Financial Life Cycle
December 2005
BY CLAY GILLESPIE
Financial planning is not a onetime event but, rather, a dynamic process that changes with you throughout your lifetime.
There are basically three phases to your Financial Life Cycle: The Accumulation Phase, The Retirement Phase, and The Estate Phase.
None of the phases of your Financial Life Cycle can be regarded in isolation but, rather, each phase must be carefully planned and prepared for prior to its happening – this is the Financial Planning process.
Accumulation Phase
There are two main risks during the accumulation phase:
- The risk of becoming disabled;
- The risk of dying.
Fortunately, the financial risks to you and your family associated with disability and death can be effectively transferred to an insurer by arranging proper risk management products (life/ disability insurance). In addition, having a Power of Attorney (POA) and a Representation Agreement in place will allow your family/ loved ones to
make decisions on your behalf should you become physically or mentally incapable of making your own decisions.
The Accumulation Phase is usually associated with many lifestyle goals such as buying a house, saving for your children’s education, buying a recreational property, saving for the next vacation, etc. As we are all aware, life is
unpredictable: it is important that you enjoy living today but also be prepared for tomorrow.
The balance between living for today and planning for tomorrow is the largest challenge of the Accumulation Phase. Savings should be setup in a structured fashion.
Saving and risk management are important aspects in the Accumulation Phase, and an integral part of saving is being able to manage the debts that will be incurred in the process (line of credit, mortgages, etc.). Unfortunately, this is one of the most commonly overlooked areas of the Financial Life Cycle. Without a proper debt management strategy in place, even the most diligent savings plans can fall apart, ultimately hindering your ability to meet the many goals you have made during your Accumulation Phase.
Retirement Phase
In this stage of the Financial Life Cycle, you need to ensure that you have a strategy in place to generate your desired income level during your retirement years. This means integrating all of your investment assets (RRSPs, ank accounts, investment accounts, etc.) and pension entitlements (OAS, CPP, company pension, etc.)
in such a way as to generate your desired net spendable income (after tax and after inflation) for the remainder of your lifetime.
Inflation is one of the greatest risks in the Retirement Phase of the Financial Life Cycle; it can erode the purchasing power of your income and thus reduce your standard of living over time. Finally, you need to plan for the possibility of long term care costs which may arise during your retirement.
Estate Phase
It goes without saying that the Estate Phase must be taken into account during both the Accumulation and Retirement Phases of the Financial Life Cycle. Just as your goals and objectives will change throughout your lifetime, so will your estate planning objectives.
In simple terms, estate planning means having your affairs dealt with at death exactly as you wish. At a minimum, this means drawing up a Will and reviewing it regularly to ensure it always reflects your most recent wishes.
You will need to decide how you would like to have your assets distributed and in what fashion. Whether your objectives include leaving all your assets to your children, donating them to a charity, or setting up a family foundation, only you can decide, and only you can prepare during your lifetime. With proper planning, most, it not all, of your estate planning objectives can be realized.
In addition, it is important to consider the potential tax implications surrounding your assets upon your death. It is possible that approximately 40% of your estate could be paid in income tax alone!
There are strategies that you can use to maximize the value of you estate and minimize both probate fees and income tax otherwise payable in the year of your death.
Summary
Planning for your Financial Life Cycle may seem daunting, but with effective planning, and the ongoing assistance of a professional financial advisor, it does not need to be difficult.