Many clients are increasingly considering the idea of 'giving with a warm hand' or sharing their wealth with family members so they can see them enjoy the funds during their lifetime rather than as an inheritance after they pass away.YURI ARCURS PRODUCTIONS/iStockPhoto / Getty Images
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While most parents are conditioned to putting funds away on a regular basis, the draw toward immediate gratification can be too powerful to resist once they become empty nesters.
That’s why Mike Reilly, financial security advisor at Freedom 55 Financial and investment representative with Quadrus Investment Services Ltd. in Victoria, insists his clients’ spending always be guided by the goals of a comprehensive financial plan – even after all the debt has been fully paid off.
“The challenge is having a long-term goal that’s important enough to overcome the temptation to spend for today,” he says. “If buying a sports car or building an addition to a home will delay an important long-term goal such as retiring five years earlier, it’s best to know that beforehand.”
Most people benefit from a balanced approach in which any new source of money is proportioned depending on the significance of the goals, he adds.
“For example, if a couple has three goals like a home renovation, a European vacation with the grandkids, and a larger retirement fund, we can set up a program to allocate proportions depending on the understood value such as 25, 40, and 35 per cent,” Mr. Reilly says
That plan is then reviewed annually or more frequently, if desired, and adjusted accordingly to keep them on track. But there’s no cookie-cutter answer to what empty nesters should do with their newfound cash.
‘Spend your money’
The first thing Amrit Mavi, founder and partner at ATA Financial Group in Regina, does when he meets with new clients is start a discovery process to understand their situation, values and future goals fully.
At a minimum, he wants to ensure they have at least three to six months worth of income put away in a savings account. From there, Mr. Mavi reviews the feasibility of their retirement projections and asks whether they want to apply their freed-up capital toward retiring earlier than planned.
If they’re well on their way to meeting their retirement goals and have paid off all their debt with extra cash still coming in, Mr. Mavi gives them his blessing to spend more for today.
“Once empty-nesters reach this point in their lives, they should really start to enjoy their money as much as possible,” he says. “I tell my clients, ‘Spend your money as we all end up in the same place at the end of the day.’ Nobody knows when it may happen either.”
Giving to children and grandchildren
Sometimes, clients want the extra cash flow to be allocated to charitable or philanthropic goals. Many clients are increasingly considering the idea of “giving with a warm hand” or sharing their wealth with family members so they can see them enjoy the funds during their lifetime rather than as an inheritance after they pass away.
“With it currently increasingly difficult to enter the housing market, parents helping their kids save toward a down payment has become very commonplace,” says Melissa Harrell, a financial planner with McRae Wealth Management in Winnipeg.
“We also see a lot of grandparents who want to help provide for their grandchildren. They’re opening up [registered education savings plans] or getting permanent life insurance or critical illness policies for the grandchildren, so they know they’ll have a strong financial foundation when they grow up,” she says.
Clients who were busy saving for retirement when they were young and could not give their children everything they wanted now find they’re in a position to share with their grandchildren, she adds.
Tax efficient ways to withdraw funds
If clients are looking to set estate goals, Ms. Harrell will look at strategically setting up shares or permanent life insurance policies to be passed on to the next generation, or at tax-efficient ways to put aside funds for a charitable intention.
She says she tends to steer her clients towards putting their money in tax-free savings accounts (TFSAs).
“TFSAs are easiest – if you have the room, then you can contribute, have your money grow tax-free, and know it’s not taxable upon withdrawal,” she says.
She advises empty nesters who are looking to receive tax deductions by investing in registered retirement savings plans (RRSPs) to proceed with caution.
“If you have too much in RRSPs and pensions, then you will either push yourself into a higher tax bracket year over year in retirement, or you will have registered money left upon death and the tax bill to go along with it,” she says.
“The goal is to even out the withdrawal rate of registered funds over your retirement lifetime.”
Withdrawing from RRSPs could claw back at Old Age Security benefits as well, says Mr. Mavi, who also urges clients to max out their TFSAs in case they ever need access to cash in a hurry.
“When looking at retirement income, having access to cash that is tax-free may be a blessing,” he says. “Life happens, and bigger expenses come up all the time.”
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