Preparing for a rainy day
PROPER FINANCIAL PLANNING TO AVOID UNEXPECTED FINANCIAL DIFFICULTIES REQUIRES LONG- TERM THINKING
Life is full of surprises – and not all of them are pleasant. For a family, it pays to plan ahead to ensure financial security in case of the loss of a loved one, a sudden illness, loss of employment or any other event that might compromise your income or assets.
The best time to address an emergency is before it happens,” says Yvonne Chan, vicepresident and wealth advisor, RBC Dominion Securities Inc. “That means developing a financial plan and making sure it is up to date as your circumstances change. If planned properly, it can make it easier to step away from a job for a while or keep up with your expenses.”
A financial plan starts with clarifying objectives, setting realistic timelines for achieving them, and putting together the financial resources to support it. “The key to the plan’s success is helping individuals think about and understand the risks they face and then finding strategies and solutions to mitigate and manage those risks,” Chan says.
Questions to be considered include: Will my family be protected if I die prematurely, lose my job, have an illness or disability? Do I need insurance coverage? What does my savings plan look like? Is my will up to date and do I need powers of attorney for property and personal care?
Chan advises starting with a systematic savings plan to accumulate a nest egg that can help in the case of an emergency. “You should always have an emergency fund in place. Having that surplus is a nice safety net in a moment of crisis.”
She suggests having enough liquid reserves to cover at least six months of expenses, whether through a savings account or line of credit. “A TFSA [ tax- free savings account] is a great place to start to park extra cash.”
Mortgage insurance can help to provide financial security for the family when the unexpected occurs. An alternative is a personal term insurance policy that would cover the mortgage amount and any outstanding financial obligations.
For a business owner, planning can become even more complicated. Chan says very few have shareholder agreements that include a clause addressing what happens if the shareholder becomes disabled or ill, takes a leave, or dies.
Depending on your business plans, you may need to consider how the business will continue to operate if a key person has to leave the business. Will remaining shareholders have the resources to finance a buyout?”
Will and estate planning should also be a top priority, says Robyn Solnik, vice- president, high- net- worth planning services for RBC Wealth Management in Mississauga. “You should determine how much support your family will need and how the funds will be allocated and dispersed. That’s an especially important consideration if you have a child with special needs that will require long term support. In many cases it might well include the implementation of a trust in one’s will, depending on your objectives and overall situation.”
She recommends revisiting wills and powers of attorney every few years or when there is a change in the family dynamic or other personal and financial circumstances. “They are always going to be works in progress to make certain they continue to meet the needs of your family. Also ensure that information on your assets and investments are documented for ease of administration and that your beneficiary designations for registered plans are current.”
Insurance is another pillar to consider for relieving the financial burden in times of crisis. Yet this is something many tend to undervalue.
While people are happy to sign on the bottom line and write a cheque for their car and home insurance, dealing with the financial consequences of a loss of an income- earning family member is often not as well planned, says Wayne G. Miller, Sun Life Financial regional vicepresident in Toronto. “That [ income] could be your biggest asset, and the least expensive to cover. But people simply don’t acknowledge the consequences as clearly as they do a damaged car or home.”
One key coverage that has been growing in importance is critical illness insurance. It’s a great stop- gap measure to deal with unexpected events, because it can help you manage financially while you are not working, Miller says. Other options that families may want to consider include long- term disability and long- term care insurance.
“You want to know that someone didn’t have to quit their job and risk their livelihood to support you, or that you aren’t choosing between your estate and your dignity,” he says.
He also recommends a life insurance policy that will provide beneficiaries enough funds to help cover estate taxes.
The simplest way to ensure you are prepared throughout life is to review your plan annually with an advisor, Chan says. “Even if you don’t change anything, at least have the conversation so you know everything is okay.”
THIS STORY WAS PRODUCED BY POSTMEDIA’S ADVERTISING DEPARTMENT ON BEHALF OF RBC WEALTH MANAGEMENT FOR COMMERCIAL PURPOSES. POSTMEDIA’S EDITORIAL DEPARTMENTS HAD NO INVOLVEMENT IN THE CREATION OF THIS CONTENT.