Published in Smart BIZ, April 2018
Financial Planning for People with Better Things to do is the sub-title for THE END OF WORK. My purpose over the past two years plus has been to simplify the mystery of “Financial Planning” so that you can look after yourself and your loved ones without getting ripped off by salesmen paid on commission. I close off THE END OF WORK with an example of financial planning that takes a minimum of time and effort in preparing for your eventual END OF WORK, while protecting yourself from a premature END OF WORK. In Part One last month I went over setting yourself up on the start of your financial journey. This month we continue with financial planning for your working years.
At thirty you find your life partner and by thirty-five have a $300,000 mortgage and have fulfilled the biological imperative of reproducing yourselves. But you are now making $6000/month, netting $4000 at a 33% MTR. But because you started at 25, you were able to cash out your TFSA and a chunk of your RRSP under the Home Buyer Plan for your 20% down payment so you avoided the CMHC $10,000 tax that is erroneously called “insurance”. You sit down with your partner to re-set your financial plan.
How much insurance do you need now? For how long? Besides final expenses, you now have a mortgage and a dependency period of twenty years till the kids are (hopefully) on their own. With no mortgage, you determine that the surviving partner would need about $2000 a month for child care and RESPs (a source of free money you will also want to take advantage of), or about half of your current take-home. $100,000 at 5% with $8020 annual draw down would last twenty years. So replacing the $2000 a month of your income that your partner needs would take $300,000. Add the mortgage and final expenses and you need $650,000 to replace the portion of your income that your partner will need if you are gone.
But what about that cancer scare you had last year, and the sky-diving hobby you took up at 28? Oh yeah, you bought that cheap term insurance at 25, so no problem. And your group benefit plan for your new management position allows you to opt for up to three times salary. So $500,000 personal term insurance, renewed as a Term Twenty, and $150,000 on your group plan should suffice. Even though your mortgage is amortized over 30 years, you plan to add payments when you can (like your annual bonus) to pay it off in less than twenty. Except for Mr. Murphy, you could actually be on a Freedom 55 plan! Your Term 20 $500,000 plan is still only going to cost you $40/mo. Now you have $400 after tax to pay yourself, where should the extra $100 go? Right into an RESP for the kids.
Another ten years flashes by. Now you are 45, well into middle management and making almost 100 grand, let’s say $8000/mo. for round numbers, and getting up there in a 44% MTR. You have kept up your RRSP in balanced funds and used your TFSA for your fixed income assets. Add in your company pension and you are doing OK on the investment side, but what about the protection side?
The ten years remaining on your half million term insurance should now be more than you need. The mortgage should be half paid off and there are only ten years left on the kids’ dependency needs. Insurance is flexible, you could always reduce your coverage. But the kids are morphing into teenagers (don’t worry, they turn back into human beings in another ten years or so). And they have picked up expensive habits like hockey or ballet – and of course you want to do everything you can for the next Karen Kain or Wayne Gretzky. Oh, and you used the home equity Line of Credit to finance an addition. Good thing you took the level term coverage instead of the decreasing term option your advisor had told you about. Good thing your group plan has grown with your salary to compensate for inflation. So you have enough protection, and the remaining ten years is probably long enough too.
But you are now about half way through this journey we call life, and you may be starting to sense your own mortality: what about critical illness? long-term care? a legacy for your kids (or your alma mater)? This would be a good time to start your own insurance company. Take the extra $200 of your 10% net and buy a universal life tax sheltered investment. If insurability is still an issue, just convert $100,000 of the term.
Mr. Murphy has spared you the worst and at 55 you are actually pretty financially independent. You have at least thirty more years and maybe forty. The kids are finishing school and setting off on their own journeys. Independence will give you the option of starting another journey if you wish. Start your own business or write a book. Perhaps you have nursed a special interest all these years. Your career has been satisfying and has provided the means to continue your special interest part-time. Now you could do it full-time. And it is not too late to be a rock musician, look at Mick and Keith!
There may be one problem with this happy plan. You may already be 35, or 45, when you are reading the book. No problem, the steps are the same. You may just have to save more or take more risk. Or take a later retirement. Whether you have otherwise been enjoying the journey of life, or recovering from life’s setbacks, with today’s lifespans, even Freedom 70 is not unreasonable.
Wherever you are going, remember to enjoy the journey!
Fredrick Petrie, B. Comm. (Hons.), author of “THE END OF WORK: financial planning for people with better things to do”, provides financial education at www.navigatingfinance.com, reach him at email@example.com or call (204) 298-2900. You can get started at http://www.amazon.ca/END-WORK-Financial-Planning-People-ebook/dp/B00XCY0AJ2/