Ensuring you have a cushion large enough to weather the unexpected is vital
What do you do when someone throws you that unexpected wrench in your plans? For those of us that are working because we need to earn an income to pay the bills and hopefully save enough for our retirement. How can we plan for that unexpected wrench that is thrown into our lives?
Did you know that nearly 80% of the working population will experience caring for a loved one in the next 10 years? 70% of employed Canadians will do it while still working and 35% of those will need to find another job with flexible hours and fewer responsibilities and most likely a pay-cut. Would you know where to start if one of your parents told you that the other has Alzheimer’s disease? Do you know what the government provides? Do you know what to expect during the journey of this type of disease? What costs are associated to this type of disease?
In this column, I will give you some information to help with your future planning needs so when that wrench comes your way you are somewhat prepared.
Alzheimer’s & Related Diseases:
Alzheimer’s disease blatantly underlines a must need for long-term care insurance. People are afraid of the journey with a cognitive disease. The importance of independence and the “guarantee” of independence to Alzheimer’s patients who opt for Long Term Care insurance (LTCi) before the onset of the disease
Alzheimer’s in a family member who becomes unable to look after themselves. By comparison, a patient with good coverage preserves independence and has the freedom to decide how to spend payouts, such as staying at home with assisted care or moving to a nursing family.
First, we calculate a client’s retirement needs and compare them to available assets. What if there’s an unexpected expense of $2,500 or $7,500 per month? How many retirement plans will be able to sustain that additional cost? Eating into family assets, where a spouse will be concerned: Will there be anything left for me?
Incidence of Alzheimer’s disease in Canada:
2008 — 103,700 new cases/year (every 5 min)
2038 — 257,800 new cases/year (every 2 min)
Prevalence of dementias in Canada:
2008 — 480,600 people with dementia (1.5% of Canada’s population)
2038 — 1,125,200 people with dementia (2.8% of Canada’s population)
— Alzheimer’s Society of Canada stats
Dementia may become Canada’s most expensive disease. Planning for long term and even planning for our short-term unexpected needs such as a car accident or heart attack. Having products like Critical Illness Insurance, Disability Insurance and Long Term Care Insurance in our portfolios would assist us.
Critical Illnesses:
Statistics tell us that 90% of people survive a heart attack, that 75% of stroke victims survive the initial attack. Then what?
Well you can’t go back to work the next day. Recovery is not always easy, especially if you’re worried about paying the bills .A critical illness benefit could help with the recovery process.
This may mean that a CI benefit during a time of health recovery may allow you or your partner to take a year off. Or how about a year’s mortgage payments paid? Or you could choose your own caretaker if you became critically ill and needed assistance?
Nobody is invincible, not even Lance Armstrong or Mario Lemieux.
Think about these questions:
• Do you know someone who has had a heart attack or cancer?
• Did they plan for it?
• Did the illness result in emotional or financial strain on the household or business?
• Would extra cash have helped?
Our ability to earn an income is necessary for about 99% of the population the other 1% don’t have to worry. That being said, stock market performance is a concern for everyone as nobody likes to lose any money.
Volatile Markets:
When markets are volatile, it’s natural to be worried about the impact on your portfolio. And when you’re worried, you want to take action.
However, it’s important to recognize that sometimes the best course of action may be to do nothing. If you have a sound investment plan, you already may be in the best possible position to weather the market storms.
We realize it can be painful to watch the value of our investments experience a significant drop. But we can assist you in understanding market volatility and in protecting your portfolio.
Strategies for dealing with difficult markets: • Have a long-term view, keep a diversified portfolio, resist the temptation of market timing, take advantage of market volatility and invest with an experienced advisor who is qualified.
Diversification is a key principle in investing, and it refers to the practice of spreading your investments among the different asset classes: stocks, bonds and cash as well as different types of investment products. Why is diversification important? Each asset class usually performs differently as market and economic conditions change, and there is no way to predict which one will be the leader.
If we had a crystal ball market timing would be the ideal strategy for an investor. Sell out of the market before it declines and reinvest just as it begins to recover. Of course, this strategy is nearly impossible to execute in reality. How do you know when to sell and when to buy? After a sharp decline in the market, many investors naturally want to sell to avoid the potential for further drops in their equity portfolio.
Not only does that lock in your losses, but it raises the question of when to reinvest. Historically, there have been no indicators that have consistently predicted the predictor, because the stock market often rebounds months before an economic recovery is evident.
Furthermore, when the market does recover, its gains come fast. Missing those first few days, or months, of strong returns can have a huge impact on a portfolio.
Dollar Cost Averaging:
Market volatility has its benefits if you are dollar cost averaging. Dollar cost averaging refers to the practice of investing a fixed amount of money at regular intervals, regardless of where the market is.
The result is that you buy more units when prices are falling and fewer units when prices are rising.
In volatile markets, this practice tends to lower the average cost of your investments.
Dollar cost averaging won’t protect you against a market decline, but it is an easy, disciplined investment strategy that’s been proven to pay off over the long term.
Retirement doesn’t always happen at 65. Nor do we want to completely stop working. I had a couple of meetings initiated from my September column regarding Guaranteed Minimum Withdrawal Benefit plans and pension plans.
I will change their names and some other details, but the situation is pretty well identical.
GMWB Planning Example:
George and Denise are age 54 and 49,respectively. Farmers by profession, they manage 400-acres in South Simcoe. With their son and daughter independent and following different career paths, Denise is beginning to wonder how their future retirement is going to unfold.
The family business has been successful over the last 21 years. George inherited the farm and sold off a portion of the property after his father died. He has always been very conservative and holds the majority of his assets in bonds and Guaranteed Investment Certificates (GICs).
In total, George and Denise have managed to save approximately $860,000 in a combination of registered and non-registered investments. George suffers from a deteriorated disc in his lower back and Denise is growing increasingly concerned about her husband’s level of discomfort.
He is having trouble keeping up with their large property, and she thought it would be a good idea to meet with a financial planner to review their situation and make a financial plan. Seeking professional advice, their friend referred them to me; we started with a simple question: “When do you want to retire?”
“The truth is, I don’t want to retire — but I do want to slow down a bit and ease into retirement at age 65,”George replies. “My plan is to lease out a large portion of our property and farm equipment to the son-in-law of a good friend of mine. That way, we can still live and work on the farm and generate income. The lease will pay George and Denise approximately $45,000 per season in income, which will cover a substantial portion of their living expenses. Denise currently owns her own cleaning company and employs eight.
Her salary is approximately $40,000 per year. According to their calculations, they will have enough money to live on for the time being, but they are also looking to fulfill their dream of travelling south every winter for three months. Denise said she thinks they can live on what they have, but she is a little concerned about any surprises that may appear along the way.
She wants to know if they can structure there savings to provide a steady stream of income when they retire, while still ensuring they have access to their savings in case something unexpected comes up.
The bottom line is GMWB plans are useful for you whether you are saving for retirement or are already retired. In particular, for those who do not have an employer pension and must rely on their own savings as the primary source of retirement income, GMWBs can provide a secure and predictable stream of income. Unlike many traditional products used to generate income, such as GICs and term deposits, GMWBs offer the potential growth of equities, coupled with the guaranteed income of an annuity.
However, GMWBs are not a blanket solution for everyone. It’s important that you work closely with an experienced advisor throughout your accumulation period and your retirement to ensure products and portfolios are suited to your personal goals and time horizon.