One of the things I love most about my business is the relationships. It’s a beautiful thing when a client trusts you with their life savings and allows you the privilege to counsel them through so many of life’s exciting (yet also stressful and complex) stages. What I love even more is that these relationships grow and extend through generations – I am fortunate to work with two and even three generations at a time with my clients.
It’s this constant intergenerational wealth conversation that I find most stimulating – because a lot of our money values, expectations and habits are shaped by the generation before us. Two conversations I have often are the pace at which you are paying off your mortgage the notion of self-funded pensions.
Real quick – the mortgage conversation is all about opportunity cost. I don’t blame those who had double digit mortgage rates in the 80s for emphasizing the idea that you must “pay down your mortgage as fast as you can”. But what if your mortgage rate today is less than what you’re earning in your investment portfolio? Sure, rates are rising but we are still near all-time historic lows and it’s the opportunity cost of where your money works hardest for you that’s the real bottom line.
When it comes to the self-funded pensions, the conversation gets a little longer –if you look back about ~40 years, nearly 50% of Canadian workers had an employee pension plan. However, for the cohort of 25-44 year-olds the pension situation looks a lot different. Only 40% of 35-44 year-olds, and a mere 27% of 25-34 year-olds have employee pension plans – and most aren’t even defined benefit plans (click here to learn about the difference between a DB and DC plan). Pension coverage might improve as this group ages, but they’re unlikely to receive the same level of coverage as their parents and grandparents.
Forging their own path to retirement
With a smaller population than the preceding boomers, other potential challenges for this group include reduced government pensions or services, and/or paying more in taxes to keep these benefits. The future will likely require this group to fund most of their own retirement. While this will be a challenge, fortunately for Canadians, there are more ways to save and generate income than ever before, and several benefits to building your own retirement that are not provided by guaranteed pension plans…
More ways to save
Registered Retirement Savings Plans (RRSPs) are now complemented by Tax-Free Savings Accounts (TFSAs) – a savings vehicle introduced in 2009 which previous generations did not have. Both offer distinct tax-benefits, and diligently saving into these two accounts alone could provide a well-funded retirement. RRSP room is created and pooled based on your annual income and the TFSA limit (for Canadian residents who have been 18 since 2009) is $57,500 as of 2018 with an additional $5,500 in room each year. Individual Pension Plans (IPPs) are another great way for the growing ranks of incorporated business owners and self-employed professionals to tax-efficiently fund their own pensions.
More retirement income opportunities
Most investors are well aware of GICs, bonds and dividend-paying stocks, but there several other ways to generate retirement income – some of which have evolved or are relatively new to the investment landscape. Preferred shares, bond ladders, Exchange-Traded Funds, structured notes and tax-deferred solutions can all be positioned within a portfolio to diversify or boost retirement income. Insurance solutions, such as segregated funds and annuities can offer guaranteed income for life, while certain whole life insurance policies can be set up to generate tax-exempt investment income while also being uncorrelated to the market. Speaking of tax, asset allocation, income planning, and income-splitting are among the other considerations that can help you effectively manage taxes before and during retirement.
Professional advice can help navigate today’s environment
Many 25 to 44-year-olds might not have the benefit of family advice on the ins and outs of saving for retirement. Furthermore, they’re living in a constantly evolving investment and taxation environment that’s quite different than that of their parents. If you or someone in your family is going to retire after the ‘boomer times’, just say the word and we’re happy to add another generation to our relationship with you.
Now you are in-the-know with Word on the Street.
Enjoy the weekend,
Investment & Wealth Advisor
Chaaban Wealth Management Group