Courtesy of Janet Baccarani from DFS Private Wealth.
Most financial planners have many elderly clients. Some need legal assistance, whether for drawing up a will and power of attorney, selling a home or completing an estate plan. The financial planner wants to have a referral arrangement with a law firm that understands the needs of the elderly clients. As a financial planner, I want to know that the lawyer I refer clients to is patient and understands that the elderly often are hard of hearing or have difficulty reading small print. These limitations do not mean that they are incompetent. They should not be treated like children.
Do you have clients who have all their money invested in GICs and at the bank? Is their income decreasing because of this? Are they being forced to dip into their capital? Clients such as these might benefit from being referred to a trusted independent financial planner.
The risk of not taking risk
Many elderly clients think the best way to be financially secure is to take no risk whatsoever with their hard-earned money. But this can be one of the riskiest approaches, because leaving money in a savings account or even in a guaranteed investment certificates (GICs) may keep money safe, but it may not grow it enough to meet future needs.
The returns offered by low-risk investments are often barely enough to keep up with inflation. So the real risk lies in not taking at least some risk. That doesn’t mean gambling everything, but it does mean putting at least some money into investments that, over the long run, do better than savings accounts and term deposits such as GICs.
The problem is that most people are afraid to take any risk.
Equity mutual funds are an ideal vehicle for reducing risk over the long term. They’re managed by professionals whose job it is to seek out and analyze opportunities. They can be tailored to fit risk tolerance and offer diversification, which means one lower-performing stock doesn’t bring the others down. In addition, they can outpace inflation. Over the long term, well-managed equity mutual funds have outperformed less risky investments.
But are elderly clients in for the long term? Life expectancy for a non-smoking woman of 70 is 86. That means that half of today’s woman will live longer than 86. Sixteen years is definitely long term. You don’t want their money to run out.
Maximize after-tax retirement income
With ever-increasing life expectancy, retirement dollars have to last longer. It’s critical that capital continue to grow as income is withdrawn during retirement. An excellent option that gives investors both income and the potential for capital growth without undue risk is a dividend mutual fund.
This type of fund buys stock in Canadian blue-chip companies, ensuring a more conservative investment than a mutual fund based on lesser-known, speculative stocks. These companies periodically issue dividends to stockholders. The dividends are the distributed to dividend fund investors, providing a regular stream of income. And since stocks have historically increased in value, a dividend fund brings opportunity for continuous growth. Another benefit of a dividend fund, held outside an RRSP or RRIF, is the tax advantage.
There are three types of investment income – interest income, capital gains and dividend income – and each is taxed differently. Income from interest-bearing investments such as GICs held outside an RRSP or RRIF are fully taxable just like salary income. Capital gains, though take more attractively than interest income, are still taxed at a higher rate than dividends. Depending on the province of residence, dividend income on an after-tax basis can be worth up to 38 per cent more than the equivalent amount of after-tax income.
Investing 10 to 40 per cent of a portfolio in international equities gives better diversification and exposure to rapidly growing economies. Canadian equity markets represent just over three per cent of world equity markets. Adding internal investments can enhance portfolio returns and reduce risk over the long term.
An independent financial planner will investigate the client’s needs, goals and objectives and comfort level with risk and investment volatility. After analyzing these requirements he or she will recommend the best plan for the client. Asset allocation is the technique of balancing assets to maximize long-term returns while keeping short-term volatility with the required comfort zone. This will allow the client to make the highest returns from his or her investments while still allowing him or her to sleep at night. The plan must be customized to the client’s needs and comfort level.
Financial peace of mind
The benefits of a comprehensive financial plan include minimizing taxes, improving return on investment, ensuring adequate retirement income and minimizing estate costs. Once all of these benefits are achieved, the client will have financial peace of mind. The financial planner will meet regularly with the client, once or twice a year, to monitor the plan and keep it on track.
For more information on related topics, please contact DFS Private Wealth, the author of Managing Alone and founder of widowed.ca. We are here to help and answer any questions you have. Should you need a connection to a professional in your area we would be happy to make the introduction for you to someone you can trust. Contact Us today.