So What Goes in a Full Financial Plan – Part 2 of 3

So here we go on part 2 of this 3-part series

Post-employment/work Income PlanningAll sources of potential revenue.

1) Employment pensions:
a) Type – Defined Benefit Plans, Money Purchase Pension Plan (Defined Contribution) Deferred Profit Sharing Plans, Employee Profit Sharing Plans, Employee Share Purchase Plans, Group RSP, etc. – past and present – valuations, statements, benefit formulas – early or late – contribution rates, maximums, etc.
b) Portability, commutability – formulas, etc.
c) Inflation protection – none, partial or fully indexed.
d) Pension choices available – spousal requirements, pension splitting options, etc.
e) Income buy-back availability.
f) Integration with OAS or CPP as applicable.

2) Personal retirement assets:
a) RRSPs, Spousal RSPs, Locked-In Retirement Accounts, Locked-in RSPs, Tax Free Savings Accounts, OPEN – depending on current purpose if in existence.
b) Valuations, statements, reasons for choices of investment holdings.
c) Plans for disposal of other investments/business interests/tax-shelters, etc. to supplement other retirement income assets.
d) CPP and OAS benefits statements – OAS maximization/claw-back minimization and planning.
3) Other Savings/Investments earmarked for other purposes/re-direction possibilities.
4) Review potential for partial employment or other post-retirement income supplements, potential inheritances, etc.

Education Planning – as appropriate For clients and family members as applicable.
1) RESPs, other in-trust holdings earmarked for education:
a) CESG and related possibilities including low-income education benefits for grandchildren/great-grandchildren.
b) Retiring student loans effectively.
c) Potential uses of Tax Free Savings Accounts for children.

Charitable/Philanthropic Intentions Family, living and/or posthumous recognition or benefits, donation planning.

Special needs – challenged or gifted Registered Disability Savings Plans, other government assistance plans, trusts, grants.

Wills, Codicils Inter-vivos/Discretionary Trusts, Alter-Ego/Joint Spousal Trusts, General and
Restricted POAs – including bank accounts, Limited POAs, Enduring POAs,
Representation Agreements (Living Wills), Multi-jurisdictional Wills/Multiple Wills for non-situs assets,
Planned inheritances, tax implications, contingent ownership issues etc.
choices for Executors/Co-Executors/Corporate/Contingent Executors, Guardianship
of the person and financial guardianship, conservatorships.

Marriage Marital regime, prior divorce, financial obligations from previous relationships that
survive death. Discuss domestic partnerships as appropriate.

Special tax-planning issues Restructuring cash flows, taxable inheritance planning. Review previous
personal, corporate, partnership, Limited Partnership financials, trust tax returns for missed items,
trends. Discuss Health and Welfare Trusts or Private Health Services Plans, as appropriate.

Risk tolerance assessment Separated by family member, goal specific – generic asset allocations, generic product

Gift planning Family and others – refer back to Charitable/Philanthropic.

Intergenerational Wealth Transfer Tax effective and efficient transfer of wealth – next and/or subsequent generations.

Implementation roadmap Suggested target dates, sequences.

So What Goes in to a Full Financial Plan? Part 1 of 3

I start this series with a bit of trepidation – I have so far, in more than 20 years of doing financial planning, been able to find some sort of universal agreement on what should be covered – but here is my attempt. I fully expect some disagreement – but that is good – it means people are thinking about it seriously! Also, readers should be aware that “financial planning” is NOT about selling products – it is exclusively about helping clients create a roadmap for their lives – financial and otherwise. For brevity, I am covering these issues in point form – obviously the actual discussions drive the ultimate destination and no two clients(even spouses or partners) have exactly the same vision – which keeps life interesting! If anyone would like confirmation of what some of these abbreviations and notes mean to me – just ask!

LifestyleCurrent and future, hobbies, interests, health issues/family history, soft-facts via
non-interview. Potential for changed occupation(s), children? Where do they
see themselves in 5, 10, 15, 20 years??

Cash Flow Actual versus planned, leakage (un-accounted for loss of revenue)/budget/cash flow
Income tax assessment/recommendations. Income splitting (CPP and other options).
Debt analysis and review – consolidation, refinance, Line(s) of Credit, Total Debt Service Ratios,
eliminate debt through use of other assets to improve cash flow, TDSR, etc.

Assets and Liabilities Including property assessments, mortgage/loan statements and schedules, details of
co-signing, credit card statements, revolving LOCs, bank accounts, GICs, TFSAs,
RESPs, all Registered Products, notes/mortgages receivable, loans to family
members, ACBs, assessments, valuations, cash flows, etc., stock options,
student loans

Risk Management Risk assessment – lives, property, automobiles and business.
Assessment of risk protection alternatives.

1) For individuals – all family members:
a) As appropriate, discussions about life insurance, disability insurance, critical illness insurance and long-term care insurance.
b) Discuss beneficiary appoints (contingent), previous spouses, blended families.
c) Review of group insurance benefits available – including life, AD & D, STD, LTD,
Medical, Dental, Vision Care, Out-of-country, HSAs, etc.
d) Current and available accident benefits, credit life insurance, disability insurance and critical illness insurance.
e) Potential for expanded benefits through ICBC re automobile injury/death.

2) For business/investment real estate/tax shelters/etc. – all involved family members:
a) Over-head Expense Coverage, Disability Buy-Sell, CII Buy-sell.
b) Grouped Executive Enhanced Benefits Plans.
c) LOC coverage as appropriate.
d) Discussion of Buy-Sell situation, liabilities, potential problems for survivor and deceased family.

3) Contingent Liabilities – all involved family members:
a) Who signed what and are the debts protected and recoverable – including review of alternatives.
b) Can contingency be removed.

4) Residence – owned, rented – reviews as appropriate:
a) Coverage for buildings, contents, scheduled items, deductibles, floaters, exclusions (earthquake), limits.
b) Voluntary medical payments, own damage, personal liability, off premises items, properties.
c) No frills, Basic, Broad Form or Comprehensive coverage.
d) Is building or contents over-insured?
e) If strata – match coverage with Strata Insurance Certificate to ensure no gaps.
f) Loss-payees.
g) Improvements updated on policy – strata and detached residences.
h) Fair Market Value versus Replacement Value updated on policy
i) Scheduled items – basket-clause application for jewelry, collectables, etc.
j) Check coverage for ATVs, boats, etc. extended re damage, theft, destruction and liability.

5) Automobiles – Government and Private insurance as appropriate:
a) Are deductibles appropriate given age of vehicles, use, driver?
b) Waiver of depreciation appropriate
c) BC residents – RoadStar eligibility/benefits.
d) Loss of use
e) Underinsured Motorist limits
f) Uninsured Motorist limits
g) Supplemental Death and Income Benefits
h) Third-party liability
i) After-market upgrades or improvements
j) Change of use
k) Experience of drivers
l) Check coverage re ATV’s, boats, etc. extended as floaters or endorsements
m) For boats – Recreational Boater operator cards, etc.
n) Coverage for personal items such computers, cell-phones, iPads, etc. if vehicle stolen or destroyed.

6) Business/Rental Properties/investments/tax-shelters:
a) Coverage limits for structures, loss payees, flood, fire.
b) Third-Party liability, voluntary medical, own damage.
c) Loss of revenue – business continuation – business financial statements.
d) Recent valuations of all assets used in the business.
e) Business cash flow.
f) Tenant damage as appropriate.
g) Revolving Lines of Credit and terms/agreements/co-signing.
h) Business agreements – shareholder, partnership, operating, financing, royalty, revenue sharing, etc. as appropriate.

How Much Home Can You Afford?

There are rules of thumb that help you to guestimate what you’ll be able to afford when you go hunting for a home to buy. One rule of thumb is that you can afford to spend 2.5 times your gross household income. In other words, if you and your pal make $100,000 between you before taxes, you can spend $250,000 on a home. Some of these rules of thumb go as high as 5 times your annual income, but we know that lending has become less sensible of late, and I believe if you go over the 2.5 – 3 times your income, you’re being overly optimistic, unless you have a whopper of a downpayment.

Nothing beats knowing the actual calculations lenders use to decide if you’ll qualify for a mortgage. To determine how much you can actually afford to pay each month for mortgage payments most lenders calculate your “debt service ratio.”

There are two different debt service ratio calculations. The first, Gross Debt Service Ratio, or GDSR, deals with the percentage of your gross income it’ll take to cover your housing costs including mortgage payment, taxes, heating costs, and half your condo (or strata) fees. Lenders don’t want you to spend more than 32% of your gross monthly household income on combined housing expenses.

Let’s say you go for a mortgage and you have no debt. Your housing costs (mortgage payment, taxes, heating costs, condo fees) will be $1400 a month. Your gross family income is $4,500. Your debt service ratio would be 1500 divided by 4500 multiplied by 100 (1400/4500*100) = 31%

You’re below the 32% -cut-off for allowable GDSR, so you MAY qualify for the mortgage. I say, MAY because there’s still another hurdle for you to leap over before you know for sure.

The second calculation – Total Debt Service Ratio, or TDSR, is everything in your GDSR calculation PLUS all your debt payments divided by your gross family income and it tells lenders whether you’re going to be able to pay them back. Your total debt service ratio needs to be under 40% for lenders to feel safe giving you their money.

Continuing with the previous example, let’s say you had a car loan that was costing you $450 a month. You’d have to add that $450 to the equation: 1400+450/4500*100 = 41%, which is over the acceptable limit. Result: You’re declined.

Your car is paid for, and you have no other loans, so you’re in the clear. How about that line of credit you’ve been trying to get paid off for the past two years? That’ll have to be factored in. So will those student loans that have been following you around for the past six years. And then there are your credit cards.

“I don’t carry a balance on my cards,” you announce proudly, “so they won’t be a factor.”

So you think. How many cards to you have in your wallet and what are limits on those cards?

“$4,000, $6,500 and $8,300.” So that’s a total of $18,600 in credit.

“But I don’t carry a balance” you protest. “I pay my cards off every month. Besides I never even get close to those limits.”

The lender doesn’t care. Since you COULD run those limits to their max, that’s all the lender cares about. So s/he adds in the minimum payment you’d have to make to keep all that credit balanced. Assuming s/he used 2.5% (pretty standard for minimum payments), s/he’d add in $465. Hey, wait a minute. That’s even more than the car payment so there’s no way you’d qualify.

Can you see why borrowing money willy-nilly can really be a bad idea? All those dinners out, those I- just- have- to- have- it- NOW purchases, those unplanned-for expenses, and those but- I’ve- been- working- so- hard vacations will come back to bite you in the butt if you’ve put them on credit.

Want to work out your GDSR and TDSR to see how you’re doing? You can get out your own calculator, or you can use this one on the web.

Don’t go underestimating what you debt repayments will be in an attempt to fool the calculator into giving you good news. If you don’t use the actual minimum you’re required to repay on your debt, you’re just setting yourself up to be disappointed when you do finally get to the lender.

Assuming your have no debt at all (yippee!), and all you have to think about is your GDSR, you can simply take your monthly gross income and multiply it by 32% to figure out the maximum you can afford for your mortgage payment, property taxes, heating costs, and half your condo or strata fees.

Let’s say you have a family income of $7,500 a month. Multiplied by 32%, you’re working with $2,400 for your total housing costs. If we estimate your property taxes at $200 a month, your heating costs at $150 and your ½ your condo fees at $125, the total amount of your mortgage payment would could be as much as ($2,400 – [200+150+125]) = $1,925.

So, how much home does that translate into. Well, it depends. First, it depends on how much of a downpayment you have. Second, it depends on how long you’re planning to carry your financing. Third, it depends on the going rate of interest.

The bigger your downpayment, the more house you can afford.

The longer you amortize your mortgage, the more house you can afford. But the more your home will end up costing in the end. Amortize for 25 years, and you’ll end up paying twice the orginal price of your home. Amortize for 40 years, and you’ll pay three times the original price of your home.

The lower the interest rate, the more house you can afford. Keep in mind that you shouldn’t go to your borrowing limit based on low rates since you have to consider how your cash flow will be affected when you renew if rates are up a point or two.

Of course, the easiest way to figure out how much house you can afford is to get pre-approved for a mortgage by a lender. That’ll take all the guess-work out of the experience. Not quite ready to hit up a lender, then try this online calculator.