Transcript Creating a Financial Plan

Financial Strategies
For a Recession in 2009
Presented by:
Kurt Rosentreter CA, CFP, CLU, TEP, FMA, CIMA, FCSI, CIM
Chartered Accountant
Senior Financial Advisor, Manulife Securities Incorporated
Certified Financial Planner, Manulife Securities Insurance Inc.
About Kurt Rosentreter
• Chartered Accountant
• Twenty years of experience in personal finance.
• Past co-founder of the national wealth management practice at one
of Canada’s big four accounting firms.
• National best selling personal finance author; six published books in
Canada.
• More than 500 published articles and interviews for The Globe and
Mail, National Post, CBC, Canada AM, Canadian Business and
Maclean’s.
• Personal Finance Course Instructor, Ontario Institute of Chartered
Accountants
• Senior Financial Advisor, Manulife Securities Incorporated* in
Toronto (*Member CIPF)
• Certified Financial Planner, Manulife Securities Insurance Inc.
Agenda
• Assess how a recession may affect your financial well being
• Examine strategies in each area of your finances impacted
–
Goals
–
Your financial plan
–
Cash flow management
–
Career
–
Debt
–
Real estate
–
Retirement
–
Children’s savings
–
Investments
–
Advisors you trust for advice
• Where do you go from here?
• Questions & Answers
How Has the Recession
Affected You?
• More than your investment portfolio….
• Define the real impact on your goals:
• Goal: retire with $$,$$$ of after tax cash flow
from age 60 to 90.
• Goal: Pay $$,$$$ towards your child’s education
from age 18 to 22.
• Goal: Take the expensive vacation for $,$$$ this
year.
• Goal: Buy a new car next year for $$,$$$.
Goals
• All financial planning must be designed in
the context of your goals.
• The starting and ending point
• Focus and accountability
• Something to measure your results against
• A risk control measure
• Define your goals in writing
• Short term, medium term, long term
• Attach costs
• Prioritize and sort through tradeoffs
• Better to have a 3rd party coach your goals.
Goal Planning
• Randomly buying stocks, etfs or mutual
funds…
• Is not a plan
• Does not address your goals
• Is more of a sales approach than a planning
approach.
• May be a tax disaster
• Can lead to an over statement of risk tolerance
• May have got you where you are today (-40%
returns or more).
• Is often a function of greed.
What is a Financial Plan?
• A summary of your goals and the strategies that you are
undertaking with your money to achieve these goals.
• Integrated planning across the different parts of your
finances.
– One approach to examining your goals, life insurance, mortgage,
tax return, spending, children’s savings, real estate, vehicles,
Will, investments and more.
• Summarized in a written document.
• Updated every year to measure progress and adapt the
plan as needed.
• Should take approximately 8 hours a year.
Components of a Financial Plan
Pre-retirement
Financial Plan
Career
Compensation &
Benefits Planning
Philanthropic
and Legacy
Planning
Personal
Investment
Program
Children
Financial Planning
Tax Return
Preparation &
Tax Planning
YOU
Estate Planning &
Estate Wind-up
Services
Real Estate
Strategies
Use of
Debt
Elder Care
Post
Retirement
Income Design
Personal
Insurance
Strategies
Legal Risk
Management
Recession and
Cash Flow Management
• Know your cost of living each year – what are you spending?
• Divide between core fixed costs, core variable costs, discretionary costs and luxury costs
• How much of your income is based on investment returns?
• The higher the number, the more cautious you need to be with investing and with spending.
• No need to budget unless there are troublesome warning signs
– E.g. Creeping debt
• Pay down debts, particularly expensive debt
• Keep three months income in a savings account for emergencies
• Stop the “charge now, pay later” attitude.
• Save for big ticket items: renos, gifts, vacations & vehicles – do not
use lines of credit
• Know the cash flow impact of major changes: maternity leave, job
change, divorce, marriage, purchase a second property, etc.
• Defer non-essential spending (e.g vacations) in 2009
Limited Budget?
How to prioritize financial spending:
•
If I only have $2,500 for financial goals right now,
which should I spend the money on?
•
•
•
•
•
•
•
•
Proper life & disability insurance
Pay off credit cards
Pay off line of credit
RESP contributions for children’s future schooling
RRSP contributions
Pay off mortgage
Contribute to the new Tax Free account
Other:
–
–
–
–
Buy a new car
Home renovations
Take a vacation
Dinner at a nice restaurant
Your Career and a Recession
• Factors:
• Mild: no bonus this year
• Extreme: job loss, loss of benefits, loss of company car, loss of
perks, loss of pension, reduction of pension
– Magnified if you are sole income earner in a family
• Planning beforehand:
•
•
•
•
•
•
Keep a cash flow cushion for 3 months
Is second spouse in a position to earn income?
Don’t be irresponsible with debt levels ever.
Have lines of credit in place as a safety net.
Minimize reliance on the employer for perks – take cash instead
Good disability insurance purchased on your own.
Your Career and a Recession
• What to do after you lose your job:
• Cut back all discretionary and luxury spending
• Look for ways to reduce debt
• Downsize your home? (depends on severity of
situation)
• Withdraw from line of credit for less than 6 months
• Withdraw from savings for less than a year
• What to do if your pension is reduced:
• Know the numbers: what is the financial impact
today and in 20 years?
Debt and a Recession
• How much debt is too much?
– Limit: 1/3rd of your cash flow monthly
•
•
•
•
•
•
•
•
•
Beware creeping debt – slowly rising debt over months
Consolidate debts to cut costs
Car leases are rarely the right financial answer
Be debt free by 50 ideally – no later than 60 for sure.
What debt to repay first? The most expensive ones.
Pay mortgage as frequently as possible (e.g. weekly)
Use fixed rate mortgages, not secured lines of credit.
Beware investment leverage / margin or investment loans!
Shop rates beyond the big banks for all debt needs.
Your Real Estate and a Recession
• In your 30’s
• Save 10% to 25% for home deposit – rent longer.
• Try not to use the Home Buyer’s Plan for home deposit money
• Avoid condos as a first home.
• In your 40’s and 50’s
• Beware impact of large expenditures on renovations and second
•
•
•
properties – don’t be “asset rich, cash poor”
Will you need to downsize if you lose your job?
Maximum 20 year amortization; can you afford a 3% rise in
interest?
Rental properties – business test; worst case scenario?
• In 60 and 70’s
• Will you downsize your home like you said you would?
– How much will you really save if you downsize?
• Avoid reverse mortgages; avoid condos as retirement home
• Late in life
• Beware putting children as joint owners of your home.
• Beware gifting the cottage to the kids before you die.
• Will you have enough money if you need a nursing home?
Planning for Retirement
And a Recession Hits
• 30 working years to accomplish a lot
• Yearly, forecast your savings to see if your retirement
savings plan is on track
• Examine “what if” scenarios / worst case scenarios
• Know what you would do in the face of sickness or job loss
• Know the impact of debt repayment, more real estate, job change and
paying for children’s schooling
• Know the impact of your investment losses on your
retirement plan
• Over age 55 – no more than 50% in the stock market
• Know the financial cost of the number of kids you have
• Accept that working longer or returning to work is
normal today
Living in Retirement
and a Recession Hits
•
•
•
•
•
Living in a paid off home – peace of mind.
Kids no longer seeking handouts – peace of mind.
No savings requirement – peace of mind.
No need for life & disability insurance.
CPP, OAS, pensions and annuities to cover off fixed costs
and core variable costs of life
• Bonds and GICs to pay for travel, car upgrades, home
repairs, other lump sums
• Stock market portfolio – used for discretionary spending
– hold off until portfolio recovers.
Children’s Savings and a
Recession
• Missing a few years of savings - ok
• Cost of private school – how much do you
sacrifice to keep this intact?
• RESP – maximum contribution of $2,500
per year – best way to save for kids
• Cost of post secondary education today
• Should grandparents help out grand kids
financially?
Investment Portfolio
Management in a Recession
• Reviewing 2008 results …
• Deciding how to invest in the future
Did You Lose Money in
2008?
Yes…
• Fixed Income
• Corporate bonds – chasing yield / greedy
• Bond funds – bond defaults, high cost, interest
rates
• Stock Market
• Too much in the stock market
• High risk small cap investments
• Too few, large positions
• Failure to capture gains….again.
• Concentration in Canada killed you.
Has Investing Changed
Forever in 2008?
• Is anything blue chip anymore?
• Are individual stocks too dangerous?
• Death of geographic diversification
• Does buy and hold work?
• How to compete with hedge funds?
• Strike three for mutual funds
• Money market mania
• Were any lessons learned from 2001?
Core
Investing Principles
• Start with a written financial plan.
• Then develop a written investment plan.
–
Plan should outline:
• What your investment goals are
• How much money you have for that goal, what you plan to add, what return you need to reach the
•
•
•
•
goal and how long until the goal reached
How the investment advisor (you or someone else) proposes to reach your goals (what strategies,
products, taxes and fees they will use)
How the investment advisor will communicate with you through out the process (how and how often)
What services you can expect as part of the relationship
Summary of all fees.
• Documentation is key!
• Proposal letter at start of the investment advisory relationship
• Investment policy statement to summarize the investment plan
• Investment analysis and report on your progress each year.
• Danger Signs
• An advisor who just focuses on products – never asks about goals, doesn’t care about a financial plan,
nothing in writing, irregular communication, hides fees.
Selecting Investment Products
• Judge all products with common sense criteria:
• Cash – use high interest savings accounts up to $100,000 each
• Fixed Income – laddered GICs of 1 to 5 year maturities
• Stock Market – Stocks vs. ETFs vs. mutual funds
– Criteria:
 Risk management
 Qualitative variables to generate exceptional performance
 Cost
 Tax efficiency
 Transparency
 Simplicity
 Objective advice and product selection
• Fees – full disclosure; choice between 3 methods; aware of what advisor
•
•
•
earns and how it impacts choices you face
When in doubt, get a second opinion
When in doubt, do not purchase.
Demand excellent reporting of results with benchmarks and indexes to
compare to.
The Financial Advisors
On your Recession Fighting
Team
A Team Approach
•
•
•
•
•
•
•
•
Accountant
Lawyer
Investment Advisor
Insurance Agent
Banker
Mortgage Broker
Real Estate Agent
Trusted Friends who you turn to for advice
• Who’s in charge?
– The Financial Planner & You!
• Only the Financial Planner can see the whole plan – the others only play
limited roles in their areas of expertise. You need an expert to manage your
big picture.
Choosing An Advisor
•
•
•
•
•
•
Education – give more weight to university degrees.
Experience – at least five years working with clients just like you.
What kind of clients do they want? Are they like you?
What is the average client size? Beware if much larger than you.
How many clients do they have? Beware if more than 500.
Prefer advisors that provide service proposals, engagement letters,
investment policy statements and written financial plans.
• Prefer advisors that are up front with costs, provide fee options and
disclose everything.
• Avoid advisors who seem to only focus on selling you an insurance
or investment product and have little planning expertise.
• Ask about the advisor’s training, the quality of their company, their
liability insurance, whether they have ever had a complaint, how
they are licensed in the province and their employees.
• Compare at least three advisors and let them critique each other.
Your Financial Plan
Pre-retirement
Financial Plan
Career
Compensation &
Benefits Planning
Philanthropic
and Legacy
Planning
Children
Financial Planning
Personal
Investment
Program
One integrated plan.
More effective results.
Time savings.
Cost savings.
Tax Return
Preparation &
Tax Planning
Estate Planning & Estate
Wind-up Services
Real Estate
Strategies
Use of
Debt
Elder Care
Post
Retirement
Income Design
Personal
Insurance
Strategies
Legal Risk
Management
Final Words
• Think comprehensively about your money.
• Demand value and service and expertise.
• Evolve your strategies as you evolve.
• Document everything.
• Get second opinions.
Thank You.
Kurt Rosentreter,
Senior Financial Advisor & Certified Financial Planner
CA, CFP, CLU, TEP,FMA, FCSI, CIMA, CIM
Manulife Securities Incorporated;
Manulife Securities Insurance Inc.
Phone 416-628-5770 Ext 238
[email protected]
www.kurtismycfo.com
Kurt’s books are available in bookstores across Canada.
Disclaimers
Manulife Securities Incorporated is registered as an Investment Dealer, or its equivalent,
with the provincial securities commissions and as such our Advisors are entitled to
sell mutual funds, stocks, bonds and other securities as permitted under our
registration. They may also be able to provide other services or products to you
through their own business. As a member of the Investment Industry Regulatory
Organization of Canada ("IIROC"), Manulife Securities Incorporated is obligated to
disclose to you that you may be dealing with companies other than Manulife
Securities Incorporated when purchasing services or products from your Associate
(remuneration to your Associate may also come from various sources depending on
the services or products purchased). For example, your Associate may offer any one
or more of the following through a separate business, which would not be the
responsibility of Manulife Securities Incorporated: * Income Tax Preparation; *
Insurance: Life, Accident, Sickness, Disability, General. Please be sure that you have
a clear understanding of which company you are dealing with for each of your
services and products. Your Associate would be happy to provide any clarification you
require.
Insurance products and services are offered through Manulife Securities Insurance Inc.
(a licensed life insurance agency and affiliate of Manulife Securities) by Manulife
Securities Advisors licensed as life agents.
The opinions expressed are those of the author and may not necessarily reflect those of
Manulife Securities Incorporated and/or Manulife Securities Insurance Inc.
Read Kurt’s Monthly ENewsletter on Money Strategies!
• Sign up at www.kurtismycfo.com