Baby steps. Solut!ons for financial planning

Transcription

1 Baby steps 8 Solut!ons for financial planning F i n a n c i a l P l a n n i n g 1 0 1

2 Preparing financially for the arrival of a new family member Rachel, age 29, and Brian, age 31, know their life is about to change. Married for two years, they re expecting their first child. They re ready for the joys of parenthood the first giggles, words and steps. And they re prepared for the hard work the middleof-the-night diaper changes and middle-of-the-supermarket temper tantrums. But they re not sure they are organized financially. Rachel currently earns $55,000 annually working for a small interior design company. Brian is a computer programmer with a salary of $80,000 a year. They have set aside $25,000 in their two RRSPs and have $1,000 in additional savings in a joint savings account. On the liability side of their household balance sheet, they have a $200,000 mortgage left on their home and other debts totalling $2,500. On the way home from a pre-natal check-up, Rachel and Brian start talking about their money concerns and decide to schedule a meeting with their advisor, Angela. It s important to them to have everything organized before the baby arrives and that goes as much for their finances as for everything else. SPRING/SUMMER

3 Client overview Clients Rachel, 29, and Brian, 31; married Goals Manage expenses on a reduced income during Rachel s one-year maternity leave, protect their family in case of accident, illness or death, and start saving for their child s education. Fictional scenario. For illustration purposes only. Here s what s top of mind for them: 1. When Rachel starts her one-year maternity leave, they know they ll need to budget carefully to manage extra baby-related expenses on a reduced income. 2. They want to put strategies in place that will protect their family in case something happens to them. 3. They want to know the best way to start saving for their child s education. At their meeting, Angela reassures them that good financial planning can put them in a stronger financial position down the road and help them ride out any financial bumps along the way. Control expenses with careful budgeting Let s start with your first concern, Angela says. Rachel, as you prepare to go on maternity leave, you should know that benefits from the federal government 1 provide a source of income while you re away from work but there s no question you ll experience a drop in your overall household income. She points out that employment insurance, maternity benefits and Assets Home: $300,000 RRSPs (2): $25,000 Joint savings account: $1,000 Liabilities Mortgage: $200,000 Car loan: $2,000 Credit cards (2): $500 parental benefits are generally based on 55 per cent of your average insurable weekly earnings, up to a yearly maximum of $47, This means Rachel will receive approximately $26,000 during the year she is away from work. The first 15 weeks will be maternity benefits, followed by 35 weeks of parental benefits. What worries us is that we ll have less money coming in right at the time we need it most, to pay for everything the baby needs, says Rachel. Keep in mind that you ll also likely spend less going out to restaurants and movies in the first year, Angela replies. You can cross off commuting costs to work as well. So while some costs will certainly rise, others will level off. The best approach is to create a budget, and that s something I can certainly help you with. I d recommend including a healthy contingency amount for the unexpected because babies are anything but predictable! To help deal with the element of surprise, she suggests that Rachel and Brian work to build their joint account savings in the months before the baby arrives. This will give them an emergency fund that will help them weather dips in income if, for example, Brian were to lose his job while Rachel was on maternity leave. Next, Angela asks the couple to make a before and after list of their income and expenses. She explains that to avoid incurring additional debt during Rachel s maternity leave, they will need to make sure they don t spend more than their reduced income. That may mean scaling down in discretionary areas such as travel and entertainment. It s temporary, she reminds them, and the baby will keep you more entertained than a pricey cable package ever could! Protect loved ones with insurance This is harder to talk about, but we re also concerned that one or both of us might get into an accident and be disabled, get really sick or even die and where will that leave our baby? says Brian. Being a parent gives you a tremendous sense of responsibility. After all, your child will depend on you for everything in the first months and even years. So it s natural to want to protect your family from the unexpected, says Angela. In general, the solution for people your age includes insurance that helps protect your income. We want to make sure that if something happens, your family will continue to receive the income necessary to cover dayto-day expenses. She explains there are three main threats to income for people in their prime working years: Disability Critical illness Death 1 The Province of Quebec is responsible for providing maternity, paternity, parental and adoption benefits to residents of Quebec. 2 As of January 1, 2013, the maximum yearly insurable earnings amount is $47, Solut!ons for financial planning

4 Disability insurance, critical illness insurance and life insurance are designed to address these threats. Disability insurance provides monthly income if someone is injured and unable to work. Critical illness insurance provides a lump-sum payment to help replace income and fund other costs if someone is diagnosed with a covered critical illness and satisfies the waiting period. Life insurance provides a onetime benefit to the family after a death. When someone mentions insurance, people often think life insurance. But the risk of dying before age 65 is quite slim for most of us. It s far more likely that you ll experience a disability or critical illness diagnosis during your working years, says Angela. That s why a comprehensive protection plan takes into account all three risks. Brian asks, What are our options if we want that kind of comprehensive coverage? Angela explains that standalone insurance solutions are available to provide the protection they need for all three risks. But in their situation she recommends a cost-effective all-in-one solution that combines the protection of three insurance policies into one package. We can work out the specifics together, starting with a complete needs analysis. The main point is that you re right to be concerned about providing for your baby if something were to happen to you and there are good choices out there that can help you do just that, she says. Save for post-secondary education early There s one more thing we want to discuss with you, says Rachel. SPRING/SUMMER

5 We know our baby isn t here just yet, but we ve read so much lately about the rising cost of a post-secondary education. When is the right time to start saving for our child s future education expenses? It s wonderful you re looking ahead, Angela replies. With education saving, as with all other types of saving, the earlier you can start the better. If you can afford to put some money aside in a Registered Education Savings Plan (RESP) in the coming year, that s great since money inside an RESP grows on a tax-deferred basis. Furthermore, when the funds are withdrawn from the plan and used to pay for your child s post-secondary education, the plan earnings and government contributions will be taxed in your child s hands. As a student, he or she will likely pay little or no tax on the money. Angela explains that there is no annual maximum contribution just a lifetime maximum of $50,000 per beneficiary. The Canada Education Savings Grant (CESG) further encourages you to contribute to your child s RESP, she continues. The CESG is money that the federal government will add to your child s savings in an RESP. The basic CESG will give you an additional 20 per cent on the first $2,500 you save each year 3 up to a maximum lifetime grant of $7,200 per beneficiary. 4 You can qualify for the CESG by contributing to an RESP after your baby is born and you ve applied for and received a social insurance number for him or her. When the time comes, your child can use the funds for full-time or part-time studies in an apprenticeship program, trade school, college or university. Planning for three Rachel and Brian leave their meeting with a greater understanding of what their expected new arrival will mean to their financial plan. They are committed to creating a budget to help them manage short-term expenses on a reduced income, purchasing insurance to protect their family from threats to their income, and starting to set aside money for their child s education. Their next stop? A baby shower for a close friend. They decide to share everything they just learned to help another growing family. Speak with your advisor If you re raising children and would like to find out more about how insurance and education savings can help you protect your family and prepare for the future, speak with your advisor. How much insurance is enough? Start exploring your insurance needs with InsureRight.ca With just a few clicks, you can use the Quick Quote calculator to estimate how much life insurance you may need. It will also show you how much your insurance will cost, depending on the type you select. If you want the full picture, the InsureRight Calculator will help determine how much life, disability and critical illness insurance may be right for you. Your advisor can help review your full needs and build your protection plan. What s the risk you ll need insurance? InsureRight can help with that, too. Its Risk Calculator lets you quickly see your risk of becoming disabled, getting a critical illness or dying before age 65 in other words, during your prime working years. All you have to enter is your age, gender and smoking status and you can look up your own risk or see the combined risk for you and your partner. Check out InsureRight on your computer, smartphone or tablet. There s even an app available for Apple ipad TM and BlackBerry 10 devices. 3 The maximum annual CESG is $1,000 on a $5,000 contribution if the beneficiary has adequate grant carry forward room available. 4 Depending on your net family income, you could receive an extra 10 per cent or 20 per cent on the first $500 you save in your child s RESP each year. ipad is a trademark of Apple, Inc. BlackBerry, RIM, Research In Motion and related trademarks, names and logos are the property of Research In Motion Limited. 12 Solut!ons for financial planning

6 2013 Manulife Financial. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Manulife, Manulife Financial, the Manulife Financial For Your Future logo, the Block Design, the Four Cubes Design and Strong Reliable Trustworthy Forward-thinking are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. TMK1513E 04/13