,000/year – coverage for the rest of your life.
It is estimated that over the next 25 years Canadians will be facing $1.2 trillion in healthcare costs, with only 50% of this being funded by the government… So we need to act now and we need to build a financial and retirement plan that is 100% bulletproof.
If you’d like to learn more about how you can implement an LTC plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
What is the difference between Group Disability Insurance coverage at your place of work versus an individually-owned Disability Insurance policy? Well, in this blog I’ll be sharing with you the key differences between the two plans, so you can make sure you have all of the important features.
Now, if something happened to you last night and you couldn’t work today, the question I always ask is… what is going to be your monthly paycheque?
If this happened to you, the best way to address the issue is something called Disability Insurance – it will step in to become your paycheque for the rest of your working life.
With a Group Disability Plan at work, you are limited to the features that have been negotiated by someone in the Human Resources Department or the Benefits Department. Depending on where you work, you might have what are called “Flex Dollars” that you are allowed to use when designing your Benefits package. These Flex Dollars can be used to purchase Life Insurance, Disability Insurance, and Dental or Medical Plans.
The key mistake I sometimes see people make is that they use some, or all, of their Flex Dollars to pay for their Group Disability Plan. This is such a mistake because if you use your Flex Dollars to pay a portion or all of your Group Disability Plan, and then you go on a disability claim, any money that you receive would be fully taxable as regular employment income. However, if you don’t use any of your Flex Dollars to pay for your Group Disability premiums, and then you go on claim, then any money that you receive would be 100% tax-free money.
So this is a huge no-brainer: would you rather have fully taxable income or tax-free money?
Also, if you are an incorporated business owner, you must make sure that you pay for your disability premiums with personal tax dollars, otherwise you would have the same issue of taxable income versus tax-free income if you went on claim.
Both plans usually allow you to add in a Cost-of-Living Allowance – otherwise known as COLA – which means that once you go on claim, your benefits each year would go up by the Cost of Living and would be indexed to inflation. This is good.
HERE’S THE THING: every Group disability plan in Canada has one huge flaw with it – it is called “Own Occupation.” Now, most of you reading this blog probably haven’t read your benefits plan in years, but if you read the fine print in your Group Disability Plan, you will find that if you go on claim, then you have “Own Occupation” for the first two years of your claim. That means that in the first two years of your claim, the insurance company CANNOT make you do any job other than the job that you were doing the day before you became disabled.
Here’s the catch: in all Group Plans in Canada, after being on claim for two years, your definition of “Own Occupation” changes to “Any Occupation,” and the insurance company can now force you to do “Any Job” that you are able to perform, and with it, any money you make is subtracted off the Disability Benefit that you are receiving.
Here is how we fix that problem with your Group Plan
You can purchase a “cheap and cheerful” Individual Disability Policy, however, I would include a two-year waiting period before the benefit kicks in – so your Group Plan would cover you for the first two years. Then, when the definition changes in the Group Plan, we turn on your Individual Disability Insurance Plan with “Own Occupation” to solve this problem. This turns out to be very cost-effective because of the two-year waiting period.
Only an individual plan can have the following feature: Return of Premium (ROP). I recommend you do a calculation of the cost of this feature versus the payback. This works like clockwork: every 8 years, if you haven’t filed a disability claim, then you get 50% of the premiums back that you paid and you receive this money “tax-free”. So either you get a disability and you receive the monthly benefit, or you get 50% of your money back.
If you are a professional, like a doctor or dentist or you have a university degree or a Masters, then you will qualify for additional discounts on your Individual Disability Insurance.
If you’d like to learn more about Disability Insurance or if you have already decided that you need to get the coverage in place, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
Doctors and dentists are great at caring for their patients, but often not as good at looking after their own financial health. Paying closer attention to finances now can help ensure a better quality of life when they decide to retire.
MISSISSAUGA, ONTARIO – 10/11/2017 — Doctors and dentists are some of the most educated people around with most attending school for an average of 8 years followed by 5 to 7 years of residency before entering practice. Those years typically pay off in the care they give their patients, but not in the care they give to their own financial health.
Why should doctors and dentists take better care of their money? Because both often have special financial situations that they can leverage to their advantage – or that can come back to bite them if they’re not careful. Certified Financial Planner and author of Heal Thy Wealth: How Doctors Are Misdiagnosing Their Own Financial Health and What They Can Do About It, John J. Moakler, Jr., BMath, CFP, CLU has come up with what he calls Financial Health Care for Doctors™ to assist those in the healthcare profession take better care of their finances. “Many people in these professions don’t know enough about managing their wealth and it can end up hurting them,” Moakler says. “Management consists of creating wealth and protecting it, and lots of doctors and dentists don’t take the protection aspect seriously enough.”
Healthcare professionals are in a unique position in that they often hold other people’s lives in their hands. In order to continue to do this, they need to make protecting their own lives a priority. Risk management products, such as life insurance, can be customized to protect their families, create a living legacy for the ones they love, and can provide a tax-free pay cheque in retirement. In addition to this, there are “peace of mind” insurance products that can be put in place so that healthcare professionals can be protected in the event of an injury or illness. Moakler notes that insurance coverage is a crucial part of a doctor’s financial profile and an important step toward protecting their wealth.
Another aspect of wealth protection is keeping one’s money safe from undue risk. Like other professionals, doctors and dentists have to prepare for retirement and those in private practice, in particular, are often left to plan for their post-work years on their own. While stock investment is attractive because of the potential returns, the reality of market fluctuations means accrued funds are often at risk. Moakler warns: “All investments have to be assessed from a risk management viewpoint. The initial returns may be a bit lower on the safer investments, but peace of mind is priceless and it feels good to know that a market drop won’t wipe you out.”
In addition to building and protecting wealth, it is important to plan for how it will be distributed after retirement. The accumulation period leading up to retirement is only half the story—understanding how the funds will be dispersed is the other central, yet often discounted, aspect of the financial planning process. As a part of his written “Financial Treatment Plan,” Moakler encourages the creation of a personalized individual pension plan that will help ensure even disbursement of their accumulated capital. Although the nature of their practice means doctors and dentists can potentially continue to work indefinitely, they shouldn’t be forced into working forever because they don’t have enough money to last. “People in these professions often put in very long hours away from their families,” he says, “Once they reach retirement age, they should have a choice of continuing to work part-time because they love what they do or moving on to the next chapter in their family life.”
Legacy planning for their practices is another aspect of financial planning that doctors and dentists must think through. While these two professions have many similarities, legacy planning can differ significantly between them as dentists can often sell their practices and patient lists when they retire whereas doctors typically cannot. Because healthcare is universal in Canada, a new doctor can potentially just open his office and get an influx of patients through the system and there is no incentive to purchase an existing practice. Dentists, on the other hand, whose services are not covered by the national healthcare plan, can benefit from purchasing an existing practice, so the earning potential of the sale of a practice is another unique consideration for dentists as they look toward retirement.
If you have children and your plan is to leave them the bulk of your estate, how do you make sure – in the case they get married and then divorced – that their ex-spouse doesn’t get 50% of the assets that you left for your child? Today I’m sharing with you a key strategy that will fix this problem.
Here’s the thing, you can leave money “directly” to your child, but if they are married or get married in the future, they “commingle” this money – along with other assets they have to enjoy their lifestyle with their spouse – and end up getting divorced, their ex-spouse could end up with 50% of the remaining money that you left your child.
So how do we correct this problem?
The solution is something called a Testamentary Trust. You can’t go out and set one up today, but it is created upon your passing and must be designed properly inside your Will.
Back when Jim Flaherty was the Federal Finance Minister, he took away a key feature of Testamentary Trusts, and so, some lawyers – who are not familiar with the Financial Planning Benefits of a Testamentary Trust – sometimes give the wrong advice about not using this strategy in your Wills.
Here are some key Financial Planning Benefits of a Testamentary Trust:
It is set up upon the death of an individual.
The Trust is considered an “Individual” for Tax Purposes – which just means it has a separate tax return.
For the first three years of the Trust’s existence, it has graduated tax rates the same as an individual.
Provides for Income Splitting with the Beneficiaries.
Creditor Protection.
Family Law Act – Divorce.
In this blog, I’ll be drilling down into those last three Benefits.
Income Splitting
Let’s use me as an example. I have 3 children, and let’s assume my estate is worth $3M upon my passing. I have set up Testamentary Trusts in my Will for each of my children and my future grandchildren. That means each of my children would get $1M in their Testamentary Trust.
Now, as I write this, none of my children have children… at least, that I know of! However, down the road when they do have children, they could take money out of the Testamentary Trust in the name of the grandchild. Now you’re taking the money out on your grandchild’s tax return, who should be in a lower tax bracket, thereby reducing your overall tax bill. So when it comes to income splitting or what some accountants like to call “income sprinkling,” this strategy is very strategic.
Creditor Protection
If you leave money in your Will directly to your son, and he ends up getting sued, then the lawsuit can go after the money that you left your son. However, if you leave the money to your son in a Testamentary Trust, and your son then gets sued, the lawsuit can’t go after the money in the Testamentary Trust. This is huge.
Family Law Act – Divorce
As I mentioned earlier, if you leave the money directly to your daughter, and she ends up getting married and then divorced, then the ex-spouse could end up with 50% of the money you left to your daughter. However, if you left the money to your daughter in a Testamentary Trust and she gets married and divorced, then the ex-spouse will end up with nothing from the Testamentary Trust. Now, the spouse might be able to go after the cash if your daughter commingles the money from the Testamentary Trust, so it comes down to making sure she is educated properly.
If you’d like to learn more about how to set up a Testamentary Trust in your Will, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
So, what is the super cool feature called Return of Premium and which insurance products offer this coverage? By the end of today’s blog I’ll have not only shared with you how you can get this feature, but I will also warn you about some of its potential pitfalls.
I find insurance policies a necessary evil – but if we can purchase policies that protect us and our families, plus give us an opportunity to get a portion or 100% of our premiums back… Well, sign me up!
There are 3 common Return of Premium options in the marketplace:
Return of Premium on Death. This is somewhat obvious in how it works, meaning the pitfall is that you have to die to collect. So really this means the money is going back to your estate.
The Return of Premium that allows you certain risk management products, or in other words the “50% Return of Premium after so many years of coverage.” I will explain later how you can take advantage of this offer
Finally the Return of Premium that says “Give me 100% of my money back after a certain time period.”
So for Critical Illness Insurance – otherwise known as CI – you can add on the feature of Return of Premium on Death. You’re either going to get a covered policy and receive the CI benefit, or if you die while it’s being processed, your estate will get 100% of the premiums that you paid back, 100% tax-free.
A Critical Illness Policy can also be designed with a term to the age of 75 – meaning you will have coverage from now until 75, and you can add on a 15+ years ROP on Surrender. So while you are alive, after paying premiums for 15 years, you can decide to either continue to pay the premiums each year, or you could ask for 100% of your money back tax-free. In this case, you are either going to get a covered CI benefit, and if you don’t, you qualify to receive 100% of your money back. This is what I call the Cadillac version of CI.
There is another Critical Illness Policy for business owners that is kind of cool.
It is called Shared Ownership CI. This means that the Corporation pays the premium for the CI benefit and you personally pay the premium for the ROP on Death and the ROP on Surrender. Why is this cool? Because after 15+ years you can decide to surrender the policy and not only will you get back all the premiums that you paid personally, but you also get back all the premiums that the corporation paid – you get them all back personally and it is 100% tax-free money.
With Personal-Individual Disability Policies you can add on an ROP feature that allows you to receive back 50% of the premiums that you have paid if you haven’t claimed on the Disability Policy. This feature usually kicks in for every eight years you own the Disability Policy, and continues all the way up to the expiry date for the coverage. So if you haven’t contracted this policy, and you hit your eighth, 16th, or 24th anniversary, then you will receive 50% of your premiums back. The best part? That is 100% tax-free money.
If you’d like to learn more about how you can incorporate the ROP feature into your Risk Management Coverage or if you have already decided that you need to get the coverage in place, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
What is a Tax-Free Savings Account (TFSA) and why should every Canadian citizen have one?
In this blog, I will give you all the necessary facts you need to consider so that you can make an informed decision about a TFSA for you and your adult family members.
Let me start out by saying – in my opinion – I think the government named the account incorrectly. It should have been called a Tax-Free Investment Account or TFIA because most Canadians are under the false impression that they can only have a TFSA at one of the major banks, all because of the word “Savings” in its name.
However, a TFSA is allowed to invest in almost anything, and I will share some ideas later in this blog on what I’m doing with my own TFSA in order to maximize my return by taking on additional risk.
So here is the history of the TFSA
It was first introduced in 2009 and you needed to be at least 18 years of age to open up a TFSA. Initially, you were only allowed to contribute $5,000 of after-tax money. This is key, because the money you are putting into the TFSA has already been taxed in your hands. Gradually, the annual contribution increased to $5,500, and then in 2015 – as a part of an election promise – the annual contribution was increased to $10,000. But, like most promises by politicians, once they got elected, they reduced it again to $5,500. Today the annual contribution sits at $6,000.
Now why is this important to you?
Because if you haven’t opened up a TFSA account yet, and you were at least 18 years of age or older in 2009, then you can put at least $75,500 into a TFSA today.
Each year a new contribution room is automatically created and if you forget or don’t have extra money to put into a TFSA for that particular year, then you get to carry that contribution room forward.
Now, it is very important that you don’t over-contribute to a TFSA. If you put too much into a TFSA, then Revenue Canada (the CRA), will charge you an interest penalty equal to 1% per month on your excess contribution. So be careful when calculating your contribution room.
I also advise you to be aware of this: if you take money out of your TFSA in, say, 2021, then you are only allowed to put that money back into your TFSA the following year – in this case, 2022. Because you were contributing “after-tax” dollars into the TFSA, when you take money out, it is completely tax-free money.
Think about it for a minute, if you were to contribute $6,000 per year for the next 25 years – and you received a conservative 5% net rate of return each year – then you would have a bucket of $300,000 in tax-free money. Plus, if you received a higher rate of return – say 7%, for example – then you would have a bucket of $406,000 in tax-free money.
Now, I did promise to tell you what my strategy is for my own TFSA…
For background purposes, I will share with you that I have a high-risk tolerance – which means that I don’t look at my investment statements when the markets are down. I also don’t look at my investment statements when the markets are up. Why? Because whatever that number is, it is not my number. I am not planning on touching my TFSA for at least another ten or 15 years, so why would I be looking at the value today?
My TFSA is fully funded with shares of a private start-up company. If you research my background, you will know that I initially started my career in the Information Technology world of Corporate Canada before moving into the world of start-up software companies. 18 years ago I left that world to become a Financial Planner. In other words, I know the stats: only one in eight start-up companies survive. So for me, based on my risk profile, I am okay with those odds.
I will tell you it has been over six years since my first round of financing, and I have since participated in three additional rounds of financing; the company I have invested in happens to now be cash flow positive, with plans to possibly go public in the next two to five years.
For the record, I did not tell any of my clients about what I was doing with my TFSA, because it brings with it a higher level of risk than what most Canadians are looking for. So investing in start-up companies is not for everybody, but it’s absolutely something we can talk about.
If you’d like to learn more about TFSAs, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
Now here’s a question you may have never thought of needing to ask yourself: are you really working with a Financial Planner or just somebody who calls themselves a Financial Planner? Well, by the end of this article I’ll have supplied you with all the necessary information needed to determine if your current Financial Planner really knows what they’re talking about – and if the recommendations they’re making to you and your family are correct.
Right now, in so many provinces across Canada, anybody can call themselves a Financial Planner and get away with it.
As an industry, we are asking for reforms and regulations to protect the public from rogue people who pretend to be Financial Planners – the ones whose sole pursuit is selling products, moving onto the next opportunity and leaving many mistakes behind.
When I am in need of a doctor – a specialist – I want to find a doctor that has a number of degrees and designations after their name. I am seeking out someone who has gone to school for a number of years, someone who is a real expert in their field. Ultimately, I’m looking for someone who knows what they are actually talking about.
This same practice should be used when seeking out a Financial Planner to work with. We have similar acronyms after our names that you should be looking for to ensure the person that you are sitting down with is actually a Financial Planner.
So – you want to make sure the person has a business or a math background; additionally, they should have at least their Certified Financial Planners designation (CFP), which is the gold standard when it comes to Financial Planning. The second designation you should be looking for is the Chartered Life Underwriter (CLU) designation. The CLU designation really focuses in on working with business owners and complex estate planning. Those two designations – either the CFP or the CLU – are what’s really required in order to call yourself a Financial Planner.
Starting this year, if you want to enroll in the CFP program, you must already have a university degree – just like lawyers and accountants need to have a university degree, so will Financial Planners. This is just one step of many that the industry needs to take in order to protect the public.
Currently, I am working on a number of client files and you can see during the information gathering process that many business clients have no clue if they are maximizing the effectiveness of their corporation, and whether or not they are paying way too much in taxes to Revenue Canada.
Just to give you an example…
One client I dealt with had a Critical Illness Policy that they owned, but when I reviewed the documents, I noticed that the brother was listed as the beneficiary of the policy. Now, if this was a Life Insurance Policy, that might be correct, but this was a CI policy. So, I explained to the client that they were making the premium payments, but if they contracted a critical illness, the payout would be going to the brother. Boy, were they displeased when I showed them their own documents. Needless to say, they fired their previous Financial Planner since they clearly didn’t know what they were doing.
Life insurance is a no-brainer to have inside a corporation. Time and time again I see business owners owning life insurance policies personally instead of corporately and that is just not being wise.
Why would you take money out of the corporation – paying 30% or 40% in personal taxes in order to pay for the life insurance premiums – when that policy could be inside the corporation?
Plus, depending on which province you are in, you’re using 11-12% corporate dollars to pay those life insurance premiums. And, if you did pass away unexpectedly, the death benefit would be paid into the corporation, at which point your accountant would prepare paperwork to declare a “Capital Dividend” and the life insurance proceeds would come out of the corporation tax-free. What I’m trying to say is: there is no downside to owning the Life Insurance Policy inside the corporation.
So, again, I ask the question: why are business owners still owning Life Insurance Policies personally? Part of the answer is that the person who “sold” them the product didn’t know what they were doing.
Cash flow management is key to running a successful business. However, during my analysis of many client files, I find out that their current Financial Planner has never taken the client through a Cash Flow Management exercise. Never!
In a more recent client engagement, once we took them through a Cash Flow Management exercise, we were able to save the client $33,000 a year in personal cash flow – which meant we reduced their personal taxes by at least $10,000-$15,000 each year. If we hadn’t come into their lives, they would have continued to make Revenue Canada rich.
If you’d like to learn more about working with an actual Financial Planner, and not somebody who is just trying to sell you products, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
Choose Your Own Adventure: The “Perms and Combs” of Career Investing and Practice Sale Strategies
Remember those “Choose Your Own Adventure” books in elementary school? They involved a character who experiences a different journey and eventual outcome based on the options created by the author and chosen by the reader. Also known as “Secret Path” books, the same one could yield different journeys for their characters, even with some of the same choices made by the reader. Based on the number of choices, there were different permutations and combinations that created a different story. For a young, developing mind, these stories gave a sense that, to some degree, the reader could control the outcome, and that choices have consequences. Sometimes, these consequences could be anticipated, while other times they could not. Then, in high school, finite math involved the study of permutations and combinations, often abbreviated as “perms and combs.” Permutations are mathematical sequences where the order of the number set matters. Combinations are sequences where order does not affect the outcome. Perms and combs could be thought of as a mathematical model of the choose your own adventure books. When we look at “real life” from a financial perspective, there are an infinite number of choices with consequences and benefits, and with dynamic, external influencers. Even when we control for external influencers and changes in the economic climate, every dollar earned can have a different legacy based on the strategy. In essence, the perms and combs of a financial strategy are endless, but they matter for the lead characters in your life. For dentists, investment strategies and practice-sale considerations have an effect on retirement outcomes, and are influenced by the climate of the stock market and practice marketplace. This article will review six financial options for a dentist’s financial “adventure.” Three are presented from the perspective of career investing, and how different long-range approaches can result in different retirement savings outcomes. The other three are presented from a practice-sale perspective, showing how different strategies of practice-sale considerations can yield different after-tax, take-home profits. By no means are these scenarios exclusive or exhaustive, but they give pause for consideration of how dentists can strategize and choose their own path.
A career of investing As a dentist, you are an associate or practice owner. As a practice owner, you have both challenges and benefits. Owning a practice requires not only investing in your clinical skills but also investing in your team and the practice to support patient care and meet current standards. The investment in practice ownership can offer a rewarding career, but it requires staying on top of clinical technologies, administrative responsibilities, infection prevention and control protocols, and patient-management considerations. Continued learning and relearning are critical for any clinician to maintain and grow a practice. Being an entrepreneur in dental practice ownership can be demanding, invigorating and satisfying — sometimes all in a single day. The early years of practice ownership often require focus on practice growth, but some consideration should also be given to a retirement plan. A dentist retiring at age 65 should expect that she and/or her spouse will have at least another 30 years of life to enjoy, with the majority of that time doing the things they want, when they want. In essence, dentists spend the first third of their lives preparing for a career in dentistry, the next third practicing dentistry, and the final third in retirement. To maximize that final third, it is critically important to plan and prepare for retirement early on in a dental career. There are a number of options to consider in planning for retirement through a career of investing that can yield vastly different outcomes; we will highlight three theoretical options. The first common, simple and straightforward approach to investing is a T4 salary approach. This can be effective in creating retirement savings but may also require contributions to the Canada Pension Plan (CPP), which can have a negative return on the funds contributed. This scenario of career investing may result in an “RRSP trap,” where the investor is forced to contribute to RRSPs in order to reduce the tax bill during her working years, only to find that tax is deferred to the final third of her life. A second option could be a blend of T4 salary and T5 dividends for the dentist’s paycheque, where one could minimize the amount of T4 salary to coincide with any government-support programs (child care, tax credit, etc.). This would permit the reduction or elimination in CPP contributions, saving up to $8,000 per year. In this scenario, creating a portfolio of real-estate properties to generate rental income that is then used to pay down debt and increase wealth could be considered. A third career-investing strategy could follow the second option presented but use the dentist’s professional corporation or a newly created real-estate holding company to invest in a “Whole Life Par Policy.” This could be designed with immediate access to cash value. Designing such a policy would mean the policy holder would pay the insurance premium on a Monday and on a Tuesday a lending institution would provide the owner with 90 to 100 per cent of the premiums back at a prime rate of interest. These borrowed premiums could be used to reinvest in the practice or in real estate.
This option permits attaining life insurance coverage for the client to protect her family at the cost of pennies on the dollar. Insurance companies in Canada reward each Whole Life Par Policy with an annual dividend. Insurers have been paying dividends for more than 150 years, with the current dividend at six per cent. These polices can be designed with immediate access to cash value, which is not common knowledge. As such, we have found many policy holders have policies that, although they were designed for them, limit access to the cash value for at least 10 to 14 years. A customizable approach is always necessary to achieve the best outcome in the interest of the client.
When it’s time to sell
The first option here considers that dental practices can be sold as shares in a dentistry professional corporation, or sold as an “asset sale.” In the case where a dentist was not incorporated or had already taken advantage of the available lifetime capital gains exemption (LCGE) at the time of sale, an asset sale may be chosen over a share sale. If we choose the path of an unincorporated dentist who is ready to appraise and sell her practice, we know that the seller cannot take advantage of the LCGE as in a share sale. In an asset sale, a seller is taxed on the various aspects of the practice, including the hard assets and the goodwill at the time of sale. For a purchaser, buying a practice as assets rather than shares presents an opportunity to depreciate the purchase according to the cost of capital allowance as set by the Canada Revenue Agency (CRA). What this means is that a buyer can “write off” the goodwill and hard assets of the purchase over decades of ownership through the allowance of depreciation that does not exist in a share purchase. Therefore, at the same valuation, an asset sale has the benefit going to the buyer and the disadvantage to the seller. Because of this, it has been argued that for a seller to end up with the same net result on an asset sale as she would with a share sale, the valuation of the practice would have to be increased by more than 30 per cent (1). Often, this can be justified by an appraiser with the consideration of allowable depreciation for the buyer. The challenge is that buyers often look at practice value as a percentage of gross revenue, and the optics of this in the marketplace can create a tougher sell. Additionally, the increase in valuation has to come from the goodwill, since the hard assets of the practice cannot change in value. In accordance with Canadian tax law, goodwill is depreciable at five per cent of the total value annually, whereas many hard assets can be depreciated at 20 per cent annually. With this in mind, and in our experience, buyers and lenders may be more reluctant in today’s climate to permit an asset sale at an inflated value. With a practice at the same valuation as a share sale, our theoretical seller could end up losing up to 30 per cent of realized profit to taxes when her practice sells as an asset sale. In imagining a second scenario where the same practice owner had incorporated her practice three years prior to her appraisal and intended sale, the outcome looks very different at the same valuation. When the practice is sold as a share sale with a single dentist as a shareholder in her own dentistry professional corporation, the first $883,384 is exempt from taxes due to the LCGE. At a comparable valuation, this creates a clear advantage to the seller. Although the buyer does not have immediate benefit from the purchase of the share sale, they are permitted to sell the practice down the road in the same arrangement. A third scenario involves incorporation with the addition of a spouse as a shareholder. Imagine our theoretical dentist incorporated and registered her dentistry professional corporation in 2008, when she graduated. She was recently married and has decided to add her spouse as a non-voting shareholder to her dentistry professional corporation for future tax advantages. In light of the current climate and the shut-down period attributable to COVID-19, her practice has a three-month window where she was unable to practice dentistry in the past year. She has had her practice appraised; it reflects a reduced valuation due to the effects of the pandemic on her practice’s revenue, the reduced capacity for treatment using aerosolizing procedures, and increased caution in the dental practice marketplace. With the resultant lower practice valuation, she can now add her spouse as a shareholder to the corporation and take advantage of the practice’s recovery moving forward. As the LCGE increases with inflation and the practice value increases with growth and inflation, so too does the ability for her spouse to take full advantage of the capital gains upon practice sale. In the year 2038 when this dentist decides to sell her practice and retire, both she and her spouse will be able to take advantage of the LCGE as shareholders, which could shelter half or more of the practice value from taxes, resulting in a significant tax advantage as compared to the other two scenarios of sale reviewed.
A happy ending As the adage goes, “knowledge is power.” A comprehensive, personalized approach taking into account your career and retirement goals should include options and strategies that help you get where you want to go — these are your co-authors on your financial adventure. The scenarios presented in this article are theoretical and not exhaustive, but are intended to emphasize the idea that it is not what you make in your career of earning, investing and later selling your practice, it is what you keep. OD
Do you have a comprehensive financial and retirement plan – written down – that maps out when you can afford to retire and what your retirement paycheque will look like?
This is the third and final blog in a series of three on this important topic.
Here’s a quick recap of what we’ve covered so far:
In the first blog we talked about the structure of your dental practice and when you are ready to sell the practice; we highlighted some of the key differences between selling the shares of your corporation versus selling the assets of your corporation.
The second blog talked about putting necessary bumper guards in place, to protect you and your family in the event life throws you a curveball.
In today’s blog, we are going to talk about how to leverage your practice to build a tax-free “personal” retirement paycheque. In addition, I’m going to explain why it is important for you to have a second corporation.
If you remember back to the first blog, I brought up the issue of “passive assets” inside your corporation. I mentioned that if you wanted to sell the shares of your corporation down the road, then you would need to restructure – or “purify” – your corporation prior to sale, to ensure that the business qualifies for the $850K+ Lifetime Capital Gains Exemption.
In order to “purify” your Dental Practice Corporation, you will need to open up a second corporation as part of that process – it will simply be an “Investment Corporation.” I don’t want to get too far into the weeds, but this second corporation is considered “connected” in the eyes of Revenue Canada. Meaning: the Small Business Tax Rate on the first $500K of active income will now be shared between the two corporations… But, if you do this correctly, this will not become an issue.
Now that you have this second corporation opened, we can now “loan money” from the Dental Corp to the Investment Corp and you only have to charge what is called the “Prescribed Rate of Interest” – which is currently sitting at 1%. So, you could move 99 cents on the dollar from your active Dental Corp over to the Investment Corp, you’re looking at 99 cents on the dollar to go out and purchase rental real estate. Now because this rental real estate is inside the Investment Corp, this will make it easier down the road to sell the “shares” of your Dental Corp in order to qualify for the $850K of the Lifetime Capital Gains Exemption.
Let’s change gears
We want to build a pension plan for you that will lead to a Tax-Free Retirement Paycheque – using either your Dental Corp or your Investment Corp. If you are confident that you will be selling your Dental Corp down the road, then I would highly recommend that we implement this strategy through your Investment Corp.
The Pension Plan is called the Insured Retirement Program (or IRP); it has both an insurance component to it as well as a cash investment component.
Now some of you reading this blog may have heard of this strategy, but I guarantee you’ve probably never seen the IRP designed the way that I design it.
Most advisors design an IRP the wrong way. How? Because they design it such that you have to wait 10, 14, or even 20 years to get access to the cash sitting inside the Whole Life Policy. In short: they have designed it for when you die and not for while you are alive.
Now I’ll let you in on a little secret: the way they designed that policy will maximize the commissions for your advisor.
In my opinion, it has not been designed for your best interest, which is what’s most important.
Let me explain.
With Whole Life Insurance, you have a component of the premium that is strictly paying for the death benefit and you have a component of the premium that can go into the Cash Investment Account. The design of the IRP mentioned earlier in this blog – where you have to wait 14 or more years to get access to the cash – means that most of your premium is going to pay the death benefit.
But what if I told you that with the way that I design the IRP, you can write a cheque for the premium on Monday and we could give you access to up to 90% of the cash value inside the policy by Tuesday.
Full Disclosure – I make a lot less commission designing it this way, but typically after four or five years, you could have access to up to 100% of the money you have put into the IRP.
So what does this all mean for you and why would I design it this way?
I have three key reasons –
1. Because I truly believe this design is in the best interest of you and your family.
2. If you think back to what happened when Covid-19 first hit, cash flow might have been an issue for you. What if I told you that based upon my design of the IRP, you could have taken a premium holiday in 2020, thereby conserving your cash flow?
3. I design the IRP this way because after four or five years, if you change your mind, you could still get up to all of your money back.
Think about it this way: if you wrote a cheque for $100K on a Monday and I told you that you could have access to $90K of that premium on by the next day… what could you do with that money?
Think about it – the $100K premium is paying for much-needed life insurance coverage for you and your family, but now you have access to $90K of that money which could be used to purchase rental real estate or to reinvest back into your business.
Now there is a fourth key reason of why I design my IRPs this way that I haven’t shared yet…
Picture this, you are making these premium payments either out of your Dental Corp or out of your Investment Corp, it doesn’t matter… We are giving you immediate access of up to 90% of the cash value inside the policy. When you decide to retire down the road, we can take that policy to a lending institution and they can turn on a 100% tax-free retirement income.
I’d say that’s kind of like having your cake and eating it too!
I’ve covered a lot about financial planning for dentists in these last three videos… now just imagine what we can do for you in person.
If you are interested in developing a comprehensive written Financial & Retirement Plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
Welcome back, dentists! This blog is part two in a series of three on this very important topic: having a comprehensive, written financial and retirement plan. My focus is on developing a financial plan for a dentist, because it is very different than developing a financial plan for a doctor.
In last week’s blog – Financial Planning for Dentists: PART ONE – we talked about the structure of the dental practice and when you are ready to sell the practice. We also walked through some of the key differences between selling the shares of your corporation versus selling the assets of your corporation.
In today’s blog, we are going to talk about putting bumper guards around you and your family in the event that life throws you a curveball.
Here’s what I know for a fact –
Your most important asset is your ability each and every day to get up and go to work to earn a living. And so, if something had happened to you last night and you couldn’t work today, the question I always ask is…
What is going to be your paycheque?
If the worst happened to you, the best way to address this issue is something called Disability Insurance – it will step in to become your paycheque for the rest of your working life.
Disability insurance premiums should always be paid for with personal tax dollars. Because if you are ever diagnosed with a disability, all of the income you would receive would be “tax-free income.” This is very important!
When designing a disability policy, you have to look at certain features that are “must-haves” in order to fully protect yourself.
The first feature is called “Own Occupation”. If you don’t have this feature, then after two years into the disability benefits, the insurance company can force you to do any other job you are capable of doing. BUT, if you do have the “own occupation” feature in your plan, then the insurance company can’t force you to do any other job than the job you were doing the day before you became disabled.
In addition to “own occupation,” you should also have a feature called Cost of Living Allowance (or COLA) because if you ever went on claim, you want to make sure that your monthly benefit is keeping up with inflation.
The third feature you should look into is Future Income Option (or FIO). As long as your income has gone up, this feature allows you to purchase additional monthly benefits, but you do not need to undergo any future medical underwriting.
The fourth and final feature we should look at is called the Return of Premium (or ROP). This works like clockwork – every seven or eight years, if you haven’t filed a disability claim, then you get 50% of the premiums back that you paid and you receive this money “tax-free”. So, either you get a disability and you receive the monthly benefit, or you get 50% of your money back.
Now that we have taken care of you and your family should you get a disability, we now need to focus our attention on your dental practice.
Most, if not ALL dentists who own a practice – which includes frontline staff as well as hygienists – will need something called “Overhead Insurance”. This type of coverage kicks in to protect your practice should you be diagnosed with a disability. It will pay for your rent, wages of your staff, etc. For more details on this, follow the coordinates at the very bottom of this article to get in touch with us.
We design “guaranteed” Critical Illness policies for our clients – either you are going to get a covered critical illness and the policy will pay out, or once the surrender clause kicks in, you can ask for 100% of your money back. You can’t ask for more guarantee than that!
In next week’s blog – Financial Planning for Dentists: PART THREE – I will get into how to leverage your practice to build a tax-free “personal” retirement paycheque, purchase rental real estate, and offer a brief overview on why it is important for you to have a second corporation.
If you are interested in developing a comprehensive written Financial & Retirement Plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos. The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.
