t.e. financial consultants © 2002

T.E. Financial Consultants © 2002

PLANNING FOR THE FUTURE

Presentation forMcGill University

Manager’s Meeting


T.E. Financial Consultants LtdEstablished in 1972 in Montreal by Tim Egan

Complete and objective financial planning services

FEE ONLYTM counselling

Recognized leader in Canada with offices in Halifax, Quebec, Montreal, Oakville, Toronto, Calgary, Edmonton and Vancouver

Qualified advisors holding professional designations andlong term experience.

No sales of any investment products


Agenda

Planning for the Future– The Purpose of Planning – Planning…Planning…Why ?– The Process

Planning #1 - Net Worth & BudgetPlanning #2 - Savings & InvestmentsPlanning #3 - Risk & Insurance PlanningPlanning #4 - Tax PlanningPlanning #5 - Estate PlanningThe Next Step


Planning for the Future...

We plan…We plan…We plan for just about everything these days...

How about taking the time to plan for our own future !


The Purpose of Planning

Consider your finances just as important as your health…The small things you do today can and will have an impact on your quality

of life. Whether it ’s financially or physically, being healthy can make a

tremendous difference...now and for the future !


Planning…Planning…Why ??• For retirement...

Provide annual retirement income.Find out how much you need to maintain your lifestyle.

• Estate planning...Provide income and liquidity for their heirs after death.Determine the impacts of what a will and a mandate can have

on the protection of your patrimony and your family.

• Education planning…Provide funds to be used towards education costs. Determine how much is needed and how much time you have

to accumulate what’s needed.


Planning…Planning…Why ??

• Investment planningDetermine what type of investor YOU are!Determine how much is needed to meet your needs and

objectives

• Tax planningPay less taxes…That’s why !!

• Risk managementDetermine what needs to be covered by insurances in cases

of unpredictable events ( accident, death, loss of job…)Establish cash reserves for emergencies


Planning for the Future - The Process

Your Goals and Objectives

Your Current situation

Analysis and Projection

Solutions / Alternatives

Decisions / Choices

Follow-up / Periodic review

To plan for the future, you must have...


Before You Start...

3 important things to remember:– Know yourself…– Set attainable objectives– Make decisions based upon YOUR situation

REMEMBER THAT YOUR BROTHER-IN-LAW, YOUR NEIGHBOUR OR YOUR COLLEGUE’S

SOLUTIONS MAY NOT BE THE ONES FOR YOU!


PLANNING, PART # 1

NET WORTH & BUDGET


Net Worth & Budget• Household cash management is a basic concept that almost

everyone has trouble with, regardless of income. …• Managing our cash flow is simply the process of laying out

an ideal - a planned method of spending - and then keeping close track of how we follow that plan..

• For most people, wealth accumulates from their pay check, so handling the cash management process has a significant impact.

The key is…Stay in charge of the situation !


The Net Worth Statement

• The net worth statement is an individual’s snapshot of his/her financial situation at a specific time. This snapshot is based upon three components:– Assets– Liabilities– Net worth


Net Worth Statement

Once you have created your net worth statement, ask yourself these questions: Is my net worth concentrated into only one asset (i.e.

house)? Is most of my net worth concentrated into types of

assets that are depreciating over time, ex: cars? On a tax point of view, are my assets invested in the

most “tax efficient” way? Is part of my assets appreciating in order to compensate

the impact of inflation over time? How much insurance coverage do I need to protect my

net worth?


Budget Management

• Identification of current expenses

• Establishment of an ideal expenses model– An effective budgeting process

demands that certain fundamental rules be followed.

• Monitoring process– We have identify eight simple rules for

an effective budgeting


8 Simple Rules About Efficient Budgeting

1 Make a detailed list of all income and expenses, at least once a year, if not once a month. If yearly, maintain the same date for your annual review.

2 Make a plan for expenditures that you expect to have for the next year. If you don’t think of any, take a look at last year’s expenses, that should help you …!

3 Set aside between 5 to 10% of after-tax income as savings before all other expenditures are calculated.

4 Plan non-discretionary expenditures first (such as food, housing, clothing, transportation and health care).


8 Simple Rules About Efficient Budgeting5 Set goals for discretionary expenditures ( set reasonable

goals)6 Avoid planning any future debt and make the payment

of existing debt a top priority for your discretionary expenditures.

7 Don’t be impatient about achieving results, or worse, guilt-ridden if goals aren’t achieved quickly. Changing personal spending and budgeting habits takes times and perseverance.

8 Ensure a system is in place whereby records are adequate enough to monitor process against the planned budget.


PLANNING, PART # 2

Savings & Investments


The Five Dimensions of Investment Planning

There are five main steps in selecting investments to ensure they meet your objectives

Step 5Portfolio Records

& Monitoring

Step 4Investment decision

Step 1Investor Profile

Step 2Investment goals

Step 3Asset Allocation

Model


Step 1 - Understand Your Risk Tolerance•There is a direct relationship between expected return and risk:

– The higher the expected payback from your investment, the higher the risk !!

•Your risk tolerance can be affected by :– Time horizon– Cash requirements– Emotional factors

•You should never feel obliged or pressured to take more investment risk than you are comfortable with.

•And, there is no such thing as a « high-return risk-free investment »…


Step 2 - Set Your Investment Goals

What do you want to achieve through investing ?Do you want to buy a house in 10 years ?

A car in five years ?Save for your newborn’s university education ?

Put away enough money to travel the world when you retire ?

You need to determine how much money you are going to need to achieve your goal and

how much risk you are willing to take to reach them.


Step 3 - Choose The Right Asset Mix

When you begin to implement your personal investment strategy, the first thing you must decide on is your asset mix.

The overall asset mix has the biggest impact on long-term results…not the performance of each asset !!

There are three basic categories of investment products or assets :

Cash equivalentDebt investments

Equity investments


Sample Balanced PortfolioAsset Allocation Strategy: 40/60

Asset mix is a long term strategy. Consult a professional.

Fixed Income35%

Canadian Equity20%

Cash5%

Global Equity40%

(including 3% Emerging Markets) (including 4%

Small Cap)


Sample Conservative Balanced PortfolioAsset Allocation Strategy: 60/40

Cash15%

Global Equity26%

Cdn. Equity14%

Fixed Income45%

(including 2% Small Cap)


Step 4 - Make Your Decisions

Establish clear and reasonable investment goals before you invest;

Select your adviser carefully. Ensure they have the qualifications and experience required, that they are properly registered in your jurisdiction and that they can provide the services you need.

Diversify your investment portfolio to decrease your overall risk by selecting the appropriate asset mix of cash, debt and equity investments

Avoid investments you don’t understand. Be sure you know what you are investing in and what impact it will have on the risk, potential returns and marketability of your portfolio


DON’T take risks you can’t afford or aren’t comfortable with.

DON’T invest on basis of hot tips and rumors. They are seldom right. Besides, trading on inside information IS ILLEGAL !!!

DON’T blindly follow investment advice that you don’t understand…just because a « professional » told you so !!

DON’T forget that the only person who is responsible of your investments IS YOU! So, don’t forget to monitor your portfolios over time and to adjust accordingly.

Step 5 - Do Your Homework


PLANNING, PART # 3

RISK & INSURANCE PLANNING


Why Buy Insurance ?

Exposure to personal riskLosing income due to premature deathLosing income due to disability, accidents, illnessRisk of losing personal assets

HouseCarPersonal belongings

Risk related to civil suits

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Evaluate Your Needs

• Your needs change over time

0

100

200

300

400

500

600

20 25 30 35 40 45 50 55 60 65 70

Needs Insurance Capital

Your needs /obligations will increase substantially between age 20 and 35, to stabilize after

Do not forget that your investmentsgrow over time


Evaluate Your Needs

• Your needs change over time

500 000 $

400 000 $

200 000 $

100 000 $

50 000 $

25 000 $

10 000 $

18 25 30 40 50 60 70 80

Amount of

Insurance

coverage

AgeLogically, your insurance coverageshould evolve according to

your needs/obligations


Types of insurance• Life

– Temporary– Permanent ( whole life ) – Universal Life

• Disability– Severe illness

• Civil responsibility– Car– House– Personal belongings

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Evaluate your needs : Life Insurance

• It is important to evaluate your need for additional life insurance, for each spouse, in case of death.

• Establish the value of your estate– Assets - liabilities – owed taxes = net value of

estate• Make an estimate of the surviving spouse’ income

and expenses• Evaluate if the net value of your estate will be able

to create enough income for the survivors• Take necessary actions


Evaluate your needs : Disability insurance• Important questions regarding your coverage…

What is your maximum coverage ? If a worker is covered by the employer’s group plan, can

he stay within the plan if he leaves his job? Can his coverage be transferred into an individual policy?

Are your indemnities indexed by the inflation rate?What are the criterias determining partial or permanent

disabilities? If a worker cannot go back to his previous job, but is

capable of attending a new position, will the disability benefits continue?

We should be able to answer all these questions in order to properly set the level of protection that is

needed.


Evaluate your needs : Home coverage

• Make sure to have your coverage indexed by the inflation rate.Home replacement value (replacement cost)

Make sure your house is not under-valuedSeparate private expenses (about 10% of replacement

cost)Furniture and other goods (about 60% of replacement

cost) Review your coverage every year in order to consider new

purchases Get additional coverage for special items (ex : jewellery & art)

Additional living allowance (about 20% of replacement cost)


PLANNING, PART # 4TAX PLANNING


Step 1 - Invest in RRSPContract created with the government of Canada that allows you to save for retirement on a tax deferred basis.Annual contribution limit has been raised to 18% of earned income or the lesser of:

2003 - $14,500 minus P.A.2004 - $15,500 minus P.A.2005 - $16,500 minus P.A. 2006 - $18,000 minus P.A.2007 - $18,000 plus annual variation of price index minus P.A.

Immediate tax savingsForeign content maximum 30%Expires at age 69


Step 2 - Prepare for Income Splitting

SPOUSAL RRSP

LOAN &GIFTS

RESP

The “legal” tools that allow income splitting

Interest

Dividends Capital gains

Certain rules and limits applyCertain rules and limits apply

SPLITTINGQPP


Step 2 - Prepare for Income SplittingExample

Income $60 000Taxes $17 843

Shared income $30 000 $30 000 Taxes $6 152 $6 152Total taxes $12 304

Tax Savings $5 539


Step 2 - Prepare for Income Splitting

Attribution RulesSpouse Gift - income attributed back to you

Adult child Gift - no attribution

Interests - attributed back to parents

Minor child Dividends - attributed back to parents

Capital gains - no attribution


Step 3 - Know About Tax Preferred Income

How much do you keep ?

Taxable Capital

Income gains Dividends Interests

$75,000 $77.10 $70.31 $54.29

$45,000 $80.80 $79.49 $61.60

$20,000 $85.32 $90.80 $70.60

Table: 2003

Investments create three types of earnings…


Step 4 - Maximize your Deductions & Credits• Moving expenses• Carrying charges• RRSP

• Charitable donations• Medical expenses in

excess of 3% of your net income ( max $1,637 )

• Union dues• Contribution to

employment insurance• Contribution to CPP• Tuition fees• Interest on student loans

CREDIT = TAX SAVINGSDEDUCTION = OWERING TAXABLE INCOME


PLANNING, PART # 5ESTATE PLANNING


Wills…Who, How and which one ???• Select the type of will

– Holograph, formal or notarized• Determine your assets, to whom they will be bequest

and how– Parents, spouse, children– Estate trusts

• Choose the guardian for your children• Designate your beneficiaries

Pension plans RRSP Life-insurance

• Think of your administrator– Prepare a file to his/her attention


Intestate (i.e. without a will)

• Without a named guardian, courts assume custody of surviving children

• Assets frozen until an administrator is appointed• Higher administration costs• Courts appoint someone to oversee your assets• Certain estate property and investments liquidated

(may not be the best time)• Spouse does not automatically inherit all the wealth


Power of Attorney or Mandate

• Permits another person to do anything that you do

• Allow for P.A. to act only if physician provides a letter stating mental, or physical incompetence

• Provide for an alternate attorney

• Allow for power of attorney to be exercised during any subsequent legal incapacity

• Prevention of public trustee from taking over


PLANNING FOR THE FUTURE

THE NEXT STEP


Planning for the future - Now What ?

• Rule # 1 - Take back the control of your financial health

Budget - Goals & Objectives - TimeInvestments - InsurancesTaxes

• Rule # 2 - Take the time to monitor your financial health

Annual reviewTools to help you monitor

• Rule # 3 - Enjoy…After all, it ’s your

t.e. financial consultants © 2002

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