Reality-testing your financial plan

Q. I am contemplating changing financial planners and I just met with one who seemed very impressive. Within about three hours he had everything laid out for me: the investments I should purchase, the use of life insurance, delaying CPP to 70 and more. Still, I would like to get a second opinion before I make my move. 

I am 63 years old and single, living in Ontario. My house is worth $1,200,000 and my investments are also worth $1,200,000. I have a small indexed pension of $17,000 and I expect full CPP. What do you think?
–John

A. Many years ago, part of my training in the insurance business was to find a person’s hot button and push it! Is there any chance the planner was throwing out ideas in a similar way to hook you? There is nothing wrong with this, because before a planner can help you, you have to be aware there is something to be solved. (That said, I also think a big piece was missing in your conversation, which I will share with you later.)

Let’s have some fun by going through the common advice for people in your situation. Keeping in mind that all of the points listed below represent good advice, we’ll see how each could be used as a hook. 

Delaying CPP to age 70

I’m sure all of your friends are telling you to take Canada Pension Plan (CPP) benefits as soon as possible. So when a professional suggests delaying your CPP to age 70, allowing your benefit to increase by 8.4% each year after age 65 and giving you a larger indexed pension for life, that should grab your attention. 

The reasons for delaying get even better, though: The initial CPP benefit amount is based on the YMPE (Yearly Maximum Pensionable Earnings) not the CPI (the general inflation rate). Last year the YMPE increased by about 5%, meaning if you aren’t collecting CPP, your initial benefit will be based on an amount 5% higher than last year’s amount. If you are already collecting CPP, you got only a 1% raise to reflect the change in the CPI.

Selling your high-cost mutual funds for low-cost ETFs

If paying fees really bothers you, a lower-cost alternative would make a good hook. There is a company now that’s trying to push people’s hot button and build their business by advertising that you can retire 30% richer just by lowering fees. Maybe, maybe not. Investment returns and planning services also play a role in accumulating money.

Identifying which account to draw from first: RRIF, non-registered or TFSA

When you have accounts that are tax-free, partially tax free and 100% taxable, the question of where to draw first and can be made to sound like a very complicated puzzle. If someone comes along saying they can simplify this, it may be a great relief to you. 

However, I’ve modelled this out many times and often there is very little difference in which account you draw from; often the best approach is to be as tax-efficient as you can each calendar year.

Strategies to avoid the OAS clawback

This is a hot button for a lot of people. Remember, if you are subject to clawbacks, it is the after-tax portion you are losing, not the full Old Age Security (OAS) benefit. Given that the maximum OAS benefit is about $7,384 per year, the after-tax amount in Ontario is about $4,179. I know, if you’re clawed back you are still out money, but not $7,000.

The trick with reducing your clawback is to reduce your taxable income, which is usually done by having tax efficient investments in your non-registered accounts. 

Using tax-efficient funds, such as capital class and return of capital funds, for non-registered accounts

Investing outside of RRSPs and TFSAs means receiving T3s and T5s, and paying tax. I haven’t met too many people who enjoy paying tax, so an advisor who comes along and explains how they can reduce your taxes should be of interest. 

Common approaches are to use capital class funds or ETFs, or return of capital funds or alternatives.

Exchanging alternative investments for bonds

If you’re concerned about low returns from bonds, I’m sure you’d take notice when a planner shows you an alternative investment with a history of steady 5% to 7% returns and very little volatility (history is no indication of future returns).

Alternative investments can be a great addition to an investment portfolio, but they come with their own set of risks—such as they can’t be cashed at any time and your investment is not guaranteed.

So, what now?

I’ve highlighted some good common financial planning strategies that can get your attention. But did you spot what is missing in all of that advice? It is you John. You’re missing. 

My question to you is this: How much time did the planner spend talking to you about the things you’ve done and your future plans? 

It’s my view that your lifestyle, not your assets, are going to dictate which investments and planning strategies you should follow. For example, spenders wanting to maximize their lifestyle right to the end don’t have to worry about tax if there is very little money left. No need for insurance or trusts. However, builders trying to accumulate as much money as they can over their lifetime will approach investing differently and may need trusts and insurance to protect that plan.

John, have I hooked you yet? The planner you met has certainly got your attention. Why not go back to him and have him show you how his ideas fit into your lifestyle? I think once that is done you will feel more comfortable with him and his advice. 

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected].

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

Linkedin Website