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  • How to be better organized financially in 2015

    A new year always represents an opportunity to do things differently. Some people set specific goals with action plans, others have a general sense of what they want to improve and act on it. According to a recent study by U.S.-based Fidelity Investments, 51% of people who made financial resolutions last year reported feeling better about their finances today — compared to just 38% who said the same but did not set goals.

    In the spirit of the season, we offer this month-by-month guide to help you better organize and optimize your financial affairs. Even if you’re already in good shape, you might find something on the list that could help you improve your overall financial picture — and your peace of mind.

    January

    • Reflect back on 2014:
      • Review prior year’s investment portfolio and discuss with your advisor your strategy for the upcoming year.
      • If any significant changes or life events occurred; births or deaths, buying or selling of material assets, make sure to revise your Will and Power of Attorney(s) to reflect current wishes.
    • Review balance sheet for all family entities (i.e. trusts, corporations, family members).
      • Effectively redeploy cash balances to reduce debt or to obtain higher returns.
      • Minimize non tax-deductible debt and consolidate where appropriate.
      • Assess short term liquidity needs; set aside emergency funds covering a minimum of 3 months of living expenses.
      • Pay interest on prescribed rate loan by January 30th. If you don’t have a prescribed rate loan, consider it; as rates are at their lowest levels 1% from January 1st – March 31st.
      • Revise pre-authorized corporate tax remittance.
      • Establish priorities for charitable giving. Revise pre-authorization of payments for changes in giving.

    February

    • Take advantage of tax sheltered compound growth.
      • RRSP contribution deadline for 2014 is March 2nd 2015; maximum contribution limit for 2014 is $24,270.
      • TFSA contribution room is $5,500 for 2015. Top up unused contribution room accumulated since 2009 and re-contribute any withdrawals from previous years.
      • Consider spousal RRSP or RRSPs/TFSAs for kids over the age of 18.
      • Review past unused contribution room in RESPs and take action. Only one year’s contribution can be carried forward in a given year to receive government grants.
    • Collect receipts and other information for tax filings due in March (trusts) and April (personal).
    • Consider paying out a taxable/capital dividend to preserve your operating company’s qualifying small business corporation status.

    March

    • First installment due on March 15th for taxpayers remitting quarterly.
    • File trust tax and information returns by March 30th.

    April

    • File personal tax returns for all family members by April 30th.
    • Pay any outstanding tax liabilities by April 30th (April 15th for U.S. filings).
    • Revise personal tax installments for the balance of the year.
    • Review Q1 investment portfolio results.

    May

    • Review life and disability insurance needs and coverage.
    • Discuss income/family expectations for university/college children returning home to set expectations for the summer and September enrollment.
    • Review your notice of assessment and take appropriate action.

    June

    • Second quarter installment due on June 15th for taxpayers remitting quarterly.
    • File personal tax return by June 15th if self-employed.
    • Pay out any prior year accrued bonus by June 30th for companies with a calendar year end.
    • Consider sprinkling the capital gains exemption on shares in your business to other family members.

    July/August

    • Review Q2 investment portfolio results.
    • Consider mid-year reflection on personal, business, family and financial goals, philanthropic/stewardship objectives etc. and develop action plan for implementation in Q3 and Q4.
    • Determine most effective tuition funding strategy for upcoming school year. Also, review student living accommodation and opportunities to buy vs. rent.
    • Encourage and support your children in establishing their own savings and investment plans.

    September

    • Third quarter installment due on September 15th for taxpayers remitting quarterly.
    • Review shareholder’s agreement.
    • Consider the merits of incorporating and/or an estate freeze.
    • Consider transferring property to other family members to minimize current and future tax liability. If you have a child turning 18, there are additional opportunities.

    October

    • Review Q3 investment portfolio results.
    • Review medical expenses for the past 12 months (including those of dependent parents) to determine if there are tax deduction benefits.

    November

    • Begin year-end tax planning:
      • Review status of unrealized capital gains and losses on investment portfolio and take appropriate action to minimize taxes for the current and prior years.
      • Consider a private or community foundation to shelter large capital gains.
      • Consider flow-through shares or other tax sheltering opportunities.
    • Ensure at least minimum RRIF and IPP withdrawals are made prior to year end.

    December

    • Last installment due on December 15th for taxpayers remitting quarterly.
    • Make all charitable donations, TFSA and RESP contributions by December 31st.
    • Ensure IPP contributions are made by December 31st or fiscal year end.
    • Determine bonus/dividend policy for your company.
    • Ensure amounts paid or payable from trusts to beneficiaries are properly documented.
    • Income splitting: ensure family members are paid for work done during year.
    • Any loans from the company to shareholders should be eliminated prior to year-end; otherwise shareholders will be deemed to receive a benefit equal to the value of the loan.
    • Final review of tax loss selling opportunities. Remember carryback of losses to shelter gains from prior years.

    Milestone Birthdays

    • OAS and CPP benefits typically begin at age 65. At age 60, consider receiving CPP benefits early or alternatively, delay OAS and CPP in exchange for the higher monthly amounts.
      • Benefits do not begin automatically; you must apply to receive benefits.
    • December 31st of the year you turn 71 is the last day you can contribute to your own RRSP. Prior to year end contact your plan administrator to transition your RRSP to a RRIF account.
    • If over 40, consider setting up an Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA).

    Millennials and money: are they ready for the responsibility of wealth?

    A freak mid-November snow storm didn’t stop some twenty-five young adults from participating in Newport Private Wealth’s popular educational and networking forum, NextWave. The evening’s discussion was led by three of our young associates, providing both professional insight and their own personal experiences on the thought-provoking topic of managing finances with a significant other.

    Participants were asked to reflect on their own relationship with money by completing the phrase “today, money means _____ to me”. The millennials slowly began to share their own words: “safety”, “independence”, “future”, and then became more comfortable shouting out, “good wine”, “freedom” and even “stress.” The responses aligned with the results of a recent study ranking security, happiness, more responsibility, fun and stress as the top five answers among the general population according to a report by CNBC.

    Surprisingly, estate planning emerged as one of the most popular issues of the evening. Although it is rather ironic as these young couples are closer to the beginning of their lives; this group was genuinely concerned with protecting their families should an end-of-life event occur. This result was contrary to a survey conducted by Lawyers’ Professional Indemnity Co., which found that 88% of Canadians between the ages of 27 and 34 do not have a will. Perhaps this demonstrates that adult children of wealthy families actually understand their financial responsibilities.

    This event was Newport Private Wealth’s fifth in a series of educational and networking seminars that is a component of Newport’s NextWave program. Nextwave is an initiative to prepare young adults to better manage their wealth in the years ahead. It is a catalyst for discovery, a forum for learning and an opportunity for networking. It was borne out of a desire expressed by our clients that their children and grandchildren develop healthy money management habits and ultimately gain the experience needed to steward wealth, responsibly.

    The NextWave program is typically implemented through a multi-generational approach. A senior advisor at Newport Private Wealth works with parents (or grandparents); whereas, a younger associate provides guidance to adult children in the hope of building a long-term relationship. Managing wealth is about building trust and fostering relationships.  At Newport Private Wealth, we take a different perspective. Yours.

    Manage RRIF rules carefully – or you could run out of money

    Planning for retirement can be challenging. Attempting to balance your need for current income against the risk of outliving your savings is hard enough and, as it turns out, the federal government is not making things any easier.

    Back in 1992, the federal government was running a significant deficit and needed cash. To help rectify this problem, the Income Tax Act mandated that at age 71, Canadians must convert their registered retirement savings accounts into Registered Retirement Income Funds (RRIFs). Seniors had to begin drawing a minimum amount out of their RRIF every year, which was taxed upon receipt. This measure was implemented to help the federal government manage their cash levels and remove the deficit.

    Fast forward to today and the RRIF rules have not changed, but the landscape certainly has. In a recent report by the CD Howe Institute, it was noted that today the average 71-year-old male can expect to live almost 30% longer than in 1992, whereas women can expect to live 15% longer.

    Not only are we expected to live longer, but the investment yield environment is vastly different today than it was in 1992 when the average yield on government of Canada bonds stood between 7.2% and 8.5%. In 2014, this range has fallen drastically to between 1.1% and 3.1%.

    Longer life expectancy is a good thing, but it means we must plan to spread our retirement savings over a longer time horizon.  If the minimum withdrawal schedule implemented in 1992 were to be updated to reflect today’s longer lifespans and lower interest rates, RRIF withdrawals would start at 2.68% at age 71 and rise to 3.76% at age 85.  Instead, the mandatory minimum withdrawal begins at 7.38% at age 71 and rises to 10.33% at age 85.  The odds of living long enough to see the real value of your RRIF depleted are much higher in today’s environment.

    RRIF july20141 1024x638 Manage RRIF rules carefully – or you could run out of money
    Source: “Outliving Our Savings: Registered Retirement Income Funds Rules Need a Big Update”. Robson, William B.P & Laurin, Alexandre. C.D. Howe Institue. 2014.

     

    This can be problematic for seniors who use the minimum withdrawal rate as their annual spending budget. Too often people make the mistake of assuming that this rate is sustainable and will provide them with a lifetime of income. As a point of reference, in our retirement planning assumptions, we generally use a 6-7% annual withdrawal rate assuming retirement at age 65, otherwise one may risk depleting their capital. (Keep in mind that if one retires earlier, 4-5% may be a better rule of thumb to use as the maximum annual withdrawal amount.)

    How can you avoid the potential downfalls of inflated RRIF minimum withdrawal rates?

    1. Seek professional help.
    2. Do not assume that RRSPs alone will adequately fund retirement.  Build savings elsewhere – such as in Tax-Free Savings Accounts (TFSA) and non-registered accounts.
    3. Plan for added tax payments on rising RRIF income.

    Seniors, with the help of wealth management professionals, are advised to create their own retirement plan specific to their personal financial situation. The majority will likely use a portion of their minimum withdrawal from their RRIF to fund their lifestyle and transfer the remainder into a non-registered investment account to maintain savings for future spending.

    There are roughly 200,000 Canadians who are over the age of 90. In 25 years that number is expected to triple. Canadians who are beginning to think about retirement should seek professional help so they can effectively manage their savings to provide security and peace of mind throughout their retirement years.

    How to protect your investments from a market downturn

    At our investment meeting this week, one of my colleagues shared the news that he had received a call late the night before from a prospective client confirming his decision to hire us to manage his portfolio. While that itself is not news we’re thankful to say, what was interesting was the voice mail message the investor left, saying, “The market seems a bit high so I’m moving my money over to you guys to put to work in your more diversified platform.”

    Although we may be biased, we think there is merit in what he says — and we applaud his foresight. Too many investors (even professional ones!) have a tendency to extrapolate current investment trends well into the future. That is, they buy in after markets have been performing well only to sell out of fear when they turn bearish. In other words, they buy high and sell low. Frequently-cited research by DALBAR shows that over the past decade, investors have cost themselves potentially 4% per year in returns by doing the wrong thing at the wrong time.  In this business, one must be vigilant about not letting emotion drive decision making.

    Let’s face it, the last few years have been good ones for investors.  The media has been full of stories of the Dow Jones Industrial Average making new highs. Stock markets have been strong throughout the world, and that has people feeling good about their investments. The data shows us that volatility is down, which indicates investor complacency. We haven’t seen a meaningful market correction since 2011. It’s nice when you have the wind in your sails. However, to further that analogy, what will happen when a storm blows in? The pundits are warning of the next market correction. Have you heard of the Swoon in June? What’s next, the Slide in July? What rhymes with August?

    As risk managers, we are always concerned about protecting capital. It is interesting that recently we have had more conversations with people, like the above-mentioned investor, who have done well with their investments over the past few years by taking higher risk, and are now looking to protect what they have gained. They are coming to us for a more diversified and conservative approach than is commonly available.

    We welcome the opportunity to put our experience and expertise to work for these people, and we hope we can save them some angst and pain if and/or when the “Scourge in September” comes along. Will you be ready?

    How to talk to aging parents about their financial affairs

    father son 150x150 How to talk to aging parents about their financial affairsThere comes a point when adult children should be asking certain questions of their parents to ensure that their financial affairs are in order. As parents age, achieving financial independence for retirement is a primary objective and effective planning should start well ahead of time. Similarly, planning for the smooth succession of assets on death is critical to maintaining family harmony through a difficult time. Here is a list of questions adult children should be asking their parents, now, to better plan for retirement and beyond.
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    A Young Adult’s Guide to Smart Spending

    NextWAVE 14May2014 SmartChoices Page 1 150x150 A Young Adult’s Guide to Smart SpendingWe recently held the spring session of our popular NextWave program, an educational and networking based initiative that helps the next generation of our client families become more informed, confident and financially independent.

    On an evening in May, a group of young adults in their 20s and 30s gathered in our boardroom to discuss ‘how to spend money wisely’. Although this topic might seem somewhat prosaic, it attracted close to 40 ‘millennials’ and inspired a spirited discussion. The following concepts were discussed as a guide for young adults to make smart spending decisions and more effectively build and manage wealth.

    Live a comfortable life, not a wasteful one. Many ‘Gen Y’ individuals have never experienced real financial hardship. The downside of this is that it can sometimes lead to overconfidence and overspending, rather than saving for ‘rainy days’ or to achieve financial independence.
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    U.S. real estate – no more “low hanging fruit”

    The U.S. real estate market is once again attracting investor interest and there is an abundance of mortgage money available to buyers. Investors in the commercial and multi-family housing sectors appear confident the market recovery is real and sustainable. As a result, prices for these types of properties have been rising.

    The multi-family sector (i.e. apartment buildings) has been one of the strongest performers for many reasons – not the least of which is that since the financial crisis many Americans have abandoned the dream of home ownership.

    MoodysChart PCS 2014 300x241 U.S. real estate – no more “low hanging fruit”We have been investing in the U.S. multi-family space since 2011 and our clients now have interests in apartment buildings in Texas, Georgia, Florida and Tennessee. Our goal was to build a diversified portfolio of properties that would capture an attractive yield and a meaningful capital gain. The capital gain would be the result of both a recovering real estate market and strong growth in rents. Our experience to date has been very positive and if anything, the market has recovered more quickly than we anticipated.

    Venterra Realty, a specialty real estate investment company investing in multi-family residential communities in the southern United States, has been an important partner for Newport Private Wealth in this program.

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