Executives can earn big paychecks that fund enviable lifestyles, with big homes, vacation properties and luxury vehicles, but visible wealth doesn’t necessarily translate into big savings and retirement plans. foolproof.
Many Canadians live on financial autopilot, not thinking too much about budgeting, saving or investing for life after work. Although there is more money each month, people with high incomes may also have too much debt and be unprepared for possible job loss, premature death or disability or a comfortable retirement. .
They face unique challenges: they typically pay the highest tax rate, they have higher expenses for home, vacations, and hobbies, and they often pay for expensive private schools for their children. Their jobs can be more risky as they move up the corporate ladder, and unpredictable bonuses or stock options can form a large part of their compensation.
These realities, along with rising interest rates, falling markets and recession worries, have led more high-income people to seek financial advice.
“Honestly, I can’t keep up, we’re currently doing two retirement plans a week,” says Kurt Rosentreter, portfolio manager at Manulife Securities in Toronto.
He often finds it to be a trigger, such as reaching a milestone such as age 50 or the decline in value of an investment portfolio, that prompts him to visit his office.
“They have big incomes and big expectations. If they make $300,000 gross, $200,000 after tax, they spend it all,” he says.
This high income can maximize his RRSPs and TFSAs, but it’s not enough, warns the advisor. These savings plans are “not designed for someone earning $300,000,” he explains.
“I do a full retirement forecast and I tell them they need $3 million to $5 million before they retire and they look at their savings and say, ‘I’ve got a million’ and I say ‘keep on going. work “. “
Ideally, high earners should set aside more than Ottawa’s annual limits for tax-sheltered investments, they should resist the urge to live large, and they should have clear retirement goals. .
“Executives are like everyone else. There are savers and spenders,” says Benoit Poliquin, founder and portfolio manager of Exponent Investment Management Inc. in Ottawa.
His company has attracted high-income earners from a diverse group that includes Alberta’s oil patch, Ottawa’s tech industry and Montreal’s corporate executives.
He also finds that major life events prompt leaders to seek investment advice. It could be a job change, a decline in a company’s fortunes, or a divorce.
“Something is going on in their life that scares them, and their financial situation needs to be put in order. Because they are type A personalities, they want to do it and do it right.
For Mr. Poliquin, a “handful of decisions” determine whether high earners end up rich or struggling. These include how they control — or don’t — their most important expenses such as their home, second home, travel, and spending on children.
He cites a high profile client “whose house was not in financial order” due to excessive travel and overly generous support from his family. Controlling these expenses has radically transformed its financial outlook.
“He really likes cars and motorcycles. But the man lives in the same house he bought when he was not an executive. The house has been paid for for 20 years and costs next to nothing to run and he is super happy. His life is simple.
The current economic mix of rising inflation and rising interest rates could last for years. This could mean that piggy banks such as tax-free savings accounts may have to be used to deal with higher inflation, rather than for health care or other pressing needs in retirement, says Douglas Nelson , president of Nelson Financial Planning Corp. of Winnipeg.
To ensure clients don’t run out of money, his firm examines both current and future expenses and how to pay for them with retirement income from sources such as private and government pensions, registered and non-registered accounts. registrations and income splitting.
“The goal is to always have two equal incomes in retirement, so the income plan must be well thought out before retirement” and also structured so that it is withdrawn in the most tax-efficient way , he explains.
Nelson says the difference between the haves and the have-nots comes down to a little planning and discipline.
The haves “are those who are forward-thinking and pay attention to detail, especially when it comes to managing their tax situation,” he says. “Those who don’t do these things always end up with some type of financial dilemma that sets them back unexpectedly.”
While this all sounds too pessimistic for high-income earners who are currently well on their way to reaching their retirement goals, all is not bleak.
“With the money they’re making, they’re in the best position to address this issue because they have the cash flow firepower,” says Manulife’s Rosentreter.
Executives and other high-income earners face the prospect of the highest tax rates in Canada, but there are steps they can take to mitigate them, says Paul de Sousa, senior investment advisor at Sightline Wealth Management in Toronto.
The first level begins with maximizing RRSPs and TFSAs, followed by income splitting to equalize spousal income, spousal RRSPs, potential low-interest spousal loans, and maximizing RESP for children. “I find that even these are table stakes, it’s not always taken for granted that these are all maxed out,” he says.
Beyond these tax-cutting strategies, de Sousa also recommends executives consider investing in tax-deductible flow-through shares, as “the macroeconomic tailwind behind resource companies is very favourable.” . He also advocates the creation of family trusts, which provide benefits such as tax reduction and income splitting.
Executives also almost always have to increase their insurance coverage to replace their income if they die, become ill or injured and are unable to work.
“If we had a machine that produces $750,000 a year, we would insure that machine. I find people who are terribly underinsured and relying on their business plan, which is nowhere near replacing their income,” says de Sousa. “They basically hope nothing goes wrong, and hope is not a strategy.”