Covid 19 and Lessons for Personal Finance

March 18, 2020 | Orlando Lopez


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Imagine if you were not reading this right now, because you could not read it. Imagine the reason is because you passed away yesterday. Covid 19 has reminded us of our imminent mortality.

Indeed, your loved ones would be left with a void, pain, and the heartache to accept you were taken away from them. Are they also going to be left with an administrative nightmare? Absolutely not, your will is already completed, right? If you didn't get around to doing your will, don't be superstitious in feeling I am putting the hex or the covid on you. Time may not be a luxury anymore, and during my years of experience, I have seen some estate planning done in hospital rooms, with the last minute help of lawyers and bankers. With this pandemic, I doubt lawyers are eager to make any hospital visits at this time.

Leave Your Family with More Memories and Less Tax

A proactive estate plan allows you to strategize on various options to save on tax and efficiently transfer assets to your loved ones. For example you can save on probate tax by adding a successor to your non-registered account with the Joint Gift with Beneficial Right of Survivorship (JGBRS) vehicle available at RBC Dominion Securities. The concept has some similarity to naming a beneficiary on a Retirement Savings Plan (RSP) or Tax Free Savings Account (TFSA), and may be an option for you after investigating with your Lawyer and Advisor. There will inevitably be a tax bill on most estates, and to reduce the shrinkage on one's estate, shifting some assets to an insurance policy allows one to leave more for the family. Along with reducing the administrative nightmare, a proper estate plan could potentially reduce the tax burden on one's estate.

Access to Cash, Credit, and Toilet Tissue

Covid 19 has also taught us to appreciate toilet tissue because we are reminded of it's importance when we need it and it is nowhere to be found. Liquidity and access to cash, or credit is an important option to have in an emergency and in various other scenarios. Much like toilet tissue, when we don't need credit we don't appreciate its importance in our lives. However, unlike toilet tissue, you cannot pick up a line of credit on the way home from work because it can take a few weeks to be put in place. We recommend you plan way ahead of when you need it. Here are some scenarios when the option to access credit allows you to be strategic.

  • The market has dropped 30% and you need to continue withdrawing from your investment. As your advisor I would recommend we explore not realizing a 30% loss, instead accessing funds from your credit facility at the single digit interest rate, until the market recovers to then repay it.
  • Imagine Covid 19 has slumped the real estate market when you were planning a downsize, so its now a bad time to sell, but a good time to buy. Access to your equity allows you to access cash to make your purchase while holding on to your original property until the market improves
  • An impact on cash flow can be smoothed out with access to credit in the short term, and when cash flow recovers to normalcy, the credit can be repaid.
  • During a market decline, you may have been fully invested with little cash to take advantage of stocks selling at a discount. Borrowing to invest in the stock market, much like borrowing to invest in real estate it has merits and risks, which should be reviewed with your Advisors.

Coverage for Disability, Life, and Critical Insurance

One of the purposes of insurance is to reduce the negative impact of a event on the life of an individual, or their family. This crisis reminds us that we are not invincible, and insurance is easier to arrange when the imminent need is not there. I am not recommending everyone to get insurance, however, I recommend assessing one's situation to understand if there is a need, how much is needed and then make an informed decision about insuring that risk.

Diversification

The crisis has adversely impacted some industries more than others such as the airline and hospitality industries. An over exposure to these industries will have a more significant impact than a more diversified portfolio. This may also be time to review your portfolio to reposition in light of the crisis.

 

In summary, Covid 19 has reaffirmed my philosophy in how I approach my practice as an Advisor in helping clients plan their personal finance. The approach can be summarized as "Hope for the best, plan for the worst". Contact if your estate plan is not fully in order, or you do not have a credit facility for emergency, or if you have not reviewed the need for insurance need, and if your portfolio needs to be re-evaluated. I am hopeful that we will overcome this crisis and pave a way forward, with some bruises. Stay healthy and confident.

 

Orlando Lopez, CFP, CIM

Investment Advisor & Financial Planner

RBC Dominion Securities

45 Wicksteed Avenue Unit 210

Toronto, ON, M4G 4H9

orlando.lopez@rbc.com