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Summer 2023 Financial Planning Report

Table of contents

The goals-based approach to TFSA investing

When The Tax-Free Savings Account (TFSA) was launched in 2009, it was common to primarily choose fixed-income investments –to hold the most highly taxed investments in a tax-free environment you’re your TFSA account grows in value the focus shifts on equity investments, based on the idea that you’ll gain the most from equities when growth and withdrawals are tax-free.

One vehicle, multiple uses

You can use your TFSA for virtually every wealth planning need. You can achieve a short-term goal, like saving for a kitchen renovation, and after the withdrawal you can replenish the funds the very next year, or immediately if you have contribution room available. Parents can use a TFSA for education savings, supplementing a Registered Education Savings Plan (RESP). TFSAs can be a valuable income source during retirement, as withdrawals are tax-free and don’t affect Old Age Security (OAS) benefits. In estate planning, TFSAs can meet a variety of needs, including helping offset taxes payable by the estate. As a tax-planning measure, you can split income by gifting funds to your spouse or children, which they can contribute to their own TFSAs.

Do you have questions for any of these topics? ​

Contact our team for additional financial recommendations.

Tips and tactics for an FHSA

The First Home Savings Account (FHSA) is being widely praised as a tax-smart way for first-time home buyers to help fund a down payment. Account holders can contribute up to $8,000 a year, to a lifetime limit of $40,000. Contributions are tax-deductible, reducing taxable income by the contribution amount. Investments grow tax-free and withdrawals are tax-free.

Helpful ways to use an FHSA

Several strategies are emerging to make the most of the recently introduced FHSA – here are some helpful tips and tactics.

Team up with a TFSA.

A prospective homeowner can withdraw funds from their Tax-Free Savings Account (TFSA) and contribute the amount to an FHSA. This manoeuvre gives them a tax deduction for the FHSA contribution. Going a step further, they could even use the resulting tax refund to help replenish their TFSA, when they have contribution room available.

Help your child.

When helping a child or grandchild make a down payment, it’s common to gift the funds at the time the home is being purchased. But those dollars make a greater impact if you give funds earlier, which the child deposits into their FHSA. Now the child benefits from tax deductions, tax-free growth and tax-free withdrawals.

Helpful ways to use an FHSA

An FHSA can be opened at age 18, or the age of majority in your province. But it can only remain open for a maximum of 15 years (or until the end of the year the account holder turns 71). So you need to consider when you imagine yourself buying a home. One person might choose to open an FHSA at 18, while another may prefer to wait until they’re in their early 20s.

Timing also matters when it comes to choosing investments. A 25-year-old aiming to buy a home in about 10 years might favour equities for greater long-term growth potential. But another individual of the same age may focus on less risky fixed-income investments if they hope to buy in five years. Keep in mind that all account holders, including conservative investors, benefit from tax savings provided by the tax deduction on contributions.

Your lifestyle in retirement

Do you ever find yourself daydreaming about how you’ll spend retirement? Or if you are already in retirement planning you next project, whether you’re exploring the wonders of Barcelona or strolling through the woods with your grandchildren, these daydreams are more than pleasant thoughts. They’re key elements in the development of your wealth plan.

Retirement lifestyle and retirement goals

The amount you need to retire comfortably is based on several factors, but none is more important than your retirement lifestyle. An individual who plans on downsizing and enjoying their favourite pastimes will have a different financial goal than someone who intends to purchase a vacation property for Canadian summers and a condo down south for winter.

Your desired retirement lifestyle affects your projected retirement income needs, savings objective and estimated retirement date. For example, a couple planning to travel the world after reaching their savings goal has a more flexible retirement date than an overworked business owner set on a life of leisure who’s entered into an agreement to sell the business.

Plans can change

Since your retirement lifestyle affects your wealth plan, it’s important to inform us if your retirement plans change – and they can change for a variety of reasons. Caring for an aging parent can affect when you’ll retire and where you’ll live. Perhaps you decide to turn one of your interests into a small business. Or you’re entertaining the notion of moving permanently to another country. Divorce often calls for re-evaluating a retirement plan, for either spouse. Remarriage can definitely lead to changes, as a new couple may have different ideas of how they’ll spend retirement.

Working together

When you keep us up to date on your retirement plans – and any changes – we can make sure your investment program remains aligned with your retirement savings goal. It’s all about working together so you can enjoy the retirement lifestyle you envision.

Risk during retirement

A retiree’s tolerance to risk can change for some of the same reasons as during their working years, such as going through a divorce or receiving an inheritance.

Also, taking your time horizon into consideration still applies, since you’re investing for a period of 20 to 30 years, or more. Upon retiring, many investors will hold a significant proportion of their portfolio in equity investments to help support a long retirement. If markets suffer a downturn in the earlier years, time remains for markets to recover. But as the years go by, the market risk increases, so an investor typically reduces their equity investments and increases their fixed-income investments. Another way to defend against a market downturn is to establish a cash reserve: by drawing retirement income from the reserve, you give your equity investments time to recover.

Some retirees are concerned about the risk of outliving their savings. A combination of methods addresses this concern, commonly involving deferred government benefits, a personalized withdrawal strategy and, for some retirees, an annuity.

Avoid the sideline trap​

Throughout the ups and downs of a market cycle, situations arise when some investors may be tempted to hold off on investing.​

A significant downturn​

In a prolonged correction, an investor might consider keeping their money on the sidelines, worried about investing during a falling market. The trouble with this approach is determining when to resume investing. In all likelihood, you’ll buy back in when prices are higher than when you had stopped.

A volatile recovery​

If a market recovery is volatile, some investors might consider waiting until a bull market is under way, rather than risk new investments losing value. But if the market takes off, you miss out on the rebound. If the volatility continues, you miss out on buying opportunities ahead of the recovery.

A new market high

When the stock market reaches an all-time high, an investor may be tempted to halt their contributions – concerned the market can only tumble. But no one can reliably predict a market downturn, and bull runs can hit numerous all-time highs.

A powerful partnership to help reach your goals

To find out how you can benefit from working with an experienced Wealth Planning Team, Contact us