Few people enjoy thinking about the inevitability of death, but it’s important to have measures in place to ensure that your financial dependants are adequately taken care of when you’re gone. When purchasing a life insurance policy, the size is largely based on the amount money your dependants will require upon your death. Determining the amount of life insurance you need depends on the following:
1. Income Replacement: A big factor for life insurance is income replacement, which will be a major factor when determining your life insurance needs. If you are the sole provider for your family or you simply want your family to be able to maintain its current lifestyle upon your death, you need to ensure that that your policy payout is large enough to replace you income.
2. Debt: All of your debts should be paid off in full, including mortgages, car loans, student debt, etc. If you have $20,000 in student loans and a $150,000 mortgage, you will need at least a $170,000 policy to ensure all your debt will be settled.
3. Future Expenses: If you are planning to pay for your children’s university education, you will need to estimate the cost of this obligation and ensure that it is included in your life insurance policy.
To most people, just the thought of retirement planning can cause them to feel overwhelmed and unprepared. Here are three common and avoidable mistakes that prevent many people from retiring ‘on time’.
1. Not starting early enough
People often make the mistake of not starting to save early enough, which results in years of foregone compound interest. The sooner you get started, the greater chance you have at reaching your retirement goal. The to key is to make saving for retirement a priority and start contributing to your nest egg as early as possible.
2. Not knowing how much to save in order to maintain your current lifestyle
An important question to ask yourself is ‘how much income do you need to maintain your current lifestyle in retirement?’ The vast majority of people are unsure how much they need, or they have made an inaccurate assumption. If they assumption is too low, the person could run into financial difficulty later in life and make unwanted changes to their lifestyle. If the assumption is too high, the goal of retirement planning may seem unattainable, and the process becomes discouraging. This is why it is important to work with a financial advisor to ensure that the amount you are saving will allow you to maintain your current lifestyle in retirement.
3. Not updating your retirement plan
Changes in financial position are very common at different stages in life. Income levels rise and fall, as do the markets, which is why it is important that your retirement plan be revisited every so often to ensure that you’re taking these changes into account. If your retirement plan was made prior to your first-born child, or an increase in your spouse’s income, the chances are your retirement plan is based on a lifestyle that is no longer relevant to you. It is important that you review your retirement plan every few years to ensure that the amount you’re saving is in line with your current retirement goals.
1. Minimize your Trading Commissions
Your trading commissions refer to the transaction costs charged when you make a trade. These costs can add up quickly and so to minimize them will result in significant savings to your portfolio. So how do you find savings across these costs? Speak with your advisor to see if there is a set fee or percentage that you could pay regardless of the number of trades that you put through. If you are using an online broker to hold your account and process your trades, then see if there could be a better priced one by using our Instant Savings Tool. The catch with online brokers is of course is that you won’t have an advisor monitoring your portfolio when you use discount brokerage accounts.
2. Save on your Investment Management Fees
Investment Management Fees come in many shapes and sizes. They could be expressed as MERs as in the case of Mutual funds and ETFs, or as Management Fees in the case of an Advisor’s Managed Account, or simply through trade commissions paid every time you make a transaction. If you are investing in mutual funds and ETFs, try using our Instant Savings Service to find potentially cheaper and potentially better performing mutual funds and ETFs. We have built this platform to allow you to search for funds which are in similar investment categories as your current fund, but which have had a higher performance, lower risk, solid ranking by Lipper, and most importantly a lower annual fee. We allow you to see instantly how much you could be paying on your current fund and how much you could save using the potential alternative funds. Enjoy your new found monies!
3. Focus on your Portfolio’s Asset Allocation
Whether you choose to try and beat the market with an active mutual fund or just want to replicate the market’s returns using an ETF, focusing on your asset allocation will save you both time and money. Setting and sticking to a prearranged asset allocation based on your comfort level is key to prudent portfolio management. Asset allocation refers to deciding how much to invest in fixed income (cash and bonds) versus equities. Essentially, the more safe you want to be, the more in fixed income your portfolio should be invested and vice versa. Once you’ve gone through the various potential allocations and have chosen the one which you are most comfortable with, have your portfolio monitored to stay within an acceptable range of say 5% of each allocation. Once an allocation goes beyond this limit, have the investments in the over allocation state reduced and the investments in the under allocation state increased. By ensuring this type of monitoring and rebalancing takes place, you will effectively be setting up your portfolio to buy when prices are cheap and sell when prices are high. This type of preset rebalancing ends up saving your portfolio significant monies. And how do you arrive at the right asset allocation? Ask your advisor to show you how portfolios of various asset allocations performed over the past 10, 20, and 30 years. This way you can see just how well they performed and also how poorly they performed. Before deciding on your asset allocation, you need to know statistics such as: what has the worst 5 year period with a certain allocation as well as the best 5 year period. Bear in mind that most mutual funds and ETFs don’t have 10, 20 , or 30 year track records. For this reason, have your advisor use the major market index returns as indicators of returns and risk. And if you’re having difficulty getting these numbers, not to worry as our portfolio analysis tool, which is coming very soon, will provide you with this information instantly!
Financial resolutions, like New Year’s resolutions, can be difficult to maintain. But good financial resolutions you follow will simplify your life, and make managing and growing your investments easier. Taking some time to address these issues now—and periodically returning to them—will allow you to automatically stick to your plan without the guilt and anxiety of letting them drop by the wayside.
Like a new year’s resolution, a financial resolution takes you through similar steps. Resolving your issue usually involves feelings of regret, failure, and pushing the issue to the side altogether. When you come back to it, you establish unrealistic expectations that you penalize yourself for, thinking this will ensure you will follow through with your resolutions…this year.
Attending to your finances is just about setting realistic and honest expectations and goals. For instance, many people don’t put enough savings aside, and needlessly become penalized by cashing in investment vehicles too early. Others panic and withdraw too early when markets act unruly. Some might not review and rebalance their portfolio yearly. But fortunately, all of this is avoidable.
By beginning the year with a focused attitude, willing to honestly evaluate your financial circumstances, can start you saving money and also earning more on your investments. Avoiding penalties and higher fees involves only a few hours of research and planning. You can easily plan ahead and set a date when you and your advisor will rebalance and review your portfolio. You can also set up automatic withdrawal with payroll at your work to allocate a certain portion of your savings to your investments. Realize that the penalties and extra costs you incur over the long-term can be a significant amount. What is more troubling however, is looking at how much that money could have earned if invested.
In the end, there is no single ideal time to make these decisions. The best approach is a long-term plan with many little tweaks along the way. A fair look at your investments and savings will do more to help you than pressuring yourself and setting expectations beyond your financial capabilities. Don’t put more stress on an already delicate situation. Remaining focused, clear, and consistent with your financial decisions is probably the best thing you can do for yourself this year. Most of us know what should be done. It is following through with what you know that is the most difficult part of a resolution.
Reviewing your insurance needs can be done when reassessing your financial plans. As your life and financial portfolio changes, your insurance needs and tolerance for risk must adapt. These changes might be due to the purchase of a major asset like a house or a life event such as marriage, divorce, or retirement. Either way, having appropriate insurance policies should be part of your financial plans in order to mitigate whatever uncertainties come your way. Why pay for an out-dated policy that doesn’t cover your immediate concerns?
Here are some things you need to consider when reviewing your insurance needs:
• New job: With a new comes new insurance benefits and policies that can be better or worse than your previous . Make sure your insurance policies reflect what you are now receiving. You don’t want to pay for something you are already receiving. Neither do you want to be uninsured for something you were insured for previously. Reviewing your insurance needs during major financial and life events ensures you keep up with changing circumstances.
• Extensive renovations: If you make a major change to your house that doesn’t reflect the new value of your home, you risk not being properly insured in case of an accident.
• Growing your family: Updating your insurance after having a baby will protect your family in case of injury or death so they can expect a similar lifestyle even with half the income. Likewise, once your children leave the nest and become financially secure, your policy should change to avoid paying for things you no longer require.
• Estate Planning: Covering all your debt, obligations, and support after your death is important. You want to make sure your death is not an immediate financial burden, that expenses are covered, and support is in place for family members. Also important is to update the beneficiaries of a policy to avoid messy legal issues, and understand the tax implications of your insurance policy.
A financial advisor can help you determine your insurance needs, and can easily be found using Optimize’s Advisor Search tool.
Much of the hype around a mutual fund is placed on the person managing it. In the world of finance, fund managers have garnered celebrity like qualities, with much of this having to do with the star rating systems, popularized by investment research agencies like Morningstar. Within this star rating world, 4 and 5 star rated managers represent to many the crème de la crème of mutual funds. For some, having a 5 star coveted manager is a bragging right. For others, it is a sense of security that their investments are in the right hands.
But the question is, how predictive is this star-rating system? Do highly-rated fund managers really offer the consistent returns and security people crave? The answers to these questions are at best, mixed. For example, some newer fund managers who are highly rated, have only been managing for 3-5 years. If they took control of a fund during a bull market, the rating system over this one period may not fully depict how skillful they actually are. A more appropriate 10+ year ranking would certainly provide more clarity.
It is important to realize however, that neither a fund’s past performance nor its star ranking can predict the future outcome. There are currently many 4-5 star rated funds that a decade ago lost 80% of their value in one year, then another 50% a year later. It is also important to consider that the performance of a fund is also based on the amount of risk it takes on. While one tends to focus on the benefits of a fund, one also needs to be prepared for potential huge losses during a bear market.