If you wish to create your own Financial Road Map for retirement, you need two things to start:
- You need to know where you are today, and
- Your best guess (estimate) of where you want to go.
If you don’t know where you are today, you can’t create a plan to get where you want to go.
If our kids, Paige and Connor, wanted to make plans to go to the Grey Cup in Hamilton on December 12, it is important to know that Paige lives in Burlington and Connor lives in Revelstoke BC. Both can get there, but the planning is different.
Just as you need to know your starting point for any journey before you can create your Financial Road Map for retirement, you need to define your starting point.
The starting point for any retirement plan is what I call your Double O’s, which is a listing of what you own and what you owe, or a net worth statement.
Examples of what you own would be:
- RRSPs, LIRAs, RRIFs, LIFs
- TFSAs, RESPs
- Non-Registered Investments
- Company Savings Plans
- Your Home
- Vacation Properties
- Rental Properties
- Pension Plans
Examples of what you owe would be:
- Lines of Credit
- Balances on your Credit Cards
Once you know where you are today, you can continue the process to create your Financial Road Map for retirement. The strategies developed will fill the GAP between where you are today, and what you wish to accomplish.
Strategy: Update your Double O’s every year so you can track your progress towards your goals.
Excerpt from Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
THE DOUBLE Os—WHAT YOU OWN AND WHAT YOU OWE
Even though the first meeting was set for our cottage, I was surprised when Aunt Lorraine and Mark showed up so early on Saturday morning. It seems Mark’s boys had come up for the weekend with their girlfriends, and the atmosphere was a little too thick over there.
“I love my sons,” Mark said, shaking his head, “but they’re at that age where they’re playing ‘kissy-huggy’ with their girlfriends all the time. Drives me crazy.”
“You’re just jealous because you can’t get a date,” I laughed. “Don’t you remember what it was like to be twenty?”
“Only too well,” he replied wistfully. “You know, Jack, it’s very hard to meet women at my age. I’ve been divorced for more than a year now, and I’ve only had one date, and a miserable one at that.”
I was waiting for the details, but just then we saw Alice and David coming down from the bunky. Alice was still friends with Mark’s ex-wife, so Mark rolled his eyes and shot me one of those looks that said, “I’ll talk to you later.”
We had drawn straws for cooking detail that week, and Sally had lost. She doesn’t cook much, making it difficult to determine who had actually lost, but she’s famous for her pancake breakfasts, so we sat down at the table when Aunt Lorraine came out of the kitchen to tell us everything was ready.
We were nearly finished when we saw Uncle Wayne barreling across the bay in his Boston Whaler. My wife, Sandra, got up from the table and said she’d meet Uncle Wayne down at the dock if I would get our kids, Connor and Paige, cleaned up. They’re just three and one, so getting sticky maple syrup off their little hands and faces is a bigger task than it sounds. However, I had them cleaned up and into their bathing suits in no time, so their cousins, Scott and Jan, could look after them.
Sandra and I had decided it was important for both of us to be as involved as possible in these financial meetings so that we could make decisions together about our family’s future.
Aunt Lorraine thanked Sally for breakfast and went outside to say hi to Uncle Wayne before venturing home to see what Mark’s boys and their girlfriends were up to.
As Scott took Connor and Paige outside, David asked if we had all made our Double-O lists of what we own and what we owe, along with a monthly accounting of our income and expenditures. We all had, except Sally. No one was particularly surprised about that.
Uncle Wayne burst into the cottage with Sandra in tow and was very direct. “It’s a beautiful day, so I don’t want to waste any time. Someone get me a coffee, and then let’s get right to work.”
I fetched the coffee, and we all gathered on the porch.
“First, let’s go over your Double-O lists,” Uncle Wayne said.
Sally looked a little sheepish while David pointed out that her list wasn’t ready.
Uncle Wayne admonished her gently. “You’ve got to put some effort into this, Sally. It’s very important for each of you to have a clear sense of everything you own and owe. You can’t plan wisely for the future without knowing where you are today. I’d keep the Double-O list and copies of all your other financial documents in a three-ring binder and/or use a secure cloud storage service. I really like the cloud storage service, as you can access it anywhere from your computer, and all the documents are stored and backed up for you in a remote secure storage system. That makes it easy to keep track of everything, and you’ll also have easy access for our meetings. I should also point out that all your original documents, such as wills, mortgage agreements, deeds to the house, and insurance policies, should be kept in a safety deposit box. If you haven’t got one, get one immediately. You can also scan all of those items in a cloud storage service as well for quick access. Okay, enough lecturing. Let’s go over the major liabilities that each of you have.”
We could see he wasn’t kidding about not wasting time. I mentioned that our major liability was the mortgage on our house. Mark had already paid off his mortgage, and David and Alice just had a small one left.
Sally said she had no liabilities at all. Uncle Wayne’s eyebrows went up and his eyes got narrow. Clearly this would not be Sally’s day to get off lightly.
“I hear you do a lot of shopping,” he said. “Do you owe any money on your credit cards?”
“Not really,” she shrugged. “I pay off the monthly minimum each time I get a bill.”
Uncle Wayne just about fell out of his chair. “Sally, I don’t mean to pick on you, but I can’t believe what I’m hearing. You’re university educated and you have a good job. Do you have any idea what kind of interest you pay on credit cards?”
David jumped in. “Are you kidding? She works for the government. What would she know about paying off debt? Those people only know how to borrow!”
Alice interrupted to save Sally. “I believe credit card interest rates are usually quite high, up to 20% depending on the card.”
Uncle Wayne continued. “That’s correct, Alice, and you all have debt of some type, correct?”
We all agreed.
“Do you need any of your inheritance money to live on right now?”
We all answered no, but David had an afterthought. “It depends on whether or not you think we need an emergency fund. Right now, Alice and I don’t have one.”
I also had wondered about an emergency fund. The advisors in the media always say to have one, but is it really necessary?
“Well,” Uncle Wayne answered, “everyone should have either an emergency account or a line of credit equal to at least three months’ expenses that you can get your hands on easily and quickly for emergencies, such as losing your job. The best place to keep your emergency stash is in a high-interest savings account.
“Once that’s taken care of, the next thing you should do is pay off all your debts in this order: credit cards, personal loans, car loans, and then your mortgage.”
“Why in that order?” Sally asked.
“Because the first debt to get rid of is the one with the highest interest rate, and that’s usually credit cards, followed by the others I mentioned. However, there’s one exception to this rule. Don’t pay off loans for which the interest that is payable is deductible for tax purposes. For example, being self-employed, Mark may have some interest payments on loans that he can deduct as business expenses on his tax return, and these you would not pay off immediately”
“It’s probably good advice,” Alice said, “but frankly, Uncle Wayne, it’s not very exciting. Wouldn’t we be just as far ahead by investing a lump sum right away? At least then we could build something up.”
Uncle Wayne looked at the rest of us. “Can anyone answer that question?”
Mark took a stab at it. “Well, I’ve been mortgage-free for a few years now, and with those payments gone, I find I have a lot of extra money every month to spend or invest.”
“You have to remember,” Uncle Wayne added, “that mortgage payments consist of principal and interest. When you pay off a mortgage, you wind up keeping the cash equivalent of all the interest you would have paid over the years. You save a tremendous amount and then you can invest that money to achieve your long-term goals.”
“How much could you save?” Sally asked.
I had an answer for that one. “I pulled our mortgage statement for this meeting, and when I really looked at it, I was shocked. We have a twenty-five-year mortgage for $300,000 at 3.8%. Right now, our payments are about $1,546 month, which adds up to $18,458 per year. That sounds reasonable, but here’s the kicker—after twenty-five years, we will have paid out $463,711.”
Sally choked. “That’s a whole lot of interest to pay!”
“Yes. By paying off the entire amount now, we’ll save close to $163,711 over the long haul.”
“And remember,” Sandra added, “you pay a mortgage with after-tax dollars. That means at a top tax rate, Jack and I would have to put the equivalent of $36,916 earned income into our mortgage every year.”
Uncle Wayne nodded. “So you see, Alice, with a 50% tax bracket, you would have to find an investment that will pay a guaranteed rate of return equal to 7.6 % just to stay even if you’re also making mortgage payments at 3.8%. In effect, paying off a mortgage is a guaranteed investment.”
David was worried that early pay-off penalties would be costly, but Uncle Wayne assured him that the future savings may be well-worth the penalty charged by financial institutions. He would have to confirm what the actual charges were, and he’d have to “do the math.”
Uncle Wayne then explained the advantage of paying a mortgage bi-weekly versus monthly. “If you pay your mortgage bi-weekly on an accelerated basis, your mortgage will be paid off in twenty-two years versus twenty-five years, and this saves a lot of interest.”
Mark added, “I’m mortgage free, and it sure is a good feeling.”
Right about then, David and Alice’s kids came in and asked when Uncle Jack could take them water-skiing. I guess they were tired of babysitting. I can’t recall exactly when I became the designated boat driver for these things, but it had been that way for years.
Uncle Wayne said I could take them now. “We’re finished for today.”
“What about next week?” Sally asked.
Uncle Wayne laughed. “Now that you’re all going to follow my excellent advice and pay off your debts, I want you to redo your Double-O lists. Then I want you to consider seriously which of these three main goals you want your inheritance to achieve:
- Do you need the cash now to pay off debts or for purchases? (liquidity)
- Do you need to set up an income plan from the inheritance to fund your current expenses and lifestyle?
- Is the inheritance earmarked to provide for your future retirement income?
“Decide individually what your priorities are relative to your personal and career objectives, and then we can devise specific strategies for each of you to handle your inheritance.”
Sandra walked Uncle Wayne down to the dock and helped push off his boat. As I went up to the shed to grab the water skis and rope, I began to summarize in my mind the main points we would be discussing together this week:
- Put a complete list of everything you owe and own and copies of all legal and financial documents in a three-ring binder for easy reference, and/or utilize a secure cloud service. Originals of the documents should be in a safety deposit box.
- Establish an easily accessible emergency fund equal to three months’ expenses, or obtain a line of credit.
- Pay off all debts that aren’t deductible for income tax purposes and do it in the order of highest interest rates, which is credit cards first and then loans and mortgages.
- Pay off what you owe to generate the highest guaranteed return on your investment and increase your cash flow.
- Decide relative priorities for the three main goals your inheritance could achieve: cash for today, current income, or for your future retirement.
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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Jack Lumsden, MBA,CFP® Financial Advisor, Assante Financial Management Ltd.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
Insurance products are services provided through Assante Estate and Insurance Services Inc.
 As this book was being published, many people were being laid off due to the COVID-19 pandemic, and a three-month cash reserve would have been beneficial.