All posts by Adrian Mastracci

How to handle windfalls, inheritances, gifts, estate freezes

“We should all be concerned about the future because we will have to spend the rest of our lives there.” — Charles F. Kettering (1876–1958), American inventor

Will a lifetime of work help the next generation’s financial security? Let’s imagine.

Boomers and younger generations often receive cash and other financial assets from several sources. Three popular ones come to mind, such as inheritances, gifts and estate freezes. Let’s call them wealth transfers or windfalls. Some are modest while others are substantial. All ought to be much appreciated.

In Canada, the value of transfers is estimated to exceed $1 trillion. Similarly, the US ballpark is likely higher than $10 trillion. These windfalls serve as a welcome boost for ageing boomers. Especially where the nest egg is in need of a little help.

Inheritances consist mostly of family homes, cottages, land, income properties, stocks, bonds, mutual funds, family businesses, cash and term deposits. Gifts typically include cash and equivalents, savings and a variety of deposits. An estate freeze often involves private companies, family businesses, farms, income real estate and family trusts.

Don’t make any snap decisions that cannot be reversed. Don’t sell things you now own or buy anything new, like stocks or real estate.

Receiving a wealth transfer is like winning the lottery. We are human and can fall prey to emotional, spur of the moment decisions. Avoiding the pitfalls of dealing with our exuberant feelings of sudden wealth is not always easy.

No need to rush

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Two free lunches: Diversification and Rebalancing

“Excellence is not a skill. It is an attitude.” — Ralph Marston

Diversification and Rebalancing strategies are two essential, time-tested portfolio tools. They improve your chances of achieving better consistency of long-term returns. Tasty free lunches are still being served in your investing patch.

Diversification spreads your risks among a variety of investments. Rebalancing makes periodic adjustments to bring allocations back in line with targets set within your road map. I assume that your road map is in place.

Experience shows that asset mix decisions have the greatest impact on your portfolio returns than any other factor. The foundation of investing your nest egg requires patience, discipline and clear investment policies.

Diversification is one necessary safeguard. You don’t want problems arising in any asset class to ruin your well designed portfolio. Diversification increases the odds of you being right more often. If some selections are suffering, others can help cushion the rest.

Initial allocations and weights of your portfolio selections will drift over time as markets rise and retreat. When drift becomes significant, it affects your investment profile and typically requires some re-balancing.

Periodic rebalancing strategies sell some assets and buy others within your asset mix. My preferred time to rebalance is when you inject new money into the portfolio or withdraw some. Use rebalancing techniques as portfolio tweaks, not for wholesale changes.

Possible ways

I highlight 10 ways to achieve portfolio changes: Continue Reading…

6 ways to ensure you won’t outlive your money

“Retirement: World’s longest coffee break.” —Author Unknown

Over the years you’ve taken plenty of advice, saved and invested diligently. Now you and your family are knocking on retirement’s door or, perhaps, in its midst.

The good news is the family members will likely live longer than before. The flip side is that more money may be required to fully fund retirement lifestyle.

Let’s assume that retirement spans from age 60 to 90, often longer. Many worry that the money won’t last and runs out during retirement.

Analyze life expectancy of the immediate family members for both spouses or partners. Specifically, review the current ages of grandparents, parents, uncles, aunts and cousins.

Some are petrified at the mere thought of such a prospect becoming reality. The question becomes what you can do to at least contain this situation.

I summarize six essential ideas designed to ballpark your lifestyle needs and help your retirement money last:

1. Family life expectancy

Analyze life expectancy of the immediate family members for both spouses or partners. Specifically, review the current ages of grandparents, parents, uncles, aunts and cousins. Get familiar with the ages attained by family members that have passed away. Pay attention to patterns of critical illness and longevity.

Today, it is commonplace for many to live well into their 80s. It is wise planning for a family to expect that at least one spouse could easily live past age 90. Another expectation is that family longevity continues to increase. Updating the retirement projection refreshes the family’s capital needs for the desired lifestyle.

2. Becoming too conservative
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Blend income splitting with retirement strategies

My investing premise is straightforward: Splitting family income is very beneficial. Take full advantage of all provisions that apply.

Think of income splitting in the same breath as your retirement planning. In my view, the two camps ought to fit like a glove to deliver the best value. Families are keenly interested in paying the least income tax. There are a few low-cost activities left on the platter.

It’s never too early to get familiar with the menu. Let’s blend income splitting with your retirement strategies.

Ideally, a family pays less income tax where two spouses achieve similar income levels. Equalizing incomes allows each spouse use of the graduated tax scales from low to high.

Another beneficial goal is to equalize asset levels as much as possible. Retirees who reduce the “clawback” retain more of the OAS pension and, perhaps, the age credit.

A dozen tips for splitting income near retirement

Utilize these income splitting tips before and after retirement: Continue Reading…

Reverse engineering your Retirement

I started my university days happily pursuing engineering studies. Then, in my third year, I discovered my new passion and began moving to finance and business.

It turns out that engineering has allowed me to assist clients in managing their nest eggs. Mixing engineering concepts with wealth strategies pays off, so let’s look closer.

What is reverse engineering?

Reverse engineering usually involves taking an object apart and analyzing it in detail: something that engineers are skilled at.

I specifically refer to reverse engineering of retirement goals: working backwards from the desired end results to design a prudent plan for each family.

Reverse engineering retirement consists of two main components:

  1. Estimating the size of nest egg that represents the retirement goal.
  2. Ballparking the investment rate of return to achieve or maintain that goal.

Let’s consider this sample situation:

Assume the nest egg to be accumulated is $1,500,000. Say there are 10 years to go until retirement and today’s portfolio value is $700,000. That implies an annual return of over 7.9% to get there. Perhaps optimistic for today’s low-return environment. Continue Reading…