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Family's wealth: a guide for smart families

21 October 2015 by National Bank
Family's wealth: a guide for smart families

How can you protect and grow your family's wealth over the course of your life? According to two experts, it has to do with choices and education. Here are some tips for each stage of a family's life.

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Choose the right savings vehicle at the right time

When a family is young, there are a lot of expenses being incurred at the same time. These include baby supplies, the purchase of your first home, impromptu renovations, a loss of income during parental leave and maybe even repaying student loans. Since there may be limited funds available for savings, it is important to choose the right vehicle.

Also, when choosing between RRSPs, TFSAs and RESPs, there is a clear choice, suggests Daniel Laverdière, Senior Manager, Financial Planning and Advisory Services at National Bank Financial. "RESPs are preferable because unlike RRSPs and TFSAs, contribution room expires when children reach the age of majority."

"The advantage of RESPs is that you can defer paying taxes on earnings," he adds. "This tax will be paid by your children, but they will definitely have less to pay than us. Lastly, it is federally and provincially subsidized, and this subsidy can total up to 30%."

On the other hand, RRSP and TFSA contribution room accrues every year. "You have your whole working life to catch up," states Mr. Laverdière.

Protecting your family when it counts the most

When you dive head first into raising a young family, you don't usually have time to think about your own future. What if you get into an accident or pass away? Since you're in the prime of your life, you think you're invincible. But this is the time when you have the most to lose.

"Take, for instance, a young doctor at the beginning of his career," Daniel says. "He just built a house, and has a spouse and three children who depend on his salary. If something happens to him, his family will be in need."

"By taking out life insurance, you can protect the value of the human capital that you worked so hard for," he adds. Because when you think about it, in case of death, an entire life's salary is lost.

For the same reason, we suggest doing an inventory of items that your group insurance covers in case of disability or critical illness. If you are not covered, additional insurance can protect your income in case of misfortune.

Make your children's financial education a priority

"You have to talk to your kids about money," suggests Sophie Ducharme, Vice President, Trust and Consulting Services at National Bank. "This way, they can become responsible for their own personal finances."

This is timely advice, since a recent survey* found that over half of students consider their parents to be "ATMs."

Daniel Laverdière takes the idea even further: "When your kids turn 18, you can put a bit of money into their TFSAs. This is a good way to help them build capital. They will receive their first returns, meet an advisor and think about their investor profile. So when they become financially independent at 25 or 26, or when they finish university, they will already have a few years of experience in personal finance."

Don't lose sight of your goal, even when your kids are at school

For many parents, the last 10 or 15 years before retirement can be a financially risky time. In fact, people in the "sandwich generation" are stuck managing the needs of both their adult children who are not yet independent, and those of their own parents at the end of their lives.

It's possible that you'll have to scale back on your own lifestyle, eat out less frequently and dip into your savings. However, you shouldn't lose hope: your children will soon be flying solo, the house will be paid off and you'll reach top pay at work.

Your early 50s are a critical turning point to ensure the longevity of your family's wealth. Critical, because there's still time to get on the right track.

But to do so, you need to get a clear picture of your family's wealth, retirement income and estate plan.

Sound estate planning

In terms of estate planning, the big question is: when should you transfer your estate? Is it better to do it progressively, when you are still alive, or all at once after passing away?

People take advantage of the former option to rollover RRSPs to their spouses, which reduces the tax that the surviving spouse has to pay on the estate.

But Daniel Laverdière says to be careful: "When you choose to transfer your estate after you pass away, that means that your inheritance won't be passed down until after the surviving spouse is deceased. According to statistics, this second death usually happens around 90 or 95 years old. So, if you had your children at 30, they'll be getting their inheritance at 60-65, when they're retiring!"

"It would be a bit late to help them," concludes the advisor. "They will have already gone through diapers, private school, hockey games, and buying a house. When families are young, their needs are greater."

"But of course, before you start to give," Sophie states, "you have to make sure that you have enough money to meet your own needs. It's great to give, but you shouldn't put your own financial health at risk."

All of this is a lot to consider, and a financial advisor's support is indispensable to help you weigh all of the pros and cons of this complex question.

There is more than one way of protecting and growing the value of your family's wealth. It's all about choices.

What will be the secret to your financial success?

Some of the lifestyle choices that will have a direct impact on your family's wealth include sending your kids to private or public school, buying a cottage, taking trips down south every winter, or going out for lunch every day.

As the head of a household, you can work on reducing household expenses, or aim to increase your income. You can even work on both at the same time!

What do you think would make the biggest difference in your family's financial success?

*These numbers were taken from an online survey conducted by CIBC between August 13 and 17, 2014. 1,001 Canadian parents who were signed up for the Angus Reid Forum responded.

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