Written for Lawyers Financial by Saijal Patel
Whether you’re getting ready for retirement or are already retired, this next stage in life will be full of important decisions. At the top of the list: how to preserve your hard-earned wealth, while also living (and spending) in the moment.
Preserving wealth requires a different mindset and discipline than growing it.
It calls for a comprehensive plan to manage your assets, minimize your taxes, and transfer your wealth on your own terms.
Here are four strategies for preserving wealth in your golden years:
1. INVEST FOR INCOME, NOT JUST GROWTH
Making bets on a few high-risk investments may score you big gains, but they can also lead to substantial losses if there’s a downturn in the markets. If you want to preserve your wealth, you’ll need an investment strategy to manage your downside risk and build a consistent revenue stream to replace the money you’re spending.
To do this, create a balanced growth-income portfolio that will grow in real terms beyond inflation with a portion in income-generating investments. Examples of assets that may fit the bill include blue-chip dividend stocks, defensive stocks, corporate bonds, real estate investment trusts, equity in residential or recreational real estate, and alternatives such as private equity, art, and even wine.
Diversifying your wealth across different types of assets will also ensure that when a market event causes some investments in your portfolio to fall in value, other investments will benefit and protect your portfolio on the downside.
2. HAVE A “TAX-MINIMIZATION” PLAN
While you can’t completely avoid taxes, there are plenty of strategies to help you minimize them.
Here are a few:
Optimize income withdrawals
Your income may fluctuate in ways it didn’t during your working life, and your plan will have to account for one-time events—like sales of investments or investment property. Review your RRSP and spousal RRSP to see if you’ve used the right tax-splitting strategies. Set out a plan for when to draw funds from your registered accounts (RRSPs or RRIFs) and when to draw on your non-registered investment accounts or TFSA. It's a good idea to review this plan every year.
Leverage your corporation
A professional corporation or holding company is subject to different tax rates than individuals. It also offers greater flexibility as to when you withdraw income and the type of income you pull out. For example, in years when you find yourself pushed into a higher tax bracket, you can reduce your overall salary by choosing to leave profits in your corporation. Claiming income as dividends also has more favourable tax consequences than salary income and can also be strategically planned within the guidelines.
Use capital losses and capital gains exemptions
If you have capital losses, fifty per cent of the loss can be subtracted from capital gains you make in a particular year, thereby reducing your taxable income. You can also control the timing of the claim because these losses can be carried back and forward.
You may also be able to leverage the lifetime capital gains exemption ($913,630 in 2022) and get a significant tax benefit if you dispose of qualified small business corporation shares, or qualified farm or fishing property.
3. HAVE AN ESTATE PLAN IN PLACE
Many people mistake having a will for having an estate plan, but a will is only one piece of that plan. In fact, the biggest leaks happen when assets are transferred, and the tax impact of those transfers can significantly diminish the wealth you leave to your loved ones.
Upon death, your property will be considered a “deemed disposition” at fair market value, triggering a capital gain unless you have a spouse who can elect for a rollover. Additionally, your estate will most likely be subject to probate taxes (the amount varies based on province or territory).
A good estate plan can put measures in place and use different tools to reduce or defer the taxes your estate must pay. For example, your advisor may recommend setting up a trust or start passing down wealth to your children before death, especially if they’re in a lower tax bracket than you.
4. USE INSURANCE TO MANAGE RISKS
Life and health insurance play a critical role in restoring income or wealth that’s lost as a result of an illness or death. For example, if you rely on your partner’s pension and your partner passes away, you may no longer be eligible to receive those benefits. In that case, life insurance can replace all or a part of that lost income.
Another wealth preservation tactic is to buy long-term care insurance. The cost of 24/7 care can quickly add up If you or your spouse become ill and require full-time support.
Lastly, life insurance can help minimize taxes and facilitate your wishes in a cost-efficient way. Suppose you plan on transferring assets to one or more parties. That can trigger a large tax liability, leaving your beneficiaries with three choices: pay, negotiate a buyout from another beneficiary, or sell the asset. None of those choices may be your intention. The proceeds from life insurance can lessen that financial stress.
We can help
Whether you're approaching retirement or already enjoying it, we can help you create a plan that prioritizes wealth preservation while you prioritize living your best life.
Saijal Patel is a financial-wellness advocate and host of Strictly Money.