by Thomas Johnson
Business owners in Manitoba have several extra layers of complexity when it comes to retirement planning. How do you factor a business into the equation? Pension projections or investment withdrawals pale in difficulty to the tax and valuation challenges of business planning.
As with any planning exercise, some assumptions need to be made before we project the impact a business will have on retirement plans. The largest elephant in the room for creating these assumptions is the exit strategy of the business owner! How you leave the business will ultimately drive how it provides for your retirement.
- Wind down the business. The simplest of scenarios; winding down the business simply means that the business stops operating when you stop working. If you ARE the business and there isn’t a market for buying your operations, winding down may be your only option.
The key consideration for businesses like this is: can I build wealth inside and/or outside my business while it is in operation? If you aren’t going to get a buyer to write you a cheque, you’re going to have to accumulate your retirement nest egg by investing in assets along the way.
- Sell the business. If your business is sellable, you could be facing a sizeable cash influx in the future, and a sizeable tax bill as well! When and how you sell your business is incredibly important in the Canadian tax code. Qualified small businesses that sell the shares of the company may entitle the owners to shelter a great deal of taxation, thanks to their Lifetime Capital Gains Exemption ($892,218 in 2021). Non-qualified businesses, or small businesses who fail to meet certain criteria, may not benefit at all from this tax exemption. Similarly, the sale of non-share assets or sale to non-arm’s length parties (family members) could leave you with far less cash, after taxes, than you had hoped.
The key consideration for business like this is: what do you expect the after-tax value of your business sale to be? You may need to hire an outside business evaluator and a tax accountant to help evaluate what a reasonable sale price could be and ensure your tax bill is kept to a minimum.
- Groom a successor. If your business is able to continue without you running the ship, but an outside buyer is unlikely, consider creating your own buyer! Hiring an employee to become your eventual buyer (or training an existing one) is an excellent strategy for business succession. You can likely predict the eventual sale price and structure years in advance, while guiding the direction of the business itself.
The key consideration for a business like this: how do you set an exit price that keeps all parties happy? Many business owners discount their business value when it is sold to a planned successor. After all, they were there for the growing pains and no business owner wants to see their legacy struggle due to a financial burden they’ve placed themselves.
Retirement planning for business owners can present many challenges and opportunities along the way. After all, your business may be your single largest asset. How you exit the business is almost certainly going to drive a great deal of your financial security in retirement. Next week we’ll talk about the opportunities exclusively available to business owners, for enhancing their retirement plans.
by Thomas Johnson
Having a million dollars sitting in your bank account sounds pretty nice, right? My personal opinion is that the majority of Manitobans would feel pretty comfortable in their retirement plans with that kind of dollar value attached to their names.
Short of winning the lottery or a surprise inheritance from a wealthy, estranged relative, how do you get to a million dollars? The most straightforward approach is to set money aside into your investment accounts on a regular basis. The more you contribute, the higher your projected investment returns, and the more time you have on your side, the easier it is to hit this (or any) milestone with your funds.
To see what I mean, take a look at the table below to evaluate how big of an impact each factor can have in your plans:
|
Monthly Contributions Required to Save $1,000,000
|
| Number of Years |
Earn 2% per year |
Earn 4% per year |
Earn 6% per year |
Earn 8% per year |
| 30 |
$2,032/mth |
$1,455/mth |
$1,021/mth |
$705/mth |
| 25 |
$2,574/mth |
$1,959/mth |
$1,471/mth |
$1,093/mth |
| 20 |
$3,393/mth |
$2,739/mth |
$2,195/mth |
$1,746/mth |
| 15 |
$4,767/mth |
$4,074/mth |
$3,469/mth |
$2,943/mth |
| 10 |
$7,529/mth |
$6,795/mth |
$6,125/mth |
$5,516/mth |
| 5 |
$15,842/mth |
$15,061/mth |
$14,322/mth |
$13,621/mth |
The biggest takeaways when we look at the numbers up close is that nothing beats starting early! Having 30 years on your side, instead of 20 years, requires less-than-half the savings rate, regardless of investment performance! Having time on your side for compounding, which allows your money to make money, is simply the biggest value you can add.
Market returns are never guaranteed. If you’re relying on large investment gains to hit your objectives, you reduce your odds of success. Instead, focus on the variables you can control:
- Increase your savings rate. Easier said than done! Revisiting your budget with an eye for expense reduction can definitely help in finding additional savings dollars.
- Keep taxes to a minimum. Smart usage of registered accounts and investment allocation can reduce the eroding effect that taxation has on your investment returns.
- Build risk-appropriate portfolios. Diversification in your investment portfolios is key to reducing downside risk. Work with a professional to design an investment plan that suits your timeframe and objectives.
- Adjust your savings with inflation. We know the cost of everything goes up over time. If you haven’t adjusted your savings rate in years, consider upping it regularly as a habit! You’ll be surprised how much less you notice incremental increases compared to sudden, drastic changes.
The best time to start investing for your goals was yesterday. The next-best time is today. Consider working with a professional Financial Advisor to bring your vision to a reality, sooner than you might think.
by Thomas Johnson
Financing purchases is something that becomes second nature to us over our lifetime. Between buying homes and vehicles, perhaps a business or cottage, or even doing renovations, you’ve likely applied for credit numerous times over the years.
What tends to surprise many retirees is how much harder it is to get credit financing once they’ve retired. What gives with the sudden difficulty borrowing?
You may have heard of the “5 C’s” of borrowing before: credit score, capacity, collateral, character and conditions. They all have a role to play in how lenders and financial underwriters justify a loan.
When you’re working, lenders tend to have a very easy time identifying your capacity to borrow. It’s your paycheque. The confidence in lending is directly correlated to their confidence that your income will remain consistent.
When you retire, your income now comes from a number of sources. It may include Canada Pension Plan and Old Age Security, a work pension, RRIF payments, annuities, account redemptions and more. Some of these income streams aren’t viewed the same when put under the microscope of a lender. RRIF payments, for example, can be easily manipulated up or down and the account value can fluctuate as well. Lenders are less confident in recurring income when that income
source isn’t guaranteed.
The second big hurdle can be collateral. Many retirees’ biggest assets are their retirement accounts. What some don’t realize is that registered accounts (think RRSPs or LIRAs) can’t be used as collateral. Regulation prevents lenders from foreclosing on a registered investment account, so it can’t be collateralized to support your borrowing request.
What can a retiree do to help with financing? If you have a low-cost line of credit before you retire, consider keeping it open. If you don’t have one, consider getting one. This can give you some financial flexibility without the need to do a new application once you’ve retired. Also consider consulting with a financial advisor or mortgage broker, before you retire, to plan out any major capital expenditures in your future plans. They may be able to give some great insight on how to keep your options open, even after your regular paycheques have stopped coming in.
Borrowing in retirement is definitely tricky. Like most things with retirement, planning early can help alleviate the challenges that come with navigating the financial landscape ahead of you.
by Thomas Johnson
The biggest driver of retirement success is not necessarily how much you’ve saved. Having a big bank account is a great start; but can be quickly eroded if you lose control of your living expenses. Instead, focusing on how much you spend in retirement can have a far bigger impact on your plans!
Now, I don’t advocate living like a miser and never enjoying your hard-earned dollars! Quite the contrary. Instead, I recommend clients take some simple, strategic actions to reduce unnecessary fixed expenses in retirement. These cost cutting measures will leave more room for the “fun” side of retirement and reduce the chance of dollars slipping through the cracks.
- Pay off your life insurance early. You may have been sending premium cheques to insurance companies ever since you bought your first home or had your first child. That’s perfectly normal. What shouldn’t be normal is continuing to pay for life insurance when you’re living on a fixed income. If your policy allows, consider “paying it up” while in your working years so you can take a permanent vacation from premiums in retirement!
- Eliminate high interest debt. I’ve talked before about good vs. bad debts, so this is nothing new! High interest charges in retirement can really eat into your monthly budget. If you have credit cards, unsecured lines of credit or any other form of consumer debt, try and have it cleared before you leave the workforce.
- Watch your utilities. Forty years ago, your monthly bills likely consisted of power, water and a home phone line. Today? Tack on cable, internet, cell phones, streaming platforms, subscriptions services, you name it! The sheer volume of monthly bills can add up quickly. Keep on top of your service providers for their best deals and don’t fear switching carriers to save cash. If you haven’t opened a particular streaming platform in months, you may want to consider cancelling entirely.
- Don’t overdo it on the presents! The day you retire might just be the day your bank account balances are at their highest. It can be easy to feel especially charitable when your investment statements look rosy and a desire to share the wealth is perfectly normal. Set a budget for gifts (birthdays, holidays, special occasions, etc…) and stick to it. Trust me when I say that your family will much rather you feel comfortable in your financial security for the next few decades than have an extra new toy.
Cutting out lattes and skipping on restaurants likely aren’t going to be the make-or-break factors in your retirement success. Life, especially retired life, is meant to be enjoyed! By taking control of your fixed expenses, you’ll feel like you have a lot more financial flexibility in how you want to enjoy it!
by Thomas Johnson
Let’s be honest, most grandkids wind up very spoiled thanks to their grandparents! Birthdays, holidays, presents, dinners and candy are common expenditures when you’re a grandparent.
If you’ve ever thought about giving your grandkids something different, something longer term, or something more meaningful, then you’re not alone! Finding ways to give your grandkids a boost with their future college tuition or down payment on a first home is a big financial goal for many Manitobans. But is there an ideal way to go about creating that bigger gift?
What to avoid. Before we dive into what you “can” or “should” do, let’s rule out what you shouldn’t do. In general, you should avoid setting up any financial instrument that is: illiquid, problematic for income tax, or problematic for estate planning.
Cash in a piggy bank? It doesn’t grow. Money in your RRSP? Potential tax liability. Tax Free Savings Account? Can’t be owned by a minor. There are lots of financial vehicles that are great for some personal goals, but really poor for intergenerational gifting.
Where to begin. Look to set a clear goal for how you want your gift to be used. If you want to help with tuition, specify that goal! Having an articulated vision for your gift will enable much better decision for “how” to maximize the value of that gift.
What are some ideas? There are a multitude of options when it comes to gifting, from trusts to life insurance to registered investment plans. Here are a few of the most common:
- If education planning is your goal, consider contributing to a Registered Education Savings Plan (RESP) with your grandchild as the beneficiary. RESPs can earn various grants and bonds to multiply the effect of your dollars. Annual contributions are limited per beneficiary, so be sure to co-ordinate your contributions with their parents!
- If your grandchild has a lifelong disability, consider contributing to a Registered Disability Savings Plan (RDSP) instead. RDSP grants can be 10-15 times higher than the Canada Education Savings Grant associated with RESPs! This simple account opening can be transformative on your family’s ability to care for your grandchild in the future.
- If you want a multiplier effect on your dollars, with flexibility on how the funds are used, consider using a cascading life insurance policy. You can own and fund the policy, using the grandchild’s parents as the lives insured. If the policy has cash values, the money inside the policy can be used well in advance of a death benefit, for both lifetime access and a large estate value.
- If you want flexibility with how the contributions are made, flexibility with how funds are withdrawn, but don’t want your grandchild to access the funds until they’re responsible adults, consider a trust account. You can pick an investment strategy that aligns with your chosen timeframe and fund the trust at a pace that suits your budget.
Ultimately, the best way to create a legacy gift for your grandkids is to talk through your wishes with your Financial Security Advisor. They can help you design and implement a strategy that is tailored to your goals and your family dynamics, regardless of circumstance. Multi-generational gifting doesn’t need to stop with birthday presents and it can start anywhere you wish!
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