How should I organize my finances & investments if I’m newly widowed?

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By Julie Cazzin and Allan Norman

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Q: I am 73, newly widowed and struggling with how to set up my investments as well as with how to minimize taxes on a fixed income. I’d love some tips on how to get things organized as well as who to look to for help. Any suggestions? — Shelly

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FP Answers: Shelly, I’m sorry to hear about your loss. I am assuming you have done the immediate necessary financial things such as contacting the Canada Revenue Agency (CRA), reorganizing your banking, reviewing the title on your home, organizing your bill payments, and reviewing as well as updating your will and powers of attorney, which is why you’re now asking about investments, staying organized and keeping a check on taxes.

Probably the best place to start is with the big picture and then work toward the details. You can do this by preparing and analyzing your current and projected net-worth and cash-flow statements. The time to set up your investments is after you have done this analysis for your new financial situation.

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As you do your analysis, keep in mind the three wealth destroyers: tax, inflation and the cost of using money — namely, fees and interest. I’ll explore the three wealth destroyers so you can look for areas of improvement while analyzing your net worth and cash flow.

Taxes

Personal income taxes will likely be your largest lifetime expense. However, you are permitted to arrange your affairs to minimize the amount of tax you pay. Think about how you can apply these next three ideas to improve your situation:

Don’t overpay your taxes to receive a refund at the end of the year.

Keep as much of the first dollar earned for as long as you can. This often means using tax-free savings accounts (TFSAs), registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs), and sometimes permanent life insurance as well.

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Use the power of the economic family unit to reduce taxes on income and assets over time. For instance, does it make sense to gift money to children now?

As well, consider if there are ways to improve your situation by minimizing your taxes and their impact on government pensions, credits and benefits, and your total wealth.

Inflation

Probably the best description of inflation I have heard of is to think of it as a rising tide. While you are working, you’re in a life raft that rises with the tide and you are not affected. That’s because pay raises hopefully keep pace with inflation, even though there may be some adjustment periods. Once you retire, you are standing on a buoy anchored to the ocean floor. As the tide rises, you slowly notice the water at your feet, then your knees, and you start to wonder if you will survive.

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Do you have a balanced investment program that protects your capital while making income withdrawals and provides enough growth to protect you from the impacts of inflation?

Costs of using money

There are costs that will reduce your overall wealth when you invest or borrow money. Costs cannot be avoided, but they may be either minimized or considered acceptable based on the product and services provided.

Now, let’s bring in your current and projected net worth and cash flow. As you look at your statements, consider which assets are liquid (cashable) and which aren’t. Also, think of the tax characteristics of each asset while you hold it as well as when it’s sold. How will that tax affect your taxable income? What assets do you have that will protect you against inflation and are the fees for those assets reasonable?

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Even if you don’t know the answers to those questions now, they will naturally start coming just by preparing the documents and thinking about your assets, liabilities and cash flows.

Your current and projected net-worth statement is an indication of your wealth and your financial stability. The statements include an itemized list of all your assets and liabilities (debts). Assets may include properties, vehicles, investments (TFSAs, RRSPs, etc.) and art work, while liabilities may include mortgages, lines of credit, credit cards and vehicle loans.

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The cash-flow statement works in conjunction with your net-worth statement and highlights your income sources and expenses, including taxes and how they may change over time.

You may have noticed that as a single person now, you can no longer pension split. As a result, your personal taxes may have increased, and you may be subject to clawbacks on the age credit as well as on Old Age Security payments.

Shelly, what are your net-worth and cash-flow statements telling you? Do you have enough wealth to maintain your lifestyle? Is it just enough, more than enough, or not enough? Each scenario has its own issues to be solved, but, again, if you lay it all out to see the big picture you can start to work on the solution.

Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (IIROC.ca). Allan can be reached at [email protected]

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