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Canada's baby boomers are on the threshold of an enormous wealth transfer from their parents, giving them a major opportunity to reduce their debt burden, says Herb McFaull, a Saskatoon-based certified financial planner with Manulife Securities Investment Services Inc. Creating a comprehensive plan with the help of a certified financial planner is the best way to make use of the opportunity, he says.
Q: What makes managing an inheritance difficult?
Herb: We're at a fascinating point in history. The average baby boomer is around 57 years old. Billions will be transferred to boomers in the next 10 or 15 years from the wealthiest generation that ever lived. The problem is that the average baby boomer has been terrible at saving and has racked up a tremendous amount of debt, and volatility in financial markets over the past decade has taken a bite out of what savings they did have. Chances are, baby boomers also face an underfunded pension plan at work. All this means that when an inheritance comes along, most of them are ill-prepared financially for their retirement years. The challenge is to recognize that this is a golden moment where they can right their financial ship, by creating a plan for their financial future.
Q: Why is it important to be comprehensive?
Herb: Some people have a monthly savings program in an RRSP [Registered Retirement Savings Plan] and think that's all they need to have a financial plan. It's a little like going to the doctor and getting one test done and saying: "I had my full physical, but the doctor didn't test for cholesterol."
Q: What are the elements of a comprehensive plan?
Herb: First, there's the snapshot of today: What are your assets – between real estate, RRSPs, Tax-Free Savings Accounts (TFSAs) and other savings – and what is your debt situation? If you have a pension at work, what does that look like? What is the projected value at retirement, and how much can you expect to draw from it each year? What kind of government benefits will you receive? What kind of insurance do you have? No matter what job you have or what your income level is while you're working, if you don't have disability insurance your plan could fail unexpectedly.
The second part is to set a date for retirement, determine how much after-tax disposable income you will need and try to estimate your life expectancy, which is a difficult projection to make. But we have to build in some assumptions and factor in inflation.
So if a client tells me they want to spend $3,500 a month in retirement in today's dollars, I have to build a plan that keeps up with inflation until the customer is 90 years old, for example. I also have to make some assumptions regarding rate of return on invested assets and inflation. Some clients come to me with this galaxy-sized question: "Am I okay?" And when we're finished I can at least take that question down to the size of a baseball park.
Q: What does an advisor bring to the job, in skills and training?
Herb: There are numerous well-recognized industry designations, each bringing some degree of specialization to the art of planning. In my case, as a certified financial planner, I think of the role as being like a quarterback – there to make sure the right calls are being made for their clients.
Q: Why can't people do this on their own?
Herb: An Ipsos-Reid study in 2009 showed people who worked with advisors had substantially higher assets saved than those who didn't - at every age group and every income level in Canada. One important thing your advisor does for you is provide perspective when financial markets throw you a curveball. It's important to stick with your plan and not bounce in and out of stock markets, for example. People need coaches for lots of common activities: If you go to a gym, you probably get better results if you have a personal trainer, because someone is holding you accountable and making you follow through on your plan. That's what an advisor does for you: asks you questions about your savings rate or your insurance coverage, and then builds a plan to help you reach your financial goals.