Adjusting to Retirement

Preparing for your retirement takes years of planning and wise investing. It seems as if retirement has been the resounding theme of your financial planning life and when the time comes to put your plan into motion, there can be mixed feelings about it. Not everyone is counting down the days until they retire. Some people dream of days with no commitments or responsibilities, while others thrive in a fast-paced, demanding environment and never want to slow down. Retirement is a time in life met by everyone in their own way. Here are five points to consider when adjusting to retired life.   

Keep Your Mind Busy

A lifetime of having a daily task list and deadlines is a lot to give up. Although retirement is your reward for putting in a lifetime of work, it’s easy for your mind to become overwhelmed with the silence. It’s important to keep yourself and your mind busy once retirement living sets in. Consider doing some small projects to stimulate your mind, or to finally tackle your bucket list of books to read. Just be sure to keep your mind occupied and avoid sitting idle for too long.

Manage Your Spending Appropriately

Since your income picture will have changed with retirement, it’s important to manage your spending to ensure you have enough retirement money to last you the remainder of your life. A discussion with your financial advisor will help to guide your spending habits and make sure your savings and retirement income allow you to live life to its fullest.

Consider Downsizing

If you are retired, there might be more travel in your future which means your big family home might be empty for long periods of time. It might be a good plan to consider downsizing your house to a smaller home, whether that be condo or a bungalow. There will be less maintenance as well as the extra money generated from the sale of your home, and the layout will be more convenient for your lifestyle in your golden years.

Be Aware of Your Portfolio Growth to Predict Financial Future

Now that you are retired you will need to pay closer attention to your portfolio growth to help predict your future spending. The growth of your retirement fund is not something you may have monitored in the past, but now that you are living off of it, knowledge of its growth can help you predict your financial future.

Try Something New!

Retirement can be a time to discover a new passion that you didn’t have time to discover before. Take advantage of a free schedule and do something that you really want to do. Maybe join a dance class, learn pottery or even Tai Chi. Learn to speak Spanish, take up painting, sign up for spin classes, or volunteer with a cause close to your heart. Try something new and challenge your mind and body.

Retirement can be a time of rest and relaxation and personal discovery. Before you plan to retire, book an appointment to meet with your financial advisor to discuss your portfolio and ensure that your financial needs will be met in retirement.

Understanding the Principal Residence Exemption

It’s not uncommon for families to own more than one property at the same time. Additional properties can be used as a source of income, or possibly be a vacation home. Whatever the purpose for your additional properties, there are tax laws that govern what taxes you will owe upon the sale of any property. The Principal Residence Exemption is a tax privilege given to Canadians to protect them from capital gains tax when they sell their principal residence.

What is the Capital Gains Tax?

Capital gains tax is accrued when you sell a property for more than what you bought it for. You will be taxed on the profits of the sale which can be quite a large amount depending on the difference in the purchase and sale price. This becomes problematic when a house that was purchased decades ago for a now nominal amount, sells for considerably higher than the purchase price because over time the property value has increased significantly. The average home price in Calgary in 1996 was $176,305; the average home price in 2016 was $453,936, representing 157% average growth. The CRA offers extensive detail on how to calculate capital gains taxes on all eligible property.

Principal Residence Exemption

Even if you do own multiple properties, whichever house is designated as your principal residence is safe from capital gains taxes upon sale, thanks to the Principal Residence Exemption. The Canada Revenue Agency states that the Principal Residence Exemption can be used by a family unit once per year. The family unit is described as the taxpayer and their spouse and any minor and unmarried dependents. This means that under the principal residence exemption, a family could move once a year and not pay capital gains on any earnings from the sale of their principal residence. Capital gains tax comes into play when additional properties are sold that are not designated as the principal residence of the family unit.

Strategic Planning

If you own multiple properties and are planning to liquidate your real estate in the near future, speak to your financial advisor on how to approach each sale and receive advice on how to possibly avoid paying capital gains taxes.

The principal residence exemption is not designed to protect house flippers who buy and sell a house in the same year with the sole intentions of turning a profit. It is designed to be a tax break for families who may need to buy and sell in the same year for whatever personal or work reasons may arise. Talk with your financial advisor if you are worried about, or would like more information on capital gains taxes, the principal residence exemption, or tax planning and tax optimization.

Preventing Conflict Between Heirs

Every family has their own complications and sometimes a death can exacerbate existing problems. When a parent dies and they are survived by their adult children who don’t have the most harmonious relationships or dynamics, this could affect their inheritance. Disputes between heirs in an estate distribution is a very common occurrence, and unfortunately can tie up a lot of time and estate funds if the disputes lead to estate litigation. If you think there is the potential for conflict with your future estate, it may be beneficial to set up some preventative measures while you have the capacity to do so. Here are some options to consider.

Jointly Held Assets

A good example of this is joint bank accounts. Often, aging parents will have trustworthy and geographically accessible children be joint on their accounts to assist with paying bills or as part of a tax planning strategy. The problem arises upon death and the bank account technically passes automatically to the surviving owner. This could be problematic because technically the bank account would not form part of the estate and not be divisible to the other beneficiaries. In order to avoid this conflict, it should be stated very clearly in the will what is to happen with jointly held accounts.

Family Cottage

Many families have cottages or vacation homes that form part of the estate when the head of the family dies. Problems arise when the heirs to the cottage differ in their desires of what to do with the cottage. This can be upsetting if one heir wishes to keep the cottage while others don’t want to take responsibility for it and wish to sell it. This is an issue that can be dealt with in the will, or even better with an honest discussion prior to death. If it’s clear that one beneficiary wishes to keep the cottage while others wish to sell it, perhaps leave the cottage solely to the heir who wants it and give an equal bequest to the others. If this is not financially possible, then it will be up to the heirs to figure it out amongst themselves.

In Terrorem Clause

Sometimes heirs will challenge a will if they think that they are not left their fair entitlement. Children can be written out of a will or given less of an inheritance at the discretion of the person writing the will. To minimize the chance of having a beneficiary contest the validity of the will, and possibly tie the estate up in litigation, put in an “in terrorem clause,” or an anti-litigation clause in addition to some sort of bequest. This type of clause threatens to take away any bequest in the will should the identified recipient start any litigation challenging the will. This may cause some waves in the distribution of the estate, but if the heir wishes to receive their guaranteed bequest they will be deterred from challenging the will.

There is no way to guarantee that there won’t be conflict between heirs while distributing an estate, but by planning ahead and addressing certain problems surrounding distribution you can help ease the process for your heirs when the time comes. Your financial advisor can help guide the estate planning process to ensure your wishes are met after you pass.

Calculating the Cost of a Business Loan

There are many reasons why a business would want to get a business loan: to buy real estate, to invest in new business equipment, or to bring on new talent for the betterment of your business. Whatever your reason for wanting a business loan is, it’s important to accurately calculate what the loan will cost you. Remember that it is perfectly acceptable, and should be part of your regular due diligence, to “lender shop” to ensure that you get the business loan that is a good fit for your company.

Amount and Term of the Loan

As with any sort of credit, your business loans need to be repaid and at terms that are acceptable to the lender. Although it’s important that these terms are also acceptable to you and your business plan. If the lender is willing to offer your business a longer repayment period, this may allow you to make smaller incremental payments which keeps more cash in your company where it’s needed.

Repayment Penalties

It’s also important that you discover ahead of time if your bank is flexible with their repayment expectations. Prior to taking out a loan be sure to know what, if any, penalties exist should you be unable to make a payment at a scheduled date. This could be because the business is having financial difficulties or the imminent need for cash in other areas. It’s also prudent to ask if there are penalties for paying off a loan sooner than the agreed-upon repayment period should the opportunity arise.

Infusion Needs

Knowing how much the lender is willing to loan to your business is key information to have. If your financial needs are greater than what the lender is willing to provide, you may need to seek additional lenders or invest your own money if need be.

Is Collateral Required?

Some business loans require collateral to guarantee your loan. The risk of potentially losing the assets you put up for collateral should you default for any reason can be a huge gamble for your business. You need to weigh the risk factors of losing your collateral if you can’t make your payments against undertaking the loan at all.

A business loan can be the infusion of cash you need to get your business where it needs to go, but you need to be certain it’s the right fit for your business. Speak to a financial advisor if you need additional advice on the risk factors of your loan or to talk about the different loan options available to you to help your business thrive and secure your wealth and legacy.