How You Can Make the Most of a Financial Windfall

Not every financial windfall comes from getting extremely lucky and winning the lottery. You might receive a large amount of money from the sale of property, a severance package, an insurance policy or an inheritance. For some, they might never have had such a large sum of money available to them. It’s tough to know what to do in that case. For others, they may know not to spend it all in one place, but may not be sure of the best course of action. If you find yourself with this nice problem to have, here are some guidelines to follow to make the best use of a financial windfall.

Reduce high-interest debt

 You may want to consider reducing any debt you are holding on credit cards, lines of credit, or personal loans. These typically have the highest interest rate so paying these off will have the biggest impact on your monthly interest costs. You may also consider making a large lump sum payment on your mortgage, as long as you can do so without a prepayment penalty. Your retirement gets a whole lot easier without a monthly mortgage payment!

Revisit your life goals

 With a sizeable lump sum available to you, some life goals that you may not have been able to pursue could become available to you. You may be able to launch a business you’ve been thinking about since you now have start-up money. You and your family could purchase a beautiful lake-side cottage to make your summers more exciting. You could retire earlier than you thought now that you have money available to put into your retirement savings. The possibilities are endless.

Adjust your risk tolerance

 A financial windfall may affect how and how much you invest going forward. For example, you can now consider lowering the risk level of your investment portfolio because you are no longer seeking as high of a return. One the flip side, it may give you the freedom to invest more aggressively, because having extra money will allow you to withstand extra volatility.

 If you find yourself in this situation, it is important to review your options, determine your priorities, and clarify your goals and aspirations. Once you have those in orders, you should contact a financial advisor at The Beacon Group of Assante Financial Management, Ltd. Your financial advisor can help ensure that your funds are managed according to your needs and desires.

 

Making Your Tax Refund Work for You

Are you expecting a nice, big tax refund for the 2015 tax year? If you are, you are probably thinking about how you can spend this free money. You shouldn’t think of a tax refund as free money, because it is really just money that the government owes you because you overpaid on taxes. This is money you could’ve been using to save, pay off debts, or invest throughout the year. Because of this, we highly recommend you use your refund for one of the following reasons.

Pay off Debts

The first thing you should do with your tax refund is use it to pay off any outstanding credit card debt. A standard credit card has an interest rate of 19.99%, so for example, if you carry a balance of $5,000 for a year, you are paying almost $1,000 in interest. If you pay off your balance with your tax refund, you will be saving more than you could if you invested it.

Contribute to your retirement savings

If you have contribution room left in your Registered Retirement Savings Plan (RRSP), you can add that amount to it in order to generate a higher tax deduction for the current year’s tax return. Of course, the main goal of an RRSP investment is to save towards your retirement, but the immediate tax boon is icing on the cake.

Save for your child’s education

If you’ve been neglecting saving for your children’s post-secondary education, now is as good a time as any to start. By contributing to a Registered Education Savings Plan (RESP), you can also take advantage of the Canada Education Savings Grant (CESG) which adds an additional 20% towards your plan.

Invest tax-free

Why not continue the trend of saving on taxes by using your tax refund to invest in a Tax-Free Savings Account (TFSA)? There are no tax deductions for contributing to a TFSA, so earnings and withdrawals from the account are tax-free. Much like RRSPs, the TFSA has a contribution limit, so it is best to make sure you don’t over-contribute, as any excess TFSA amount is taxable.

Of course, it’s OK to indulge if that shiny new 4K HD TV is too hard to pass up. In this case, you can consider enjoying the best of both worlds by buying a new toy and using the rest to solidify your financial future. For help determining how to best use your substantial tax refund, contact a financial advisor at The Beacon Group of Assante Financial Management, Ltd.

 

 

A “Floor First” Approach to Building Retirement Income

Canadians are living longer than they ever have before. This is great news, of course, but it does make it hard to plan out your retirement. How many years will you need to save for? To alleviate some of your doubts about how much you need to save, you can create a retirement income floor. This floor is the amount of annual income necessary to meet your basic living expenses. The following are the steps necessary to calculate your income floor.

List Expenses

The first step is to make a list of your basic yearly living expenses. This list will include things like your mortgage payments, groceries, insurance, and health care, among others. Remember to stick to the essentials. “Nice-to-haves” like vacations or a new car should be separate from your income floor.

Calculate Guaranteed Income

The second step is to calculate how much you (and your spouse) will get annually from your Canada/Quebec pension plan and old age security. Next, add any other pensions or incomes you may have. We call these your guaranteed incomes. If they are sufficient to cover your list of expenses above, you are lucky. Most Canadians won’t have enough guaranteed income to meet their basic needs, so investments are needed to fund the rest.

Funding to the Floor

In order to fund the shortfall, and to ultimately save enough money to go above the income floor, you need to invest. There are many options to choose from, including GICs, annuities, Tax-Free Savings Accounts, and Registered Retirement Income Funds (RRIFs). On your own, it’s hard to tell which options best suit you and your family’s needs.

Talk to a Financial Advisor

This is where The Beacon Group of Assante Financial Management Ltd. can help. Your financial advisor will work with you to help choose the investments that best fit your needs. The strategy of calculating an income floor can be implemented before, during, or even after retirement. Our retirement planning specialists can help you with these calculations along with other important decisions concerning your retirement.

Benefits to the “Floor First” Approach

Calculating and reaching your retirement income floor does more than just meet your basic needs, it also gives you more freedom to pursue more growth-oriented investments that you can use as income to fund that trip to Europe you have on your bucket list. It can also help you with estate planning because you will have a clearer picture of what you will be leaving behind.