Wealth accumulation, distribution, or transfer? Mending the financial planning generation gap

How much accumulated wealth is needed to retire? How should wealth be distributed? When should wealth be transferred to your loved ones? All these financial planning goals are different and are sometimes present at different stages in life but can be achieved with a solid financial plan.

The Stories

Accumulation

Here is the story of Jack, a 30-year-old self-employed real estate appraiser and his 29-year-old girlfriend Judy, a self-employed general construction contractor. Both Jack’s and Judy’s businesses are booming. They would like to get married, start a family, purchase a home, and start saving for retirement.

Distribution

Jack’s Parents, Joe and Mary are married, both in their 60s and recently retired. Joe operated a very successful heating and plumbing business that he sold before retiring. Mary was a homemaker for much of her life and raised the 3 children (Jack, Sylvia, and James).  Joe and Mary have no debt, own their own home, and have retirement investments.  They would like to preserve their investments and determine the most tax efficient way to de-accumulate from their investment accounts.

Transfer

Jack’ grandparents, Robert and Sophie are married and in their 80s. They are both retired university professors with generous pension plans and healthy investment accounts. Robert and Sophie have no debt and own their home. They would like to sell their home, move into a retirement residence, and help their grandchildren purchase their first home.

The Financial plan

Here are some of the questions that should be answered in a financial plan.

1. Personal situation

From the 3 stories, Jack and Judy’s situation stands out as requiring a planning analysis around their future civil status, the family patrimony, matrimonial regime, and protection mechanisms for minors. This is because of their intentions to get married, purchase a home, start a family and the desire of Jack’s grandparents wanting to help them purchase their first home. What would be the impact to the plan in the event of future marriage breakdown between Jack and Judy with regards to the monetary assistance that they received from Jack’s grandparents to purchase their first home? What are their rights? If they have children and they become incapacitated when their children are still minors, who will be the guardians?

2. Tax

In all 3 stories, overall tax planning is an important component to their financial plan but given the different stages the goals vary. Jack and Judy are seeing their self-employment income rise rapidly and as such they would be excellent candidates in maximizing their annual RRSP contributions. Jack’s Parents may want to consider pension income splitting and possibly delaying their application for OAS if it will be clawed back. Jack’s grandparents may be pre-occupied with the potential changes to tax laws in future government budgets and the introduction of an estate and gift tax.

3. Investments

Everyone’s risk tolerance and investment objectives are unique, but Jack and Judy do have one distinct advantage. Their investment time horizon is longer and as such they should be more heavily weighted in growth assets as they provide higher returns. Jack’s parent would typically take a cautious approach with their investments as they are retired and rely on their investments to support their retirement.  Jack’s grandparents are in a unique situation in that they can take a more aggressive approach with their investments given that they have stable pension income that supports their retirement.

In Conclusion…

One thing is certain, no matter what life-stage you are in it is important to establish realistic financial planning goals and a timeline within which they can be completed. With a solid financial plan and realistic goals, you should be able to reach the finish line.