What’s your investing “why?”

Q. My wife and I are in our 40s and about to receive a sizeable (for us) inheritance. We want to generate a minimum 8% annual return on the money and keep it safe, while at the same time minimizing taxes. We’re looking at putting the maximum allowed into the TFSAs of six family members, totalling roughly $350,000 since we think it’s a good way to minimize taxes. Is there anything else that we should be considering in this fortunate situation?

A. Keeping your inheritance safe and generating 8% return a year? Here’s a solution: Use your inheritance to buy a joint last-to-die life insurance policy. If you and your spouse don’t have an extended stay in this world, you’ll likely earn a safe 8% return. Just what you are looking for, right? Oh, that’s not what you meant?

Of course it isn’t. My life insurance suggestion would be a good solution if you were only concerned about the safety of your principal and generating an 8% return. But I imagine you take a broader view, and so to come up with a proper solution, you need to answer these three questions rather than jumping straight to the last one:

  1. What lifestyle do you want to achieve and maintain throughout your lifetime?
  2. What financial planning strategies and tactics will support that lifestyle?
  3. What financial products/investments are needed?

Let’s try to work backward from question No. 3. I like your thinking on the TFSAs, so keep thinking that way. Since you consider this inheritance to be family money, ask yourself how you can you make the best use of other family members to maximize tax savings and government programs.

Here are some quick ideas:

  1. TFSAs – Maximize everyone’s TFSA as you suggested. You can gift them the money now and they can keep it forever, or you could politely ask and hope they give it back to you when you need it.
  2. RESPs – If you have children or grandchildren, maximize their RESP accounts to get the federal government’s Canada Education Savings Grant.
  3. Canada Child Benefit (CCB) – Do you have children with children of their own? Make RRSP contributions to reduce their taxable income so they get more of the CCB.
  4. RRSPs – Gift your children money so they can contribute to their registered retirement savings plan accounts.
  5. Mortgages and debts – Put money towards existing mortgages and debts you and your children may have.

Trevor, take some time to ask yourself what you really want. I know it’s a tough question, and most people can’t answer it, but it is where your focus should be. Most people know what they don’t want, and they also know they want to maintain their lifestyle. Build from there.

Once you know what you want to do, ask yourself: “What am I waiting for?” Time moves fast and seems to speed up as we age. For instance, I watched the Tom Hanks movie Castaway on TV the other night and I didn’t think it came out that long ago. When I looked it up, I discovered the movie was actually released 19 years ago, in 2000. So ask yourself, what are the things you are putting off today to do tomorrow? What is holding you back from doing them now? Will you still have your health?

Once you are clear on what exactly it is you want to do, it will become much easier for you to figure out how much money you need to put, and where. At that point, look for investments that will support what you want to do. I’ll toss your initial question back to you and ask: What financial products are going to give you a safe 8% return? You may be out of luck here. It is possible there are some products that appear safe and offer an 8% return, but be careful.

It sounds like you are in a good financial situation, Trevor, but it’s important you take your time to figure this one out. There is no rush. It is better to lose a little interest than to rush and making a big mistake you can’t recover from.

Allan Norman is a certified financial planner and Chartered Investment manager in Barrie, Ont. Allan can be reached at alnorman@atlantisfinancial.ca

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning services through Atlantis Financial Inc.



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