Financial goals

School days: The ABCs of using RESP funds

October 5, 2020 by Darcie Doell and Laurianne Osmak

Your wee babes have grown into young adults ready to take on the world – or at least head to, post-secondary education. Knowing that college and university come with a hefty price tag, you have faithfully made contributions over the years into a Registered Education Savings Plan (RESP). Now that it’s time to use these funds to help your kids or grandkids with tuition, the next steps may feel somewhat overwhelming. Consider this your primer on how to use these savings – including the “what now” scenario if a post-secondary dream falls flat.

RESP refresher

Anyone can open an RESP for a child, whether a parent, grandparent, other relative or friend. There are different types of RESPs. An individual plan has one beneficiary. A family plan can have many beneficiaries, which is ideal for families with more than one child. Group plans have multiple beneficiaries and multiple contributors, and are generally managed as scholarship funds.

You can contribute any amount up to a lifetime limit of $50,000 per child. The federal government adds 20 cents on every dollar contributed up to a maximum of $500 annually and a lifetime maximum of $7,200 per child. This federal contribution is known as a Canada Education Savings Grant (CESG). For lower-income families, the federal government makes higher matching grants so that the $7,200 maximum can be reached with lower contributions.

Learning grants

In addition to the CESG, additional education funding assistance is available.

The Canada Learning Bond is a federal grant available to children who are Canadian residents born in 2005 or later, with a net annual family income of $47,630 or less. Qualified applications receive an initial deposit of $500 into a child’s RESP. Additional deposits of $100 are automatically made to the RESP each year to age 15 or to a maximum of $2,000.

The British Columbia Training and Education Savings Grant (BCTESG), offers parents in British Columbia a one-time RESP grant of $1,200 available for children aged six to nine.

The Quebec Education Savings Incentive (QESI) offers a refundable tax credit paid directly to the RESP for 10 per cent of net annual RESP contributions up to $250 per year. Up to an additional $250 from previous years can be paid to an annual combined maximum of $500. Also, low- to middle-income families can receive up to $50 above the basic $250 credit amount. There is a lifetime maximum of $3,600 per child.

Time for school

Great news! Your child has been accepted to the qualified post-secondary institution of their choice. After many years of contributing into an RESP, it’s now time to make a withdrawal. There are a few things to know in advance:

Funds can be withdrawn only by the person who set up the RESP.
The RESP provider will require proof of enrolment, such as a program offer letter, course confirmation documentation or other school documentation that shows a student number for the beneficiary.
The government grant and investment earnings portion of an RESP withdrawal must be claimed by the student when they file their taxes. The student will receive a T4A slip indicating the grant and earnings portion received, which is known as an Educational Assistance Payment or EAP.
The EAP has a withdrawal limit. During the first 13 weeks of schooling, you can withdraw only $5,000, or $2,500 for part-time studies. There is no further EAP limit following this initial 13-week time period as long as the student remains enrolled.
The contribution portion of a withdrawal, known as the Post-Secondary Education or PSE amount, is paid tax-free. The EAP withdrawal limit does not apply.

Delays and cancellations

Despite careful planning, post-secondary education isn’t always in the cards for a young adult. What happens to an RESP in this scenario? Luckily there’s a long timeline when it comes to RESPs, which can be helpful if a student is reluctant to jump into a post-secondary institution right after high school. From the time it’s opened, a plan can stay active for 35 years. Here are a few scenarios:

Keep the RESP open – sometimes a student just needs a break from schooling and will decide to resume their education later.
If a child firmly decides not to continue education, contributions can be withdrawn without penalty or taxation. However, any accumulated income on the investments held will be taxed according to the contributor’s income level, plus another 20 per cent. Alternatively, these amounts can be contributed to the RRSP of the person who opened the RESP, as long as they have enough contribution room.
RESP contributions can be transferred to to a sibling of the original beneficiary who is under 21 years of age. The government grant portion of an RESP (CESG) can also be transferred to a sibling as long as there is sufficient grant room available. When applicable, RESP funds can be transferred to a Registered Disability Savings Plan (RDSP).
Unused portions of any grant money must be returned to the respective provincial and federal governments.

Switch gears from saving to withdrawing

While richly rewarding, post-secondary education can be expensive. But thanks to starting early with an RESP, you have helped soften the blow of covering the bills for tuition, books and other costs. If plans change, multiple withdrawal options still remain. As with any financial decision, your advisor can help you fully understand the withdrawal options that are best suited for funding education success.

Taking the team approach: The value of advice in planning your financial strategy

September 21, 2020 by Darcie Doell and Laurianne Osmak

The experience of the coronavirus pandemic clearly confirmed that Canadians are much better prepared to face challenges and make informed decisions when they can trust and rely on the advice of experts. Thankfully, we can only speculate how the situation could have unfolded without the commitment of leading authorities to guide us through such unprecedented circumstances.

The lesson learned through this time of uncertainty can easily be applied to personal financial matters, given that the two are so closely linked. When a crisis occurs and the markets react, it’s natural for investors to wonder how it will affect their personal finances. During such times, the value of advice can especially prove its worth, in finance, as well as other areas.

WATCH: The Value of Advice, a video about the benefits of getting professional advice.

Where would we be without the aid of good advice?

Few people would diagnose their own medical issues, prepare their own legal proceedings or perhaps fix their own car without the aid of good advice. Managing your finances isn’t so different. Since economies can sprint, stumble, stop and restart at any time, having a qualified partner who can help you assess market fluctuations and how to consider responding to them can be a valuable asset.

After all, a sudden change in a person’s financial situation, like the loss of a job or an economic downturn, can cause great stress and anxiety. Advisors know this and will talk through the situation with options that can help you move forward with confidence as opposed to second-guessing, acting on emotional impulses or, worse still, abandoning the markets altogether.

A 2019 study from the CIRANO Institute showed that investors who received professional advice accumulated almost four times more assets after 15 years than comparable investors without advisors.

More than numbers

The typical image of an advisor who crunches numbers while watching insurance rates and stock markets rise and fall applies only loosely to the current reality of the profession. These days, advisors reflect how much the financial and insurance industries have changed in recent years, and with them, client expectations. Basic service delivery is no longer enough to fulfill a successful client/advisor relationship. Advisors monitor the market data and investment trends that many people would admit to having neither the time nor the passion to follow too intensively. In today’s swiftly moving global economy, clients can rely on advisors for leadership, clarity, understanding and motivation, especially in challenging times.

“Working with an advisor is all about communicating and collaborating as a team,” says Bernard Letendre, Head of Wealth and Asset Management, Manulife Canada. “The conversation has moved beyond one-sided recommendations of a particular product versus another, and now focuses on building a holistic relationship that looks at the bigger picture. Clients should feel more confident driving the conversation towards their financial concerns, whether it’s retirement savings, affording their children’s education, looking after insurance or estate-planning needs or rebalancing a portfolio. Advisors can present the facts and respond with clear insights and advice that can help clients through any economic scenario.”

Stay current and connected

Becoming more comfortable with and informed about investments and insurance can feel intimidating, but now might be a great time to challenge yourself to learn more about your own finances, how investing works or the various ways that insurance can assist with estate planning. Think about going to the doctor for a check-up, even when you’re healthy. Between those appointments, it’s generally up to you to monitor and maintain your own good health. When it comes time to visit the doctor again, the conversation can instantly move up to a new level of understanding, which enables you to gain more value from the discussion.

The same applies in a client/advisor relationship. You’ve made a commitment to save and invest your money with goals in mind – and if you prepare yourself to make educated decisions about the strategies that will help you achieve them, it will be more than worth the effort. An abundance of online sources is available to enhance your knowledge of the terminology, laws, trends and events in the markets, as well as the diverse landscape of insurance plans. An advisor can also point you towards helpful resources that can deepen your understanding of any specific topics that are of interest to you.

At the same time, advisors continually expand their own knowledge and skill sets to respond more effectively to individual client requests. This year, there’s been a sharp upswing in adopting digital programs to maintain client communication and service standards without the need for face-to-face contact.

“The digital programs and platforms we’ve been using for convenience have suddenly become essential for conducting business in a post-pandemic world,” says Rob Hollingsworth, Vice President and Head of Insurance Sales, Retail Markets at Manulife Canada. “With the aid of video conferencing, digital signatures and document-sharing technology, it’s easier than ever for an advisor to keep up with any personal needs and life events through the current circumstances and reliably into the future.”

Advice as a wise investment

Advice can be instrumental in helping you stay focused on your long-term and short-term goals, with strategies that react positively to market volatility, such as portfolio diversification, dollar-cost averaging and maintaining a balanced portfolio.

While there’s no crystal ball of market performance guarantees, seeking the advice of an expert is itself a wise investment. Consider scheduling regular touchpoints with your advisor that coincide with the changing seasons – spring, summer, fall and winter – to review, plan and discuss opportunities that can help you can feel confident and assured. And if you don’t have an advisor, a great place to start is by reaching out to friends and colleagues for their recommendations on advisors they know and trust. There’s no better time than today.

The value of advice...An advisor can help you focus on your goals and filter out the noise. 96% of mutual fund investors trust the advice their advisor provides. Investors who received professional advice accumulated almost four times more assets after 15 years than comparable investors without advisors.

Watch a few short videos to learn how advisors can help

Millennials and mortgages: A guide to buying your first home

August 24, 2020 by Darcie Doell and Laurianne Osmak

Millennials in Canada are facing a very different home‑buying environment than their parents. Soaring real estate prices, high levels of student debt and precarious employment are making it difficult for young people to get into the housing market.

WATCH: Property ladder, a video about the challenges of buying a new home.

Despite these challenges, a recent survey found that 80 per cent of Canadian millennials want to own their own home. What’s more, 27 per cent already do.[1] If purchasing a home is a goal for you, here are some tips to guide you through the process.

See what it will cost

Look at home prices in and around your desired location and be realistic about what you can afford. Perhaps moving to the outskirts or setting your sights on a smaller property can bring costs down. You might also need to think outside the box a little – like bringing in a tenant to help lower the carrying cost of your new home. Keep in mind the purchase price is only one part of the equation – closing costs such as real estate commissions, legal fees and land transfer tax can add an additional four per cent to the purchase price. You’ll also want to factor in ongoing expenses like property taxes, mortgage insurance, utilities and maintenance.

Save for your down payment

If you aren’t already saving, start now. If you can put down 20 per cent of the purchase price, you’ll avoid needing to purchase mortgage insurance (which can add thousands of dollars over the course of the mortgage). If not, at least five per cent is required for first-time buyers. Consider setting up a dedicated home-buying fund and putting aside money from every paycheque. Pad your savings with tax refunds and any bonuses or gifts you receive. You may also be able to negotiate a personal loan from parents or a family member to put towards your down payment.

Learn about government perks

Home Buyers’ Plan (HBP). You can withdraw up to $35,000 tax-free from your Registered Retirement Savings Plan (RRSP) through the HBP to put towards your new home. This amount will be repayable in instalments back into your RRSP over 15 years.

First-Time Home Buyer Incentive. This federal program was introduced in September 2019 to help first-time homebuyers reduce their mortgage payments and the total interest paid over the life of the loan. It’s available to households with an income of $120,000 or less and offers a loan of five to 10 per cent of a home’s purchase price to put towards the down payment. The incentive is repayable when the property is sold or after 25 years, whichever comes first. A potential drawback of this program is that repayment is based on the fair market value of your home at the time– if it increases in value, you’ll pay back more than you borrowed.

First-Time Home Buyers’ Tax Credit. New homeowners can claim a non-refundable tax credit of up to $750 to cover closing costs.

GST/HST New Housing Rebate. If your home is a new build and cost less than $450,000, you may be able to recover a portion of the GST and HST that you paid. Your province may also offer rebates on the provincial portion of the GST or HST.

Land transfer tax rebates. Some provinces and municipalities (for example, Ontario, British Columbia, Prince Edward Island and the City of Toronto) offer rebates on the land transfer tax for qualifying buyers.

Explore your mortgage options

When shopping for a mortgage, there’s more to consider than the rate. That’s why it’s so important to seek help from a professional. For example, a flexible mortgage that allows you to make prepayments can help you pay off your mortgage sooner and save on interest in the long run. Think about your personal situation – if the possibility of rising interest rates makes you nervous, you might be more comfortable with a fixed rate. If you’re expecting changes to your financial situation, an open mortgage may be ideal. You can also customize your mortgage by splitting between a fixed and variable rate and an open and closed mortgage.

Get pre-approved

Before applying for a mortgage pre-approval, it’s a good idea to review your credit rating and report any errors. You can request a copy of your credit report once a year for free from Equifax Canada (www.equifax.ca) or TransUnion Canada (www.transunion.ca).

With a mortgage pre-approval, your lender will let you know how much it is willing to loan and the estimated size of your payments. The current interest rate will also be locked in, so you’re protected in case rates increase before you purchase your home. The lender will also apply the mortgage stress test to ensure you can make your payments if interest rates rise.

It’s important to note, a mortgage pre-approval is not a guarantee that the lender will grant you the mortgage. When it comes time to make an offer on a home, it’s a good idea to insist on the condition of financing – it protects you in the event your financing falls through. If you waive it, you could lose your deposit and risk being sued by the seller.

Don’t shop alone

Buying a first home can be an exciting and challenging task, but knowing what to expect can make it easier. A team of experts including an advisor, mortgage professional, real estate agent and home inspector can help you figure out your options and ensure you’re making the best purchase decision possible.

Mortgage basics

Principal is the amount of money you borrow to buy your home. With every mortgage payment, some of the money will go to paying down the principal and some will go to interest.

Fixed interest rates will not change during the term and your payments will stay the same.

Variable interest rates are usually lower than fixed rates but are subject to fluctuations.

Mortgage term is the length of time you’re committed to your lender, the rate and any conditions – five-year terms are most common, but you can choose anywhere between one and 10 years.

Open term mortgages allow you to pay back what you borrow at any time, without penalty. Because of this flexibility, interest rates are generally higher.

Closed term mortgages do not allow you to pay back the entire balance without penalty, but many offer some prepayment options to help you pay down your mortgage sooner.

Amortization period is the length of time before you pay off your mortgage, up to 30 years. The longer the amortization, the lower your mortgage payment, but you will pay more interest over the life of your mortgage.

Mortgage insurance is needed if you have less than 20 per cent for your down payment. This insurance protects the lender in case you can’t pay your mortgage.

[1] https://abacusdata.ca/rented-dreams-the-truth-behind-millennial-home-ownership

First job, first paycheque: Help your teen navigate the basics of earning, banking and saving

August 4, 2020 by Darcie Doell and Laurianne Osmak

Although it’s still an uncertain time when it comes to employment, eventually your child will be ready to get their first job, and this will be an exciting new phase. As they move towards increased independence, they can still benefit from some gentle guidance to help their earnings last. Here are some tips to help them manage their new financial freedom and responsibilities.

Banking 101

Now that your teen is earning a wage, they’ll need a place to deposit their pay. Help them open a low- or no-fee bank account if they don’t have one already. You will likely have access to and control of the account if your child is under 18. This can be beneficial as they get used to managing their money. What may seem straightforward to you – setting up direct deposit, using a debit card responsibly, avoiding bank machine and other service charges – might be a complete mystery to your teen. It’s also a good idea to open a separate high interest savings account for longer-term goals.

Saving vs. spending

This is the perfect opportunity to talk about expenses, budgets and responsibilities. Discuss what you will continue to provide for your child and what they may now be expected to pay for – such as a phone, clothing or entertainment. Encourage your child to create a simple budget to help track and manage their spending. Have your teen think about things they want to save for, such as a car or post-secondary education, and how much of their earnings will go towards these goals. A good strategy is to set up automatic transfers to a savings account when they get paid, before they have a chance to spend their earnings.

Take advantage of tech

Your teen is probably never far from their phone, so suggest they set up online banking so they can view their balance, deposit cheques electronically or transfer money. Some mobile banking platforms may also offer a visual breakdown of spending. Just remind them to protect their password and avoid public Wi-Fi.

Managing income is one of the most important life skills for teenagers to learn. By teaching good habits now, you can help set them up for a healthy financial future.

UNDERSTANDING A PAYCHEQUE

Help your young worker understand the line items on their pay stub. Standard deductions include income tax, Employment Insurance and Canada/Quebec Pension Plan contributions. Part-time employees may receive vacation pay on each paycheque (about four to six per cent of their wage).[1]

DID YOU KNOW?

There’s no minimum age to open a Registered Retirement Savings Account (RRSP), as long as the child has earned income and files a tax return.
A child must reach the legal age of majority and have a valid social insurance number (SIN) to open a Tax-Free Savings Account (TFSA).
Assuming their annual income is quite low, a teen may benefit more from using a TFSA than an RRSP. Filing a tax return and reporting income creates RRSP contribution room that can be used later in life, when their income is higher and the tax deduction is more valuable.

[1] www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/income-expenses-budget/income-expenses-budget-2/2.html

Shoot to score: A goals-based approach targets financial planning to meet objectives throughout life

February 11, 2020 by Darcie Doell and Laurianne Osmak

How do you measure the success of your investment strategy? Most people look at their returns: five per cent is better than three per cent. But investment returns don’t tell the whole story. Whether or not an investment strategy is successful depends on whether it delivers the money the investor needs at the right time, allowing them to achieve specific goals.

That’s the aim of a goals-based approach to financial planning. Rather than chasing returns on investments, this approach identifies the amount of money required at different times throughout an investor’s life and structures separate investment portfolios, alongside debt management, insurance, tax and estate planning strategies, to help ensure the investor has that money available when it’s needed. Then, instead of checking returns against the markets, the investor evaluates success by measuring their progress towards each goal.

In addition to redefining success, a goals-based approach also redefines risk. After all, the true risk for an investor is not that an investment portfolio loses money this year; it’s that the investor falls short of their savings goals and can’t do what they had planned to do.

What are you saving for?

For most people, the answer is, “Lots of things!” But that’s a bit like setting a New Year’s resolution to “Do a bunch of stuff.” It’s not specific enough. And when goals are vague, it’s hard to know how much to save, which investments to choose and what level of market volatility you consider acceptable.

Well-defined goals, on the other hand, are more achievable. Knowing exactly what you’re working towards is a great motivator to keep saving. It also makes it possible to build a financial plan around specific milestones that help keep everything on track.

As a starting point for goal setting, consider goals many people share: a comfortable retirement, a new home, a cottage, a renovation, education (for children or for yourself) and travel. Keep in mind that some common goals stretch beyond a lifetime – for example, a desire to provide a legacy to loved ones or make a substantial donation to a favorite charity.

Let’s consider Maggie, age 40, who has three primary goals. She would like to take a year off work and go back to school full-time in three years, renovate her kitchen in six years, and retire in 20 years. Because the date she needs to access her money is different for each goal, so is her tolerance for market volatility. Maggie can’t afford for her savings to be worth less than they are now when she’s ready to hit the books. On the other hand, it’s okay if her savings for retirement are temporarily down three years from now, as long as they recover in time for her to have enough money to stop working when she plans.

Since Maggie’s goals have different time horizons and risk tolerances, it makes sense to create three investment portfolios – and that’s exactly what a goals-based approach does. Each portfolio will have a different balance of equities, fixed-income investments and cash: more fixed-income investments and cash for shorter-term goals, and more equities for longer-term goals. When Maggie reviews each portfolio, she can of course look at its rate of return, but the more important measure of success is whether she’s on track to achieve the goal that particular portfolio is designed to help her reach.

Of course, sometimes goals shift. Maggie may decide to keep working and take classes in the evenings. That may allow her to put a down payment on a larger home instead of renovating her kitchen. Maybe one of her teachers will connect her to a new job she loves and she’ll change her mind about retiring at age 60. A goals-based approach can generally accommodate new plans, as long as they’re not made at the last minute. Portfolios will simply be appropriately adjusted, and investors can start tracking their progress towards new goals.

Whether or not goals shift, all investment portfolios need fine-tuning as investors approach the date when they need to access their money. As each goal gets closer and the time horizon shrinks, the related portfolio allocation will have to reduce its exposure to market volatility to ensure it can deliver the right amount of income when that money is needed.

That said, a goals-based approach ensures that only the portion of money that’s required in the near future has its risk level (and therefore growth potential) scaled back. The rest of an investor’s money can continue to enjoy a greater opportunity for growth towards longer-term goals. The flexibility to precisely calibrate a portfolio to its goal, while leaving other investments to keep working towards other goals, is one reason a goals-based approach adds so much value.

Not only about investments

How do debt management, insurance, tax and estate planning fit into a goals-based approach? They’re other essential components of a complete financial plan and can contribute to the likelihood that an investor will achieve their goals.

Debt is a drag on any financial plan, slowing it down with every dollar in interest paid. Having clear goals in mind can be a powerful inspiration to pay down debt and get rid of that drag. Your advisor can recommend strategies to be debt-free faster, including targeting the highest-interest debt first and consolidating debt into a single account with a lower interest rate.

Unexpected events can derail the best-laid plans – and that’s where insurance comes in. Health and dental policies can help with the cost of medications, dental procedures and health-related services when needed. Disability and critical illness policies help protect the ability to meet goals by providing financial support in case an illness or injury prevents you from working. And life insurance policies can help ensure loved ones avoid financial hardship and can continue to make progress towards their goals after the insured person’s death.

Plan to reach your goals

With the right strategies in place, you’re much more likely to reach your goals. Here are steps you can take in the short term, medium term and long term to improve your financial well-being. Remember, every step you take gets you closer to your goals.

Short-term steps	Medium-term steps	Long-term steps
Create a budget	Arrange insurance protection	Save for retirement
Start an emergency fund	Save for larger purchases	Develop an estate plan
Pay off debts	Plan for children’s education	Save for “nice to haves”

Effective tax planning reduces the amount of money paid in taxes, providing more money to invest towards goals. Simple tax strategies include maximizing Registered Retirement Savings Plan contributions every year to get the biggest possible tax deduction and, where practical, earning the most highly taxed type of investment income – interest income – within a registered plan where money grows on a tax-deferred or tax-free basis.

For many people, the goals addressed by estate planning are among the most important. Estate planning can help make sure assets pass to beneficiaries efficiently and tax-effectively, establish strategies to meet the needs of a loved one with a disability and/or set up a generous gift to charity. It can both provide significant tax savings and ensure family members are well taken care of.

Speak with your advisor

Defining clear goals and aligning financial planning to meet them can help you make the most of your money and avoid common financial pitfalls. For example, knowing that overspending or paying too much in interest will jeopardize your ability to have the experiences you want in life may prompt you to redouble your efforts to trim your budget and eliminate debt. Meanwhile, knowing exactly how much income you need in retirement makes it less likely you’ll skip a few months of saving, because you know the precise amount of money you must set aside regularly to stay on target towards the future you want.

Furthermore, understanding what you need your money for and when you need it will help you avoid investments that are inappropriate for your situation and focus on the ones with the risk/return profile that suits you best. An added benefit is that when you know exactly why you’re invested in a specific way, you are less vulnerable to the distractions of market ups and downs and can stay invested towards your goals.

Overall, focusing on goals makes financial planning more concrete and less abstract, allowing you to mix and match strategies with a very clear idea of what they need to achieve. It can also clarify conversations with your advisor, giving them a well-defined job: to get you what you want when you want it.

We want to hear “Your Story” – Let’s talk about how a goals-based approach to financial planning can help you achieve your dreams.

Source: manulifesolutions.ca