What is Financial Planning?
Financial planning is much more than just saving and investing. It is a systematic way to assess the current household financial health. It also includes projecting the growth and possibly, later on, depletion of assets. During the financial planning process, our financial planners do a comprehensive review of a client’s situation. First, we study their balance sheet of assets and liabilities. Then we run modelling scenarios to project income through retirement under different conditions. We also tweak multiple variables including income assumptions, expenses, investment returns, any inheritance, any donations, etc. Similar to what businesses do, it includes forecasting a household’s income statement and cash-flow.
Financial Plan: Components
A financial plan should include some or all of the following components:
- Balance Sheet Projections (Assets and Liabilities – Net Worth)
- Cash Flow Projections
- Retirement Planning
- Special Goals (like college, charity)
- Family Security and Insurance Requirements
- Tax Minimization (Tax Planning)
- Wealth Transition / Estate Planning
- Business Succession Planning
Financial Planning: Net Worth Projections and Future Cash Flow
To do this our financial planners work with clients to understand and estimate future input factors (i.e. expectation of inheritance, large expenditures such as a vacation home, charitable giving). We run projections into the future to demonstrate potential future net worth. Additionally, we can run multiple scenarios to illustrate how changes to the model inputs can alter future wealth. We do this repeatedly over time – updating with the most current information and projections.
Financial Planning: Family Security
One of the top priorities in financial planning is protecting your family against devastating financial risks that result from accidents, premature death, disability, illness, significant property loss, and liability claims. It is natural for us to avoid thinking about the bad things that might happen. But bad things do happen. You cannot predict them but you can make sure you are properly protected financially if they should happen to you or your family.
Financial Planning: Special Goals
In our client financial plans our financial planners include planning for special goals, such as college, cottage/cabin, or other such special goals.
Financial Planning: Charitable Giving
It is so rewarding to give back to the causes you feel strongly about. If you have surplus assets, you may wish to make charitable donations. Many individuals include a component of planned giving within their estate planning. If you would like to make donations before your death, donating stocks in one method to minimize the tax impact. Capital gains taxes are exempt from tax – you save on the capital gains tax.
Financial Planning: Retirement Planning
With life expectancy having increased markedly over the last few decades, many of us may live into our nineties or longer. We need to have accumulated enough assets to draw from for possibly thirty years or more. How do we know whether we have enough? How much money is needed?
A good start is to use rules of thumb such as the 4% rule. This rule states that you need to divide 80% of the amount of money you need before retirement by 4%. For example, if you need $100,000 per year before retirement, you can assume you’ll need $80,000 in retirement. Then if you divide $80,000 by 0.04 or 4% it gives you a nice round figure of $2,000,000 as what you need to retire one.
What about CPP, OAS, any pensions from work, inheritance, etc.? It all then becomes a bit complicated. This is where our financial planners come in: through our financial planning process, we take into consideration your particular circumstances. We can then determine what you need to save, what investment returns you can reasonably expect to assume, and more.
Business Succession Planning
If you own a business, chances are that it represents a substantial part of your net worth. You may be planning to plan to pass on your business to family member(s) or you may be planning a sale which will contribute to your retirement income. In some cases, business exits are may not be at the time of your choosing due to disability or death. Without a succession plan, your business may not survive your exit. Or you might find that you or your family cannot get someone to buy it for what it is really worth.
Your planning should consider the involvement level and desires of your family members relative to the business, in addition to your needs. This can affect who you might sell to – be it a partner, key employees, family members, or a competitor. Should you sell to family members, your estate plan needs to treat fairly the interests of those who are active in the business versus those who are not involved. Once you define your business exit plan options, then our financial planners will work with you to help you put together the right tools to protect your business value and ensure you get the most for it. Here we can help you with Shareholder (or Buy/Sell) Agreements) and tax planning to manage the capital gains tax on sale or on your death.
We can also help you with your business succession planning.
First of all, because we actually offer the service. Our professionals have advanced financial planning designations such as Registered Financial Planner (RFP) and Certified Financial Planner (CFP). Some wealth managers and many investment managers do not offer it.
Secondly, due to our portfolio manager licencing, we are fiduciaries and so we have to give you advice that’s in your best interest. Actually seeing numbers in writing about your future financial life makes it even clearer to see what’s in your best interest. For example, you may decide it’s not in your best interest to buy the boat you wanted, the more expensive car you wanted, etc. etc.
Lastly, subject to a minimum portfolio size, it is included in our management fee—so why not?