What’s Your Number?

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It’s the million-dollar question….no pun intended, but it’s a number you should have some clear direction around.

What if you were sitting with a travel agent, planning that dream vacation you want to take twenty or thirty years from now. Seems crazy right? You don’t know where it will be, how much it will cost or how long, but you are putting aside money every month for the trip. You’re not even sure how much to save or when you have saved enough. Crazy, huh? Well welcome to Financial Planning.

So, do you know your number?

When I meet with new clients and I ask them what their number is, some aren’t sure what to say, some kind-of have an idea and some have a clear number in mind.

Is your number one million dollars, two million dollars or something less? For everyone that is still in their working years, you are expected to anticipate your future expenses, the amount that you need to cover those expenses, so you can enjoy your golden years. Seems daunting?

As Financial Advisors, we can help you determine what your number is by using multiples of final salary to percentages pegged to your pre-retirement income. But no one formula fits every person or life stage, and there are a few other factors and questions that need to be talked about.

Here are a few questions that you’ve probably been asked:

– At what age would you like to retire?

– What do you want to do when you retire?

– Will you want to travel every year?

These are important questions, and the answers will help map out your number to fund your golden years. However, we also need to keep six planning factors in mind and how they relate to you in determining your number.

Pension Incomes: Will you have an employer sponsored Pension Plan?

There are still Canadians who have Defined Benefit Pensions. These pensions guarantee a monthly income in retirement for life. However, not all Defined Benefit Pension plans are as secure as others. One of the most notable examples is Nortel, where pensioners are not receiving their full benefits they thought would be there.

According to Statistics Canada, there are approximately 4.2 million workers with defined benefit pension plans. Of these, 1.3 million are privately funded putting them at risk if the company declares insolvency or becomes bankrupt.

The other pension plan that is more widely offered today is a Defined Contribution Plan. Defined contribution plans are pretty much like an RSP where both the employer and employee make contributions. The amount available for retirement income is linked to total contributions and market growth.

We also have the Canada Pension Plan (CPP) which pays a monthly benefit and is based on your earnings and how much you contributed during your working years. The maximum monthly amount in 2018 is $1,134.17 with the average being $673.10 a month.

The second Federal pension is the Old Age Security. OAS yields a lower basic monthly benefit of $596.67 in 2018 and is subject to claw back rules.

From “Your Number” standpoint, the more reliable pension income you have, the less you potentially need to save…..maybe.

How long is your retirement going to be? One of the questions commonly asked is “when do you want to retire?” The earlier you retire, the more money you are going to need to draw from for the rest of your life. Will your number cover your retirement period for twenty years, thirty years or longer?

This seems to be basic right? but now you need to determine your Savings Rate.

The growth of your savings matters. We can all agree that the higher the rate of return on your investments, the better, and it could mean less you need to save. The opposite is true, the lower your investment return, the more you are going to have to beef up that retirement nest egg. If only it was possible to know in advance what your returns are going to be, planning would be some much easier. Future returns are unknowable. So be careful to use conservative return assumptions in your planning. Over-estimating future returns will result in under saving and increase the risk of outliving your money while in retirement.

Investment vehicles also play an important role in structuring retirement income. Investments such as Annuities are often overlooked for the potential of higher investment returns, but they could provide a steady known stream of income.

Retirement spending. Retirement means different things to different people. If your life style in Retirement will cost $100,000 dollars a year, you’re going to need to save more than someone who is comfortable living on $40,000 dollars a year. Knowing what your Retirement lifestyle looks likes is going to be is an important thing to consider. Remember that question I asked earlier? What do you want to do in retirement?

Are you a homeowner? If so, you have another asset that can potentially support you in retirement, perhaps in your later years. Real-estate can make up a significant asset for homeowners and if this asset doesn’t exist you will need to create a larger nest egg.

Legacy. Are you planning on leaving money or a specific asset to your children or even a grandchild? How about a favorite charity? Your number will need to represent the legacy that you want to leave.

No matter what your age, you should have at least some idea of what your number will need to be in retirement to live your desired lifestyle. As I already shared, you can use a multiple of final salary or a percentage pegged to your pre-retirement income. Most Financial Advisors set this number at 70% to 85% of pre-retirement household income.

Case Study

Let’s look at a savings rate of 5%

Meet Kara, a 30-year-old who earns $40,000 per year, and expects 1.5% raises each year until her retirement at age 67. Investing in a diversified portfolio with an expected annual rate of return of 6%, Kara will have accumulated $316,592.07 at age 67.

If Kara needs 75% of her pre-retirement income to fund her desired lifestyle, she will need $4,272.84 each month.

Based on her current savings she could withdraw $1,054.02 per month, include Canada Pension and Old Age Security, the savings rate of 5% is significantly short of her desired goal.

So, what is Kara’s number?

Using the same assumptions, Kara’s number is $902,000.00 which is a 14.25% savings rate. Adding in Canada Pension and OAS her retirement would be funded.

The bottom line is you need to know what your number is and what factors can have an impact on it. Planning is not something that you do shortly before you stop working. Rather it is a life long process that will go through several changes as your personal circumstances change.

Want to discuss what your number is? Please email [email protected] or call 778-215-7230 for a chat.

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The information contained in this post is of general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed, and Zakus Kowalchuk LLP assumes no responsibility or liability

Let’s Talk……..Critical Illness Insurance

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If you’re like most people you understand the need for Life Insurance to help protect your family and provide for them when you are gone. You buy car and home insurance in the event of an accident or a flood. But what about helping to provide for your family if you are still with them but suffering from a Critical Illness?

Every year, hundreds of thousands of Canadians suffer from serious illnesses each year. In their 2018 publication, the Canadian Cancer Society estimates that 206,300 Canadians will be diagnosed with cancer in 2017, and that number is expected to increase. Similar projections regarding heart disease came from the Heart & Stroke Foundation, projecting that the number of people affected with heart disease has nowhere to go but up.

Thanks to advances in medical science, the majority will survive, but recovery is often long and carries a financial expense that can leave families devastated. While we are fortunate to live in a Country that provides Universal Health Care, there are a number of expenses that they don’t cover.

Non-medical costs may not be covered by provincial health plans or basic health insurance so you may have to cover things like:

· travelling to and from treatment or appointments

· some drugs

· child care

· home care

· nutritional or food supplements

· medical equipment or supplies

You may also need to take unpaid time away from work, or if you are self-employed, the financial impact of a Critical Illness can be hard for you and your family.

What can Critical Illness Insurance Do for Me?

Critical Illness Insurance provides a tax free benefit when you are diagnosed with a covered condition and you meet the waiting period. The full list of covered illnesses varies from provider to provider, but typically they will cover 25 conditions, which include Cancer, Heart Attack, Stroke and Coronary artery bypass which are considered the four “Big” conditions.

Consider these statistics

· 1 in 2 Canadians will develop Cancer in their lifetime.

· The average cost of a single course of treatment with current cancer drugs is $65,000 with the individual being responsible for up to $13,000 or more of the cost.

· 10min – Someone in Canada has a stroke every 10 minutes.

· 75% of those who have a stroke live with some impairment or disability.

· An estimated 564,000 Canadians are currently living with Dementia.

If you are diagnosed with a Critical Illness, how long could you live off your savings or would you need to redeem investments to maintain daily living. Could you reduce your expenses? Would you have to delay retirement? Go into debt? Or even downsize your home?

Critical Illness Insurance provides a benefit when it is critical and is designed to help take your mind off your finances so you can concentrate on getting better.

If you haven’t added critical illness insurance to your plan we can help…..Let’s have a quick chat to make sure your family and your future are secure.

The information contained in this post is not intended as insurance, investment, tax or legal advice and is provided as information only. To learn more please email us at [email protected]

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What Events Should Trigger a Life Insurance Review?

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Last week while I was meeting with a new client over coffee, I ask a simple question.

“When was the last time you and your wife reviewed your life insurance coverage”?

Unfortunately, I wasn’t surprised by his answer of “I’m not sure……. maybe 5-6 years”. The fact is Life Insurance is often forgotten until it’s too late or when those premium renewal dates come up.

We all have hectic lives with other priorities, but it’s important to pay attention to the not-so fun items that can protect our families. Here’s a list of some life events where I strongly encourage you to review your life insurance.

Your Wedding

You’ve had the wedding of your dreams and a beautiful honeymoon on a tropical island; you now look forward to the rest of your lives together. Even though this is one of the happiest times in your life, you never know what’s around the corner and preparing for the ‘what if?’ scenario is important in protecting your loved ones. Things such as final expenses, outstanding debt and income replacement needs to be considered, especially if your partner depends on you financially.

Purchasing that Dream Home

Purchasing a new home is an exciting time and a stressful time. Trust me, as I sit here writing this article, the plumbing and duct work is being installed in our new home that is months behind schedule.

This purchase not only adds an asset to your balance sheet but also a liability until you payout your mortgage.

Mortgage payments can result in one of your largest monthly payments, that either you or your spouse might not be able to make alone. Increasing your insurance coverage would allow your spouse to pay off the remaining mortgage balance. Alternatively, they could invest the proceeds and create a stream of income to meet the monthly mortgage payments so that your family is not forced to move from the home.

First comes Marriage then comes……Baby

To me, this is the most important life event where you absolutely need to assess your insurance needs, as well as start mapping out your estate planning. We all know that having children isn’t cheap. The cost of clothing, childcare, education expenses and extracurricular activities keeps rising. In the event of a tragedy, you or your spouse could be left both emotionally and financially devastated. When determining the amount of coverage, these factors as well as loss of income should be included in your calculations. Ensuring that your family is taken care of financially in your absence is not something you want to overlook.

Job Changes

How would leaving a job, receiving a substantial pay raise or entering into retirement affect you?

If you are leaving a job, review your coverage to see if it is portable. When starting a new job, there is normally a waiting period that must be completed before you are eligible for company benefits. If you have large outstanding debts or other responsibilities, you might consider increasing your personal insurance to cover this period.

Since the trend is not to stay at the same job for ever, it is recommended that you have personally owned coverage that you maintain no matter where you are working, and use your group plan to top up your life insurance coverage.

Receiving a substantial pay increase will likely lead to a higher standard of living. With this milestone, you should review your loss of income calculation and make changes to your coverage as needed.

Hopefully by retirement you have the mortgage paid off, and minimal debt. When preparing for retirement, it’s important to make sure your income streams are protected. We also want to protect our estates from the tax man, so while the need for life insurance may not seem necessary it may be relevant to the planning that was done years before.

Two Years

You should review your life insurance every two years at a minimum. While we can predict and plan for some life events, some we cannot. And while we can predict some, you can’t guarantee that you’ll be insurable. I was recently at an education session and one of the speakers made this statement:

“Nobody is going to sell you life insurance when you are in an ambulance or lying in a hospital bed. Sure you can buy life insurance without having a physical, but there are limits. That’s why it’s important to have the right coverage in place against foreseeable risks today”.

If you feel that your Life Insurance Planning has made its way to the back of a file and would like a complimentary review of your insurance needs, and how they fit into your long-term financial plan, please contact us.

Kevin J. Zakus, is the Managing Partner at Zakus Kowalchuk LLP in Kelowna, British Columbia. You can email him at [email protected].

Kevin’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. The information contained in this post is not intended as investment, tax or legal advice and is provided as information only.