Throwback Thursday!

Cornerstone Four: Financial Security at Death

I know we are all ten feet tall and bulletproof; however unfortunately, the fact of the matter is that someday our time will end here on earth. When that happens, what I like to do is make sure your family is now financially impacted by your loss. What I will show you first are the four changing needs for life insurance.

First, I want you to think, have you ever heard the approximate price of a funeral today in Ontario. I have heard of some as low as $4000 and have heard other stories where funerals have cost upwards of $40,000! However, the average funeral and burial cost in Ontario today is approximately $10,000. This is what we would call a final expense; something that is there no matter your age when you pass away. We see this in the light blue area above. There is a slight increase because as you age, there are additional debts to be covered, as well as taxes and fees that are incurred with your death. So think about yourself today; think about the cost of a funeral and your current debts; believe it or not, that is your immediate need for life insurance.

Next thing I want to talk about is another changing need for life insurance called income replacement and debt elimination. Over time you are expected to earn more money, not only due to inflation, but we can also assume that you are going to move up in your company and earn more and more money. If you were to pass away prematurely, think about what burden your family would be left with if they no longer had your income coming in to pay the bills every month. If you are the sole provider for your family, that impact could be huge! In addition to this, as you earn more, you spend more. You buy a bigger home, a nicer car, a nice getaway on the lake, if you have debts from those large purchases, unfortunately they do not disappear. This income replacement and debt reduction is the second changing need for life insurance as you can see in the yellow shaded area above.

I will now address the third changing need for life insurance which we refer to as your estate. As I addressed earlier, as you earn more money, you may buy more toys. They may have been in the family for a while and losing those would be a huge detriment. Through life insurance, there is actually a way you can protect your estate from all of the nasty taxes that are imposed upon the second death of a couple. Through the use of life insurance, you can protect your estate from all probate fees, taxes and any other fees that may be incurred. Believe it or not, when your kids inherit your cottage, the gains on the property are actually taxed! Let me illustrate the fees that may be associated with the transfer of a secondary property. 

Here we see a cottage that was purchased for $60,000 30 years ago; today, that property is now worth $259,317. Assuming 50% capital gains inclusion rate and a 46% tax rate, the total taxes payable on the cottage to be rolled over to your children would be $45,843! That is the total fee payable for taxes only! On top of that, you may have lawyer fees and other fees that the government may impose. Would you want to leave your dependents with that tax liability?

The final use for life insurance is using the policy to actually enhance your retirement! I am not going to go into too much detail with this one however you can always contact me to learn more about this! In a nutshell, you can use your life insurance policy to actually provide you money during your retirement and there are ways to structure this so that every single dollar would be tax free!! That is a lesson for a later date and one we should discuss in person. 

I want to close this post by talking about your insurable interest. Today, if we were to go to the insurance company with an application, they may (based on underwriting) insure you for up to 20 times your current salary. However, if you were to delay taking out life insurance for say 20 years, the insurance company may only be willing to insure you for about five times your current salary! This is due to changes in medical history, as well as your age.

The two biggest factors in taking out a life insurance policy and the cost involved come down to two things: age, and whether you are a smoker or non-smoker. So put time on your side and call me today. Unfortunately you are never younger than what you are right now!

I can be reached in the contact box to the right, or by phone at (905) 475-0122 ext. 411.

Cornerstone Two: Retirement

Retirement is something most of us dream of and everyone looks forward to. From stopping or scaling down your work and travelling, to just relaxing at the cottage, everyone has different retirement dreams. However, what you do now determines how your retirement looks in the future. The plan you put in place will ultimately determine whether you are golfing on the beach in Florida, or mini putting at a miniature scale putting green.

If you are in your twenties and are reading this PERFECT! You are going to learn what you can do now to set yourself up for your dream retirement. If you are well into your working career and are reading this thinking about how much you procrastinated, it may not be too late, we just have a lot of catching up to do.

The first huge impact on how we save for retirement is inflation and the effects of inflation on not only the goods we purchase, but also how inflation erodes your money. To illustrate the effect of inflation I will use arguably the most debated topic of gasoline.

In August of 2000, the average price of fuel across Ontario was 70.3¢ per litre.

In August of 2014, the average price of fuel across Ontario is 139.2¢ per litre.

*http://www.energy.gov.on.ca/en/fuel-prices/fuel-price-data/?fuel=REG&yr=2000

Using these two numbers, we can see that in 14 years, the average price of fuel has risen 198% and almost doubled in price! Think if everything rose that much, what we would be paying for everything!? Now think how much of an impact that would have on your savings you are putting away today.

Through inflation alone, in the next 20 years your expenses are expected to double. So if we look at a 25 year old today with expenses of about $1500 per month, their expenses by the time they are 45 (due to inflation alone) are expected to double to $3000. Then if we look at their expenses by the time they are at retirement age of 65, they are expected to double again (again due to inflation alone). We all know that your expenses fluctuate over time however, this illustrates what consequence inflation will have on your overall cost of living!

Now that I have scared you away talking about inflation, I am now going to talk about how we can use compounding to battle inflation.

Compounding is the ability for your money to make money. How does this happen? Well the way I like to describe it is to think about a snowball. You can start out with a small little snowball and roll it down a hill. That little snowball is still there, however as it rolls down the hill it is gathering more and more snow and growing larger and larger.

How does this relate to money? Think of a small amount of money, say $100. Now lets say that money is put into a fixed investment that earns 4% over 5 years. The chart below illustrates how that $100 grows.

Beginning of Year	End of Year
$100	$105
$105	$110.25
$110.25	$115.76
$115.76	$121.55
$121.55	$127.63

As you can see, not only is the interest applied to the original $100, but it is also applied to the end of year balance from the previous year. This is a small scale example, now lets look at the procrastinator who delays their retirement until they are well into their working career, for this we will look again at Person A and Person B.

Person A is 25 years old today and starts to put away $2500 per year into some sort of a savings plan. Over the course of their working career, assuming they retire at age 65, they will be putting $100,000 into a savings plan. Now, assuming a conservative 4% interest rate, we can say that their $100,000 investment is expected to grow to approximately $250,000. Thats $150,000 of unearned money. Meaning you didn't have to put any effort in to make that $150,000!

On the flip side, lets look at Person B. This person procrastinates and procrastinates their retirement then realizes by age 45 they have nothing in place for their retirement. So at this point, instead of putting away $2500 they start putting away $5000 per year. They are still putting away the same $100,000, however assuming the same 4% interest rate, their money is only expected to grow to $150,000. Thats a difference of $100,000 and about 60% more!

You might still be wondering and asking, well Scott, how does that work? To explain this let me go back to the snowball example.

Person A is young today and since they are young chipper and in shape, they can climb all the way to the top of the hill. They make a small snowball and roll it from the top. Since they have the whole distance of the hill to roll their snowball down, their snowball grows quite large.

Person B however is 20 years older. Since they are older and not quite as in shape as they once were, they can only climb half way up the hill. They make the same size snowball as Person A started with, however their snowball is rolling for a shorter distance and doesn't grow to nearly the same size as Person A's snowball does. 

Now that I have illustrated both the nasty effects of inflation and how you can use compounding to battle this, I have now concluded my talk about retirement. I hope that you have started your retirement savings, and if you have congratulations! If you have not, get something going. Every little bit helps. Maybe instead of buying all your coffee's at Starbucks, you can start to make them at home!

Start early and put time on your side. As I talked about in liquidity the government and our employers are giving us less and less so you are the largest part to contributing to your retirement.

If you would like to start your retirement savings now call me. We can work through your exact situation and create a retirement plan that will help you retire in Florida or at your new cottage, rather than in your backyard.

If you have started your retirement savings great! Let's still sit down and evaluate what you have. Let's have a look at what you are putting away and if that truly is enough to retire comfortably with. 

And finally, if you are retired, congratulations! Do you know if your money will last you for your whole retirement? What if I told you I can predict if and/or when that money will run out. Let's sit down and look at your current situation.

I can be contacted be email at Scott.Loney@Freedom55Financial.com or by phone at (905) 475-0122 Ext. 411.

Thank you and stay tuned!

Cornerstone One: Liquidity

When we talk about liquidity, we are talking about your access to money right away in the event of an emergency or an opportunity. Examples of an emergency can range from the brakes failing in your car, to a family emergency overseas that requires you to book a plane ticket to tend to the situation. Opportunities can range from new business opportunities, to upgrading your family to a bigger home.

Experts have shown and believe that you should have 3 to 6 months of your expenses put away in case of this emergency or opportunity. This ensures that if a situation does arise, you have the cash readily available to take care of your situation.

Think about your situation today, if an emergency or opportunity were to arise, where would you turn for the money?

One way we can make sure that we get you to this state is through paying yourself first, or in other words a “me tax”.

To illustrate what I mean when I say to pay yourself first I will use two different people, Person A and Person B.

What this illustration shows is what happens when each person’s paycheque comes in.

Person A receives their paycheque every two weeks and goes out to the bar, pays their car insurance, and IF there is any money left over, they then put that money into some sort of savings plan.

Person B however receives their paycheque every two weeks and right away takes a percentage off the top (just like the government does) and saves that money. Then WHEN there is money leftover, they can then take care of their needs and wants.

Now think, have you ever heard a percentage that you should be taking off the top of every paycheque? I know over the years I have heard 10-15%, but before I go further lets ask ourselves a few questions.

1. Are people today living longer or shorter lives?
2. Is the government and our employers providing more or less money for our retirement?
3. To people today want to retire sooner or later in life?

Experts believe and have shown that we should be taking anywhere from 15-30% off the top of every paycheque and putting it into some sort of a plan! What’s even more alarming, is that only approximately 1-2% of Canadians today are doing this!

So what can you do now? Start with SOMETHING! Since 98% of Canadians are Person A, I wouldn't be surprised if you were there as well!

Start with taking a small percentage off of your paycheque. Put it away and forget about it until you absolutely need it. I'm not talking about that new  gadget or new purse; I'm talking about a real emergency!

Next, find yourself a trustworthy advisor who can help you allocate your money into an effective plan. Then you can tell your friends you are one step closer to being financially independent!

My personal goal with all of my clients is to take them and move them more and more to be Person B.

Stay tuned for the next cornerstone where I will talk about retirement!

In the meantime, I would love to show you this in person! Please contact me at Scott.Loney@Freedom55Financial.com or by phone at (905) 475-0122 EXT. 411 to set up a meeting!

The Four Cornerstones to Financial Management

One of the first things I do when I meet with every client is assess them in comparison to the four cornerstones to financial management. Ultimately, my goal with all of my clients is to use these four cornerstones and use them to build a plan that will lead to financial freedom and financial independence. Over the next four blog posts I will reveal the four cornerstones to financial management and will give a quick overview as to how I use these to achieve financial independence.

Over the next four blog posts I will discuss:

• Liquidity; and the ability to have readily available money in the event of an emergency or an opportunity
• Retirement; and the ability to use compounding to battle that nasty thing we call inflation
• Living benefits; and what would happen if you were to become ill or injured
• Financial security upon death; and the ability to leave an income to your loved ones and cover your debts upon death

I look forward to sharing these four cornerstones with you!