Finances - The Future is Coming

For many of us “the future” means retirement. It means our golden years spent traveling, pursuing a long-term hobby, or even continuing part-time work. Either way, it signifies significant change that requires substantial coin to support. Saving money is great, but proper investing means making that saved money grow into even more money. For most people, the process touches on fear and even sentiment, prompting them to consult a professional. 

“A lot of people do a good job in the early stages of the accumulation process, but I’ve come across people keeping Canada Savings Bonds at extremely low return rates, just because they got them from their grandmother,” says Valerie Chatain-White, a local director-at-large for the Financial Advisors Association of Canada and owner of Winnipeg’s VCW Financial. She says market amateurs can only get so far making their own money. “You can get into some pretty expensive issues,” she says. “It depends on how much time you have and how much you know about markets and the tax implications of what you do.”

Chatain-White says a triggering factor usually gets people to first seek professional help. It can come with having children, a job change or a significant birthday. Greg Bieber, investment advisor/first vice president at Richardson Partners Financial Limited, says most people come to him for help starting in their 40s. “Too many people wait until they’re approaching retirement,” he says, but adds that clients are getting steadily younger.

Bieber says a sound financial plan centres on a few standard questions, but that the answers change for everyone over time. He first asks, “Who’s the money for?” Your situation now sets a minimum goal that you need to support past the years you spend working. He also wants to know how you get your money and how much you get. Finally, knowing when you want to start spending the money helps determine how much you’re likely to have. The answer to each question affects the others, so Bieber suggests regular portfolio updates.

“People want a source of capital to spin them out an income,” says Bieber, “and you need an income outcome that outlives you. No one wants to be dependant in their last years.” The answers to Bieber’s questions might mean working longer or living simpler. “Focus on what you can control,” he says.
Gerald Butler, the financial consultant behind BCWB Financial Care, asks clients to fill in a list of expenses that covers everything from mortgage payments to money spent on magazines. Butler says anyone planning your financial future needs hard details from you – salary, assets, liabilities and cash in the mattress. “When you go to the doctor, you take off your clothes,” compares Butler, describing the entire investment process as multi-billionaire market player Warren Buffet does: “Simple, but not easy.”

Butler says many investors falter on discipline. They experience the cut of an inevitable market correction and right away want to cut and run. “Markets do go down,” says Butler. “Bulls don’t know where to stop, and something always triggers a correction. But the markets don’t stay down.”

Now, where do you put your money? Bieber suggests distributing it among three asset classes. He says cash is best for emergencies, such as bridge financing related to disability. Ideally, you want to make it equal to about two or three years of after-tax income. Fixed income instruments, including government and corporate bonds, make a good fund for anticipated large purchases, he adds. But he encourages clients to determine the least amount necessary in cash and bonds. “By default, the balance goes in equities,” he adds, stressing the effect of stock ownership on any client’s wealth growth.

“Traditional returns for cash are about three per cent, and for bonds about five or six per cent,” says Bieber. “But stock appreciates 10 to 12 per cent annually. The markets go up more than they go down.”
Besides a plan, and patience to ride out the lulls, advisors remind clients of the persistence they need for any long-term goal. Invest whenever you can afford it, they say, and never stop thinking of the future.

“Remember you’re not thinking in today’s dollars,” says Bieber. “If you need $60,000 a year from now, you have to consider three per cent inflation. Twenty years from now, that makes it $108,000. You might have a pension coming, but if you expect a 20-year retirement, with an annual five per cent withdrawal, you’ll need the equivalent of more than $2 million,” he says. “But when you have a plan, time becomes your friend.”
Rethinking your portfolio requires answers to important questions, and rules to follow faithfully. The first step, if you haven’t taken it already, is to seek help. Make a plan, based on a hard look at life, and steel your nerves to make sure it works.

The Financial Planners Standards Council, which licenses certified financial planners in Canada, has a web page listing the top 10 questions to ask your advisor. Check them out before your next portfolio update: www.cfp-ca.org/public/public_10questions.asp .