Financial Independence (and more on how NOT to have a short retirement)

I guess we’ll start with how to have the shortest retirement.
It’s fairly formulaic: Work for 40 years. Retire at 65. Sit on couch. Die next year.

Ok, so that’s tongue-in-cheek but there are certainly stories told of precisely that; folks who spend their entire adult lives socking away into pension plans and RRSP’s until they hit that magic number, only to find the ennui of career-lessness expediently terminable.

What bulwark might we erect against such tragedy, other than getting a gym membership and laying off the smokes?

Financial Independence vs. Retirement

I don’t care much for the label “Retirement”. There is too much baggage associated with it, I feel, which often leads to a narrower vision of the possibility space for financial goals.

To be sure, a LOT of people benefit greatly from having structure provided to them rather than building their own. Probably most.

I can’t see what harm could stem from understanding which opportunities exist out there in the ether, regardless of whether you seize them.

So, my preferred moniker for those Golden Years in the latter chapters of life is “Financial Independence”. We can define the condition in general terms.

An asset is anything that pays you income without the requirement of your labour. Some obvious examples are interest earned in a savings account (do they still pay that?), dividend income from public stocks, or net rental income (among countless others). Even paying off a debt could be considered an asset, given it reduces your expenses. And reducing your expenses is not a taxable event!

You’ll want a bunch of different types of assets so you have a diversified income stream and you don’t “Unretire”, as a friend of mine once described his financial history. Ghastly language and I must emphasize he was and is NOT a client.

Then you establish your lifestyle requirements, including or excluding debts depending on how you want to set your budget up and your personal feelings toward and appetite for holding debts.

Financial Independence is the point at which your assets produce income greater than or equal to your lifestyle. At a high level, it’s that simple.

A Case Study

I was conducting a planning review with a long-term client (we’ll call her Emily). When we first began implementation, she was 36 and we put a 10-year Financial Independence program in place. Our recent review was five years into the 10.

Now, we haven’t followed through with all my initial recommendations, so I was interested in where we stood relative to the original projections.

Obviously 45-50 is an aggressive retirement target compared to standard age-65 planning. It is certainly more achievable than most might think, but this isn’t a how-to article.

And then there’s the question of what she’s going to do sitting around all day.

Part of what makes this plan work is that Emily has a goal of doing humanitarian work abroad when she becomes Financially Independent.

This plan is really about liberating her time to pursue interests and activities she finds intrinsically rewarding, including charitable ones.
Our deal is that she’s going to save aggressively while she grinds out her current contracting arrangement in to a multi-faceted set of investment strategies.

Then, once she has socked away enough of a nest egg, she can move on to other, relatively low-paid employment. She can make sufficient earnings to pay her bills and she won’t need to touch her other investments until 10-20 years down the road, if/when she decides to cease all employment.
Well, it was a good news meeting as it turned out our age-46 target had become 47.

There is a ton of redundancy built-in also, although I prefer to let that hedge out other various risks and be pleasantly surprised by windfalls than be more aggressive with her timeline.

Thinking More Broadly

And so there are plenty of ways to think about structuring your own retirement. I have clients who take “Retirement Years” over the course of their working life. They love to travel for extended periods of time and are, in this way, able to make the most of their youth in going to places that are less accessible as one ages. We just build it into the plan.

I even think about my personal family goals in an outside-the-box manner which I shamelessly ripped off of author, and Lifestyle Architect, Tim Ferris. His model laid out in the 4-Hour Work Week is to take “Dreamlines” where he relocates for 3 months, picks up a new language and a new skill.

For me, an example of this would be to move to Catania, Sicily at the foot of Mount Etna (the second most active volcano on the planet!). I’d pick up some Italian and learn how to make proper pizza. I’ll never think of pizza the same after a port calling in Messina found me in a tiny, alleyway restaurant in Taormina. I need to make that pizza.

The reality for me is I won’t likely EVER retire in the traditional sense. My work is very rewarding and I have wonderful relationships with my clients, why stop? Financial Independence is really just about living on your own terms.

And so, the challenge is to dream. Expand your thinking about what is and is not a possibility for you in your life and try it on for size, see how it feels. This could lead to practical steps, like planning a trip to explore places you might consider spending extended periods of time. At the very least you’ll come back with great stories!

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Learn to Understand Human Capital and your Financial Well-Being, the easy way.


Life-threatening cancer. Permanent disability. Premature death. These are all facts of life. Not pleasant ones, but very real ones.

When we think about building a robust financial plan to accomplish family goals, we need to crash-test it. From my perspective as a financial planner, it’s not a matter of if one of my clients is going to experience a catastrophic life event, but simply a matter of when.

So, we build our financial plans assuming everyone gets cancer to make sure all family goals can still happen.

What is Human Capital?

Human Capital is the potential to convert your labour into dollars and cents over the course of your life. Simple math can demonstrate the scale of what that amounts to, especially for younger folks. We’ll start with a stripped-down scenario and layer on more assumptions.

A 30-year-old person planning on working until 65 with a $50,000 after-tax, annual salary, just with simple multiplication, will earn $1,750,000 over their working life. That’s no chump change. We’ll just assume that person got raises matching inflation yearly, so that figure doesn’t need to be adjusted downward to account for the effect of rising price levels.

And if, as is generally the case, your later income years are your highest… Well, you can see how substantial that figure can become.

How do I protect my Human Capital?

Your Human Capital is typically the greatest single asset a person has in their young adult life. You insure your house; how are you going to pay for your mortgage? If the answer is “go to work,” then it is more than sensible to insure against that catastrophic scenario.

The three tools we employ are, in prioritized order, Disability, Critical Illness, and Life Insurances.

Disability (DI) Insurance

Our first line of defense is Long-Term Disability insurance. I regularly sit down with clients to discuss our bullet-proofing plans and ask about their group insurance. People invariably can tell me how much money they have allocated for massage benefits but have no idea whatsoever about their group Long-Term Disability insurance. That coverage is far and away the most important in the package.

High quality Disability insurance is designed to replace your monthly income in the event you can’t work due to illness or injury. Most group benefits plans pay tax-free benefits also, but this varies from plan-to-plan. And there are other bells and whistles that may or may not be attached to the plan.

Most group plans have a key weakness, namely how they define “disability”. Having reviewed hundreds of group benefit plan coverages, almost all contain what is known as an “own occupation” definition for the first 24 months you are disabled, which is what it sounds like. The idea is that you are covered if you can’t perform your job functions. The coverage then typically reverts to “any occupation” AFTER 24 months, which is also just as it sounds. Can’t develop software anymore but you can push a broom? Tough nutties, you aren’t covered.

I always recommend reviewing this coverage to make sure it is sensible for the individual and then we can supplement with individual coverage accordingly.

Critical Illness (CI) Insurance

I speak regularly with Canadian who make off-handed remarks about how great it is to have “free” healthcare in the Great White North (usually by contrast to our Southernly Neighbours). It’s at that point that I realize they likely have had limited engagement with the health care system. As a Type-1 Diabetic, I am constantly engaged with various doctors and pharmacists in the Canadian healthcare system; I can assure you it is NOT free to use.

Critical Illness insurance provides a one-time, lump-sum, (generally) tax-free payment designed to help a family weather a period of increased costs and reduced income while undergoing treatment for a covered condition. Coverages vary, but almost all policies will provide a payout for heart attack, life-threatening cancer and stroke (the Big Three), potentially including a host of other conditions such as severe burns, loss of limb, paralysis, Alzheimer’s disease, etc., etc.

The policy can be structured in many ways, but I generally recommend mapping the duration of the coverage onto a retirement plan. Once you retire you should be “self-insured” for these risks, having saved sufficient funds along the way to insure this risk with said funds.

More and more group insurance plans are beginning to include some amount of CI, although this typically is a token amount like $25k and the covered conditions can vary broadly. I generally recommend total coverage of about 2-years gross salary.

Life (LI) Insurance

Most people are aware of Life insurance and its purpose, so I won’t spend much time here. The reason it should be mentioned is that part of a proper Life insurance needs analysis is to calculate income replacement for survivors. The same logic applies as with Disability above; how are your spouse and/or children to pay for their mortgages, educations, costs of living, etc. without your income?

Again, proper analysis will use a time-value of money calculation which can be complicated for the lay person. I’d recommend getting assistance from someone who knows what they are doing there also.

The Main Point (TLDR;)

There are times to play the odds to your advantage and there are times to hedge your bets. If the risk is financial ruin and the joint probabilities of disaster are between 50-75% (https://insureright.ca/calculator/#analysis)…

Hedge; don’t bet.

Check out more of what we do and how we do it.
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How to Retire Well – Build your three-layered pyramid.

You can picture it in your mind, that image of the attractive, elderly couple smiling in a sunbeam? Aren’t they cute? And then we see the tag line about the importance of planning for your future, being generally responsible with your money, getting “Cash for Life” or something of the like. To retire well.

But what does it mean to retire well? How should I think about and plan for my golden years?

I like to visualize a sound retirement plan as a three-layered pyramid.

The Foundation – Your Financial Independence

The most important component of the program is a solid foundation, namely your Financial Independence. I define Financial Independence as the accumulation of assets (assets simply being anything that earns money for you without labour) such that the income from your assets is greater than your lifestyle expenses.

The particulars of how much is needed, what types of investments you should look at, and what your timeframe should be are all particular to your family. But, generally, you should make sure that you have different sources of income, guarded against inflation, guaranteed for life.

In other words, a solid foundation.

The Mezzanine – Your Legacy

For most people, family is a very important dimension of their life. Once you are finished with your assets, how do you want them to be transferred to the next generation? There are plenty of considerations here.

For example, in Canada in 2020 it is very common for retirees to live into their 90’s. This means that your adult children are likely between the ages of 55 and 70 upon receiving an inheritance. Consequently, it may be sensible to consider the benefits of leaving money to grandchildren, although that should also be handled with care. Nothing ruins an 18-year-old’s life faster than an unearned million.

Legacy is all about who gets what, when and how. You want clear direction in a professionally drafted Will. Estate settlement is known to bring out the worst in certain people. The more money on the table, the more it makes sense to go to court over it.

The Pinnacle – Your Social Contribution

At the peak of our pyramid, we deal with life’s other certainty – taxes.

Upon your death, the CRA will come knocking. Now, in Canada there is no true estate tax, unlike south of the border where larger estates can be subject to direct taxation. That by no means exempts a Canadian estate from paying other taxes.

Lawyers often draw attention to the Estate Administration Tax (EAT – where was the focus group on that decision?), formerly known as probate. In Ontario, this is a paltry 1.5% on estate assets beyond the first $50,000. And while the absolute value can grow to an impressive number on very large estates, the truly massive amounts billed tend to be charged on the final income tax return. In my experience, most folks have a limited appreciation of the impact of income taxes on their future estate.

The most common tax-bomb scenario is the one-time payout of Registered Retirement Savings Plan or Income Fund (RRSP/RRIF) assets. Upon the death of the second spouse and barring the existence of a disabled or minor child, the value of the RRSP is counted as income all in one year. For accounts north of a few hundred thousand, you can comfortably cut those accounts in half as an estimate.

There are tools to help reduce that bill, one of my favourite being Donation Tax Credits. How to structure an estate gift can make for a very positive conversation on a downbeat subject.

So, you will make a contribution to society – you just get to choose how you want to do it; to the CRA or to the charity of your choosing.

Sound planning can prevent future chaos and acrimony, both in your retirement years and for your beneficiaries. Financial professionals are a key in this process, so be sure to involve trusted advisors who have expertise in these areas and get ready to retire well.

Check out more of what we do and how we do it.
Contact us at contact@howlettfinancial.com

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