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Balancing future needs with ‘right now’ needs

Life transitions can trigger investors to withdraw investment income early, but the right strategy can ensure future needs are also addressed

By: MARJO JOHNE

Date: April 28, 2016

When life happens – a job loss, the birth of a child or the end of a marriage – financial priorities often shift to focus more on the needs of the moment. This shift may, in some cases, trigger an earlier-than-planned withdrawal of investment income.

While it’s hard to know for certain how many Canadians have cashed out some or all of their investments before retirement, data on registered retirement savings plan (RRSP) withdrawals provides at least a partial glimpse of the big picture. According to Statistics Canada, 1.82 million Canadians made an early withdrawal from their RRSP in 2012. By comparison, about six million contributed to an RRSP in the same year.

Guided by the right strategy, investors facing tight or uncertain financial circumstances can strike the right balance between a current need for investment income and an ongoing imperative to keep saving for the future. To help investors balance “right now” needs with future needs, advisors should work with them to create a plan that clearly defines what investors are saving for, says Kari Holdsworth, vice-president, individual wealth at Sun Life Financial in Waterloo, Ont.

“The idea is you define the categories you want to save towards – these could be categories such as protection, growth and income – and then consciously spread your scarce savings into these buckets,” says Ms. Holdsworth. “This way, you know you’re making progress in all of them. Without such a plan in place, you could be doing a great job of building up an emergency fund but find yourself 10 years behind in retirement savings.”

It’s important to choose the right types of investment instruments, says Ms. Holdsworth. Tax-free savings accounts (TFSAs) are ideal for investors who want a lot of flexibility. In addition to the benefits of tax-free growth and withdrawals, TFSAs are especially useful for addressing income needs today and in the future because they allow withdrawals to be re-contributed.

Ms. Holdsworth notes that investments providing a guaranteed lifetime income can also be purchased through a TFSA. This adds another layer of ease for investors who want growth as well as stable income in the future.

Timing can be important when taking out funds for “right now” needs. Ms. Holdsworth warns against taking money out of investments when markets are down and asset values are low.

“This will significantly deplete investors’ savings,” she says. “If possible, they should time their withdrawals for when markets are strong.”

Cherise Berman, a fee-for-service advisor with Bespoke Financial Consulting Inc. in Toronto, says it’s also a good idea to look at ways to trim expenses before taking money out of investments. When working with clients going through a transition, one of the first things she does is ask them to create a budget. This gives them a clear idea of how much they’re spending and what they can cut back on or defer to minimize the impact on their savings.

“We find that clients are surprised when they go through this exercise, and as they list their expenditures they’re already identifying areas they can cut back on,” says Ms. Berman. “It’s a real eye-opener for them.”

Ms. Holdsworth notes that a comprehensive plan to address current and future income needs goes beyond putting money into savings and investment assets. She suggests that insurance should also be a component of an investor’s financial portfolio.

“After creating a savings plan, the next thing that needs to be done is to put the right insurance in place,” she says. “Life insurance will help cover short- and long-term income needs after the death a spouse, while critical illness insurance can fund medical treatment and make up for lost income.” Insurance is especially important for younger investors who are just starting to build their portfolio while juggling other priorities such as saving for a house and paying for child care.

If investors do need to pull money out of their portfolio during challenging times, Ms. Berman points out that they should also have a plan for replenishing their savings once their financial circumstances improve.

“They’ll want to look at the bigger picture and figure out how much they need to meet their goals,” she says. “If they determine that they need to save more, they may want to double their contributions if their cash flow permits.

“But this is where creating a budget really helps. Saving is usually about trade-offs, and when you have a budget, it’s easier to identify what you can do without so you’ll have more money to save.”

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