Your parents were likely the first to tell you, “money doesn’t grow on trees!”. Parents have lofty dreams for their children’s futures. As a parent myself, I’ve realized that this requires more than just daydreaming; it involves extensive planning and preparation. Our children’s futures depend largely on how we manage our own finances, and the examples that we set for them.
Family life can be busy, and it’s easy to lose focus when planning for the family’s financial future. Here are some common mistakes to avoid:
1. Neglecting the Importance of Life Insurance
insurance can play a significant role in your estate planning, as it can help you meet a wide range of potential objectives. When determining how much insurance coverage you need, keep in mind that the goal is to avoid placing an undue burden on the surviving parent, in the event that one of you should pass away. This will help to keep opportunities, such as post-secondary education, available to your children, without causing financial strain.
Furthermore, if the surviving parent were to pass without well-planned insurance coverage, the estate might be at-risk of shrinkage, due to the final tax bill. In the year of death, the deemed disposition rules of the Income Tax Act treat all capital property owned by the deceased as if it were sold immediately prior to death. A final tax return must be filed by the estate’s executor, that includes all the income earned by the deceased, up to the date of death. Potential significant tax liability will arise from the recognized capital gains from your non-registered investment portfolios, rental properties and incorporated businesses, due to these deemed disposition rules, as well as the de-registration of any of your registered assets, such as RRSPs or RRIFs.
You should work with a life-licensed representative for an “insurance needs assessment” to determine the type and amount of insurance most suitable for your situation.
2. Not Saving Enough for Retirement
The World Economic Forum has recently published a report, which warns that most retirees in six of world’s major economies will outlive their savings by between 8 and 20 years. There is growing fear that millions of retirees in developed nations will run out of money, and Canadians are among those at risk. People often underestimate how long they will live, as well as their post-retirement living costs.
Inadequate retirement savings could lead retirees to depend financially on their children, which, if unexpected, could sideline their children’s own financial goals. Here are some tips for effective retirement planning:
Anticipate a long life (it’s better to be over-prepared than under-prepared).
Set up more conservative return expectations and inflate your retirement income needs.
Plan for the unexpected; sudden medical bills or a drop in the market could significantly affect your retirement income needs.
Take the inflation rate and tax implications into consideration.
Review your retirement plan annually to ensure that it is on track
3. Not Educating Your Children on Financial Matters
Your children’s ability to manage their own finances in the future will depend largely on what they grow up observing from you. Financial literacy should be an ongoing education throughout their childhood, rather than a one-time discussion. Try to set a good financial example for your children, by avoiding excess debt, living within your means, and saving adequately for the future. Children are not only listening, they’re watching too!
It’s never too early for children to acquire good money sense and understand how to best maximize money. Here are some tips:
Teach them to recognize the time value of money and the power of compounding.
Teach them how to create a budget and stick to it.
Help them to save and invest their own money.
Take advantage of TFSA account for those aged 18 and up.
There is no set of instructions that can fully prepare you for all the challenges that come with family life. As such, it is important that we impart valuable financial lessons upon our children, and preserve the resources that they will need to meet their future goals. If you need additional guidance, ask your investment advisor to help design a plan.
Remember to always stay one step ahead, your children will thank you!