Transcript John Kehoe CFP Ontario Civil Service Credit Union

Financial Planning
John Kehoe CFP
Who are we?
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A financial co-operative owned by our members
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Established in 1945
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Full-service banking
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Approximately 18,000 members across Ontario
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Government employees, current and retired, and their
family members
Agenda
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Getting started – personal finances
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Retirement planning
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Estate planning
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Tax Free Savings Accounts (TFSAs)
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Investing in volatile markets
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Getting financial advice
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Questions & answers
Budgeting &
Debt Management
Getting started
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Net worth
What you own (assets) minus what you owe (liabilities)
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Cash flow
Income minus expenses
How to increase your cash flow
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Increase your income
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Reduce your expenses
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Taxes
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Fees
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Interest
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Discretionary spending
Types of debt
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Fixed credit
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Revolving credit
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Loans
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Credit cards
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Mortgages
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Lines of credit
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Leases
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Line of credit mortgages
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Umbrella mortgages
Debt management
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Payments should always include principal; avoid
paying just the interest
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Make extra payments to highest interest debt first
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Contact credit card companies for lower interest rate
options
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Consolidate, cut up cards that you have now paid off
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Keep one card with a reasonable limit
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Use LOC mortgages carefully
How do you spend your money?
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Non-discretionary
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Discretionary
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Groceries
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Dining out
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Clothing
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Vacation
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Mortgage / rent
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Gifts
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Utilities
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Entertainment
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Gas / commute
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Hobbies
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Insurance
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Personal spending
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Taxes
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Saving
Track your spending
Apr 16
Coffee
Gas
Lunch
Apr 17
Bookstore
Apr 18
Groceries
Apr 20
2.83
40.00
6.12
33.20
231.56
Movie
28.50
Dinner
55.00
Train tickets
54.75
Retirement
Planning
Retirement
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At what age will I retire?
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What do I want to do?
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Where will I live?
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How much will it cost?
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What income sources will I have?
Canada Pension Plan (CPP)
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Payments can start as early as age 60, as late as age 70
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0.5% reduction per month prior to age 65
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0.5% increase per month after age 65
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Maximum monthly benefit in 2008 = $884.58
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Benefit based on contributions from employment income
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Child Rearing Drop Out Provision
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CPP sharing
Old Age Security (OAS)
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Payments start at age 65
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Maximum monthly benefit in 2009 = $516.96
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Clawback of 15% of income that exceeds $66,335
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Total clawback at $107,692 annual income
Will CPP & OAS be there when I retire?
Employment pensions
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Defined Benefit (DB)
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•
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Defines amount of
pension income
payable at retirement
Formula used to
calculate benefit
Pensioner bears
NO investment risk
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Defined Contribution (DC)
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Contributions known
(% of salary)
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Final benefit depends on
investment performance
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Pensioner bears
ALL investment risk
Retirement allowance
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Eligible for direct transfer to an RRSP:
$2,000 for each year of service before 1996, in which you were
employed by the employer who paid you the retiring allowance
plus
$1,500 for each year of service before 1989, if employer’s pension
contributions had not vested to you.
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Ineligible portion:
Can be contributed to an RRSP, or to a spousal or
common-law partners RRSP, subject to the
recipient’s available RRSP deduction limit.
OPSEU pension
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Age 65 pension = 2% × (a × b) - (c × d)
a = your best five-year average annual salary
b = your credit (years of pensionable service)
c = reduction for CPP integration = 0.655% × the lesser of:
your best average annual salary and your final five-year average Year’s
Maximum Pensionable Earnings (YMPE; $46300 in 2009) under the CPP
d = your credit after 1965 (to a maximum of 35 years)
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Early retirement (age 55+)
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Insured benefits
Combined retirement pensions
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Retire at age 60 with 30 years’ service
$80,000 pre-retirement income (2009 $)
income
before
retirement:
$80,000
$55,515
(69%)
$52,620
(66%)
Income replacement
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How much to maintain your level of spending?
Source: Fidelity Investments Canada ULC
Registered Retirement Savings Plans
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Registered with Canada Revenue Agency
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Contributions are deductible from earned income (within limits)
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Annual contribution limit = $21,000 (tax year 2009) minus pension
adjustment (PA); carries forward
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Must convert to income by end of year in which you turn 71
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Registered Retirement Income Fund (RRIF)
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registered annuity
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direct withdrawal
Income splitting in retirement
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CPP sharing
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Spousal RRSP
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Pension income splitting
Tax Free Savings Accounts (TFSA)
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For Canadian residents 18 years or older; individual accounts only
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Annual contribution limit = $5,000 (indexed to inflation in later years,
rounded to $500); may be carried forward
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Contributions not deductible, but investment income is not taxed, even when
withdrawn
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Withdrawals at any time, for any purpose
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Amounts withdrawn are added to next year’s contribution room
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May be transferred to spouse upon death
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Generally, may use any RRSP-eligible savings or
investment vehicle
Estate
Planning
Objectives of an estate plan
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Provide guardians for underage children
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Minimize taxes
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Transfer assets in an efficient and fair manner
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Provide income for survivors
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spouse
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child support
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disabled child
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elderly parents
Getting started
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Prepare a household balance sheet
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Draw up a will and powers of attorney
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Evaluate current life insurance coverage and
future needs
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Have a team of professionals in place
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accountant
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lawyer
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financial advisor
Estate planning provisions
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Current and/or former spouses, common-law and same-sex partners
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Births, adoption, stepchildren
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Family members who have disabilities
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Aging parents
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Deaths of individuals you have included in your will
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Any individuals you are supporting, plan to support or should be
supporting
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Changes in citizenship or in province/state/country of residence
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Changes in marital status of other family members
Other considerations
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Matrimonial property rights
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What is a “spouse”?
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Provincial rules for family property
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Inherited assets
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Support for dependants
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Ensuring your will is followed when you die
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Intestacy
Financial needs
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Immediate
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Funeral expenses
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Debts
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Legal fees
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Probate fees
Ongoing
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Income for survivors
Life insurance vs investments
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Cost
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Volatility
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Liquidity
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Tax treatment
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Named beneficiaries
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Creditor protection
Will & powers of attorney
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Will
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Powers of attorney
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Executor
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Property
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Beneficiaries
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Personal care
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Guardians
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Allocation of estate
proceeds
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Testamentary trusts
Your executor
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Make funeral arrangements
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File for probate
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Pay debts
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Dispose of assets
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Address challenges to will
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CRA clearance
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Distribute assets
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File final tax return
Your estate plan
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Keep up to date records, accessible to your executor
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Review your will and powers of attorney every 3-5 years
or when circumstances change
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Marriage
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Divorce
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Death of a spouse heir, executor
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Retirement
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Changes in financial situation
Investing in
Turbulent Markets
Why do we invest?
16,000
S&P TSX Composite Index
June 18, 2008 – March 6, 2009
15,000
14,000
13,000
- 49.62%
12,000
11,000
10,000
9,000
8,000
7,000
Jun 08
Jul 08
Aug 08
Sep 08
Oct 08
Nov 08
Dec 08
Jan 09
Feb 09
Why do we invest?
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Retirement
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Education
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Estate planning
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Home purchase
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Major expenses
Growth, inflation & taxes
Marginal tax bracket = 31.15%
Inflation = 3.0%
Asset class
Benchmark
rate of return
%
taxable
After-tax
return
After-tax
real return
Cash & equivalents
2%
100%
1.37%
-1.63%
Bonds & mortgages
5%
100%
3.44%
0.44%
Dividend stocks
8%
53%
5.08%
2.08%
Growth stocks
10%
50%
8.44%
5.44%
Have a plan
For each major goal, establish specific objectives:
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When will you need this money?
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How much will you need?
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How much money do you have now?
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How much can you save in the meantime?
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How much do your savings need to grow to meet the objective?
Know your risk tolerance
• Financial
position
• Investment
• Reactions
• Personal
knowledge & experience
to volatility
outlook & experiences
* Remember your risk tolerance when times are good
Beyond market volatility
Other forms of risk
• Inflation
• Interest
rate
• Liquidity
• Longevity
Asset allocation
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Long-term growth
• equities
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(stock market investments)
Income
• dividends
• bonds
• Mortgages
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Short-term needs & opportunities
• money
• GICs
• savings
market funds
Diversification
• Asset
class
• Geography
• Sector
• Maturity
• Management
• Style
Beware…
• Under-diversification
• Over-diversification
Invest in quality
Investment funds:
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Management
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Track record
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Expenses
Equities:
Bonds, mortgages:
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Market capitalization
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Type
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Profitability
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Issuer
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Dividends
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Maturity
Dividends
A share of profits
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Stable, well-managed companies with stable business models
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Regular stream of income, generally not affected by market
conditions
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Enhance returns, reduce volatility
1997 - 2007
10 year return
5 year return
Stocks that do not pay dividends
1.7%
18.1%
S&P/TSX Total Return Index
7.4%
18.8%
Stocks that pay dividends
12.8%
19.5%
Stocks that increase their dividends
14.1%
20.1%
Source: RBC Capital Markets Quantitative Research
Use a disciplined approach
• Review
plans regularly - have your objectives or situation
changed?
• Dollar
cost averaging
• Portfolio
• Buy
rebalancing
low, sell high
• Spend
lowest-cost money first
• Manage
your debts
The cycle of investor emotions
I am
buying
MORE!
This is great!
The price is
going up!
Not to worry,
I am a long-term
investor!
Euphoria
Denial
Panic
Capitulation
Confidence
Optimism
1994
1995
Relief
Optimism
Sell
NOW!
1996
1997
Source: Mackenzie Investments
1998
1999
2000
2001
2002
2003
2004
Achieving your financial goals
What choices have the greatest impact on your financial success?
Where to Go
From Here
Getting financial advice
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What kind of advisor do you need?
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Banking officer / account manager
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Mutual fund representative
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Insurance representative
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Certified Financial Planner
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Investment advisor
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Finding an advisor
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What to look for in an advisor
Working with your advisor
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Communicate openly & honestly
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Keep records
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Know the risks
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Be realistic
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Ask questions
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Make informed decisions
Information, regulation & education
Mutual fund advisor
Ontario Securities Commission (OSC)
Mutual Fund Dealers Association (MFDA)
osc.gov.on.ca
mfda.ca
Investment advisor
Ontario Securities Commission (OSC)
Investment Industry Regulatory Organization of Canada (IIROC)
osc.gov.on.ca
iiroc.ca
Insurance advisor
Financial Services Commission of Ontario (FSCO)
Advocis
fsco.gov.on.ca
advocis.ca
Certified Financial
Planner
Financial Planners Standards Council (FPSC)
fpsccanada.org
General information
Investor Education Fund
Canadian Securities Institute (CSI)
investored.ca
csi.ca
Make an informed decision
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Financial advisor
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Accountant
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Lawyer
Involve yourself in the process
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