How to know if you are on the right path to reaching your financial goals
The financial planning process I go through with clients is not a product but a process. This process is one of the most important things to do. Completing a financial plan and updating it on a regular basis will make sure you are keeping on the right path towards meeting your current and future financial planning and lifestyle goals. For you, retirement may be starting soon or not for another 25 years, but right now is the best time to start your plan if you don’t already have one – or to update it to make sure all the necessary changes are being made. I like to make sure I cover all aspects of a financial plan so that a client won’t come back and say ‘I wish I would have known that’.
I like to use acronyms as they are easy to remember. Therefore, I follow a financial planning process using the acronym P.A.C.T. The words that make up this process are protection, accumulation, conversion, and transfer.
Protection
The protection stage is the starting point to every financial plan so that you have a foundation to build upon. Having a few thousand dollars saved up for a ‘what if’ scenario may make you feel comfortable but will not help you if a major unfortunate situation occurs.
- Life insurance
Life insurance is there to help meet your goals if you were to pass. A goal could be either to pay off your mortgage or make sure there is enough money for your surviving spouse.
- Critical Illness insurance
This type of insurance helps you deal with the unfortunate scenario of you having a stroke, heart attack or another illness, allowing you to have money available to maintain a standard of living you are used to or have extra money to pay the bills. Disability insurance is coverage to assist in paying the bills while you are off work due to a disability.
- Long-term care plan
Looking further into the future you may want a long-term care plan that will assist in the payments of care in your senior years so that your desired care is continued without the added expense passed on to your children.
Of note, an emergency fund is not an insurance product but a pool of money (i.e. 3-5 times your monthly salary). This should be fully accessible if you need money for an emergency that will not last long, if you don’t have additional coverage for your particular situation.
Accumulation
The accumulation stage could include your RRSP, Spousal RSP, Pension Plan, Tax-Free Savings Account, or another investment or property that you would like to see grow and from which you plan to use the proceeds during your retirement. It’s very important that you establish your risk tolerance before you invest a penny (or a nickel). The necessary evil of the stock market is volatility. It’s the volatility that makes you rethink your investment objectives more often. It would be great if the market continued to grow but that is not realistic. You may want to plan for a 5% annual return and hope you get 8% so that you limit the surprises. If you take less risk you may have to work longer than you planned; however, that may give you a better feeling than having to work longer because you took more risk – and have to make up the difference with a delayed retirement.
You may end up doing some work during retirement but it is better to continue to work because you wantto rather than because you have to. When it comes to your pension plan at work, it is very important that you understand how it works as this will affect your retirement age, income decisions and other investment decisions.
Conversion
Once you have decided to retire, you will come to the conversion stage. Hopefully your retirement decision is made a few years before the actual date so that you can create a smooth transition within your sources of retirement income. Pension decisions are made with your predictable future in mind even though things can change. You will want to make sure that all sources of income (registered and non-registered) are received in the most tax-efficient way possible. For example, you may want to delay receiving money from your RSP until you have to convert it over to a RRIF. Or you may want to start receiving a monthly payment right away if you are worried about the OAS clawback in the future, or if you don’t have a pension plan from work.
Transfer
Estate planning and your passing is not the most enjoyable thing to plan for. But, the transfer stage discussion may be the most important part of the financial planning process as this is when you can make sure your wishes are followed through and your lasting legacy is what you want it to be. Whether this includes passing your estate down to your children or including charitable donations, this is important to discuss and update when necessary. Right from the beginning of the financial planning process you should make sure that your will is updated and is reviewed on a regular basis as your personal situation or government rules can change.
Indeed, you never want to die without a will and let the government decide what happens to the legacy you’ve worked so hard to leave behind.