Estate planning is done in large part to minimize a variety of taxes, and is often a part of retirement planning.
It’s always good to have clear arrangements in place when estate planning in Canada. It’s also important to keep them up to date as your circumstances inevitably change.
Estate planning in Canada: Ensure you have money to leave
Estate planning tips only help if you first have assets to leave to your heirs. Of course, your initial goals should be saving for retirement. Let’s take a moment to review retirement saving goals.
Read this before you invest again
A report that’s essential reading whether you look after your own investments, or have someone else do it. Four decades of proven experience have gone into Pat McKeough’s comprehensive report “Wealth Management and Retirement Planning”. Read it now.
Let’s say you’re 50 and you want to retire at 65. You have $200,000 in your RRSP, and you expect to add $15,000 in each of the next 15 years. To determine if this is enough to retire on, you need to make assumptions about investment returns and income needs.
What you can expect: Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For purposes of this retirement plan, we’ll assume a 6% yearly return, and disregard inflation. Your $200,000 grows to $479,312*, and your yearly $15,000 RRSP contributions add up to $370,088, for total retirement savings of $849,400.
You can run the calculation yourself using one of the many compound-return calculators available online.
Estate planning in Canada: Invest based on your heirs’ timelines
If you have substantially more money than you’ll need for the rest of your life, and you plan to leave the excess to your heirs as part of your retirement planning, it makes sense to invest at least part of your legacy on their behalf. That is, invest based on their time horizon, not yours.
For instance, if your heirs are in their 40s, your retirement planning should involve holding at least part of your portfolio in a selection of investments that would suit investors in their 40s. Of course, you’d still want to invest conservatively. But you’d want to take advantage of the many years that 40-somethings have till they reach retirement age.
If your retirement planning involves holding your money in T-bills for the last few years of your life, it will generate a minimal return after taxes—you may actually lose money after accounting for taxes and inflation.
After your death, it may take months or longer to settle your estate. After that, your 40-something heirs may need time to put your legacy to work, especially if they are inexperienced as investors. They may have passed 50 by the time they get around to investing in an age-appropriate fashion. Missing out on, say, three years of even moderate returns can take a big bite out of the funds they’ll have a couple of decades later, in retirement.
Estate planning in Canada: What prepaid funerals can teach you about long term investing
The topic of prepaid funerals brings up the age old investing topic of having a healthy dose of skepticism when you encounter new investment products. Most seasoned investors will talk about the value of everyday qualities like patience, consistency and a healthy sense of skepticism—in short, the kind of qualities that bring success in all aspects of life, not just investing.
This investing mindset is the perfect way to deal with the idea of prepaid funerals. Being able to think critically about an investment product and knowing how money is being made on both sides is crucial to making an informed investment decision.
These qualities also help you apply our three-part formula for investment success: invest mainly in well-established, high-quality companies; spread your money out across most if not all of the five main economic sectors; downplay or stay out of companies that are in the broker/media limelight.
Patience plays a crucial role. All too often, investors buy a promising stock just as it enters a period of price stagnation. The idea of prepaid funerals may be a relatively new idea and may make sense for future investors, but for now it has too many downsides when you could be investing the money more profitably in the stock market.
Are you planning to leave your heirs some dollars or live down to your last dollar?