When it comes to your financial plan, think process, not product

Jason Heath: A financial plan is more than a one-time event, and it certainly shouldn’t exist just in your head

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The title of “financial planner” is not regulated in all provinces outside of Quebec. This means that financial planning in most of Canada is a vague service offering with few guidelines. Therefore, it can be difficult to know what to expect from a financial plan.

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RBC’s 2019 Financial Independence in Retirement Survey found that 54% of Canadians said they have a financial plan. This number has remained constant in recent years, with the Ipsos (2015) and CIBC (2017) polls indicating the proportion to be 50 and 54% respectively.

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An interesting finding from the recent RBC survey is that one in three respondents who said they have a financial plan admit that the plan is just “in their head”. As a financial planner, I’ve always thought those financial plan survey numbers seemed high given how few people seem to have a written financial plan, but perhaps the truth is now out. In other words, not only do many people lack a financial plan, but even many who think they do, actually do to some degree. For some consumers, their financial plan may consist of just an investment proposal from a mutual fund salesperson or a few speculative stock picks in their discount brokerage account.

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FP Canada – formerly known as the Financial Planning Standards Council – sets financial planning standards and confers the title of Certified Financial Planner (CFP) in this country. According to the national professional body, a financial plan should include: investment planning; insurance and risk management; Financial direction; retirement planning; tax planning; estate planning and legal aspects.

Of the six components of a financial plan, investments and insurance are the two most frequently discussed by consumers. Canadians know they should consider RRSPs, TFSAs and RESPs to build their future nest egg. And most people insure against at least some of the risk of financial loss due to death, medical problems and property damage.

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Money management and retirement planning are two often misunderstood components of a financial plan, while tax and estate planning are often overlooked. Although they may be less visible components than investments and insurance, they are arguably more important.

Money management involves identifying your current net worth (assets and liabilities) and cash flow (income and expenses). Online banking tools like RBC’s myFinanceTracker and TD’s MySpend, and personal budgeting apps like Mint and You Need a Budget can make this easier than ever. Beyond determining today’s net worth and cash flow, which you can and should do yourself, medium-term financial management and long-term retirement planning also require forecasting. for the future.

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The “retirement plan” component of a financial plan must forecast future income, expenses, taxes, investments, pensions, debt repayment and other financial implications, the purpose of which is to determine and to quantify long-term financial independence. A detailed retirement plan can go so far as to model every dollar that goes in and out of your hands for the rest of your life, holding several factors constant or stress-testing results subject to conditions such as returns. higher or lower investment rates, increases or decreases in expenses, early or late retirement dates, etc.

Money management and planning for retirement helps people determine their personal savings goals, what they can afford to spend, and how best to organize their family’s financial affairs. Retirement planning can quantify how much you need to have saved to retire and whether your risk-return trade-off can meet your long-term goals. These are situation-specific calculations — not just rules of thumb — that are hard to do on the back of a napkin, let alone just in your head.

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Tax and estate planning are often overlooked parts of a financial plan for a variety of reasons. The business of Canadian taxation, for example, has become very transactional, and much less Canadian. In fact, accounting firms large and small have been outsourcing part of their tax return preparation processes for years, often to India. As accountants have sought to compete with DIY software, discussion and tax planning can be sacrificed for efficiency and pricing.

For many Canadians, their relationship with their accountant is also retroactive, preparing a tax return in April for the previous year. Proactive tax planning to minimize next year’s tax, as well as lifetime tax and death tax, are important parts of a financial plan.

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Estate planning can also be an overlooked financial planning exercise. A 2018 Angus Reid Institute poll found that 51% of Canadians do not have a will and only 35% have an up-to-date will. The thing about estate planning is that it should go beyond simply preparing a will, just to tick a box and say it’s done.

In a financial planning context, it is important to take into account elements such as the designation of beneficiaries, joint ownership of assets, tax obligations and survivor benefits that may result from the death of a person. Just as a married couple might plan for retirement together, it’s important to consider what might happen if either spouse dies prematurely. It can be as much an exercise in financial planning as it is an exercise in estate law.

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Since investment or insurance beneficiary designations and co-ownership of assets may result in some assets being completely transferred outside of a well-drafted will anyway, estate planning should be a financial planning experience. more holistic, an integral part of which certainly includes wills, powers of attorney and other estate documents.

Financial planning is still very product-centric, with an emphasis on investments and insurance. A financial plan should also include financial management and retirement, tax and estate planning. Having investments and insurance without addressing the other four areas of a proper financial plan is like leaving home for a road trip without a map (or nowadays, a GPS).

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Do you need a professional financial planner to develop a financial plan? Not necessarily. At the very least, aim to maximize ongoing advice from existing investment, insurance and tax advisors, or ensure that if you are your own advisor, you address all six components of a proper financial plan yourself.

Since a family’s personal finances are constantly changing, it’s important to remember that financial planning is a process, not a product. A financial plan may not be something that requires annual maintenance or even necessarily the services of a professional, but it’s certainly more than a one-time event that shouldn’t exist solely in your head.

Jason Heath is a Certified Financial Planner (CFP) and Income Tax Professional for Objective Financial Partners Inc. in Toronto.

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