I had the opportunity to catch up with an old friend by a dock earlier in the summer.
He is a true entrepreneur who took a calculated risk, established a successful business, sold to a multinational, had a brief retirement (at age 40) and a few years later is looking for the next challenge.
With those buyout funds in hand, he observed the recent economic turmoil with much skepticism about market investing. Actually he was a skeptic well back in time, and those funds never left the safety of his bank account. Even so, he knows he can’t remain on the sidelines forever.
So as summer comes to a close, here is what we threw about, apart from the horseshoes and mosquito swatter.
Run a business, if you are so inclined
My friend firmly believes that true wealth is built through active business management. And given his track record, I can’t disagree that a well-run enterprise can net impressive results – emphasizing the requirement to be well-run.
In actuality, he is something of a zealot when he extols the virtues of running a business, and more specifically the benefits of running a business through a small business corporation. He is living proof of the value of the small business rate, spousal income splitting and the lifetime capital gains exemption. Heck, he almost bubbles over in recalling the joys of a well orchestrated salary-dividend mix.
However, running a business is more than merely a financial decision, whether tax-driven or otherwise. In many ways, it’s a lifestyle choice, and has to be undertaken with that aspect clearly in focus.
Kill the mortgage
There is perhaps no more clearly predictable rate of return on applied money than to eliminate a big debt like a mortgage. Somewhat ironically, that kind of arithmetic certainty dovetails well with the more nebulously measured emotional comfort of being mortgage-free. Hey, it’s your home.
In his case, he had already achieved this prior to the business buyout.
That’s not to say that he was pursuing mortgage retirement to the exclusion of retirement savings. Rather, he placed more proportional emphasis on the mortgage than any raw calculus might explain.
Now being free of that debt burden, he is committed to becoming more knowledgeable and effective in fashioning his retirement income plan.
Getting 20% upfront on your RESPs
As people within the financial service sector, sometimes we forget that those outside the field have things on their mind other than the nuances we see much more regularly.
For instance, my friend was not even aware of the 20% Canada Education Savings Grant he was receiving on his RESP contributions. Thus, he was only contributing paltry amounts well below the $2,500 limit upon which the current year’s entitlement would be maxed out.
On the positive side, now that it is possible to pick up past years’ unused room, he will be able to get up to $1,000 CESG annually by putting in $5,000 for each of the kids until he catches up. Yes, he’s the same skeptic about market investments, but that’s a whopping tax/support benefit left on the table if that CESG is not unclaimed.
It remains to be seen whether he is inclined to make any further use of the RESP tax sheltering room beyond the CESG entitlement thresholds.
We differ on life insurance
While we are roughly on the same page that life insurance is a top priority matter for income replacement purposes, beyond that we diverge a bit.
He waffles on what to do with current life insurance, given the lack of an income replacement need. In not so many words, he defines that need in terms of whether his family would suffer a drop in lifestyle should he be removed from the equation. In that context, I agree that he does not need to replace income.
That said, terminal taxes and final debts loom, distant though they may be in the future. A tax-free death benefit may make sense to service that eventuality. Past premium payments are water under the bridge, and future premiums continue to be priced based on an earlier age.
A consideration of the internal rate of return of continuing premium payments may prove fruitful. That’s the kind of analysis an entrepreneurial business mind can appreciate.
Do the Wills
Actually they have done their Wills, but that was well before the business came to together and was later harvested.
The tax benefits of testamentary trusts may have been a passing topic in those earlier estate planning discussions, but now the benefits are very real – for the couple, the kids, and who knows who or what may come up in summers ahead.