Podcasts – Your assets, our expertise

Welcome to Your assets, our expertise the financial literacy podcast from Desjardins Securities. This week I’m joined by Martin Bray, who’s a wealth management specialist and portfolio manager with Desjardins. Hello Martin.

Hello Catherine.

Emotions are an integral part of being human and, of course, being an investor. We’ve lived through some remarkable events and major changes that have made us experience all sorts of emotions. As an investor, you may have been affected by a range of emotions when the stock markets fluctuated widely. Should we talk about emotions when we're talking about investments? Isn’t it true that when it comes to investments, the problem is investors who aren’t able to manage their emotions? Those are questions we’ll be asking our specialist here today so we can better understand how investors manage their emotions. Martin, it's not easy to stay calm when financial markets are fluctuating. Many of us have experienced it, both when markets are rising or falling. What’s the impact of emotions on investments?

For sure, Catherine, I think they have a big impact. We often minimize the importance of emotions in our financial success. I like to explain it by talking about stock market cycles or economic cycles. You can think of it in terms of our emotions fluctuating along with the stock market. The first stage is optimism. The market is going up and we tell ourselves it’s going to continue rising and we invest. Next comes exhilaration when the market peaks. People continue to invest, saying: “The market’s climbing, it's time to buy.” Then, the markets start to decline and people start to worry. They say it must be temporary. “I’m investing for the long term, there’s no problem. I’m staying put. I’m keeping my money invested.” After that, they panic because the market continues to fall and they say: “I’m selling. I don’t want to lose any more money. I can't stand it any more.” Next, the market bottoms out, which is what we can call the capitulation point when people say: “I’ll never make up the money I’ve lost.” And then, the market gradually starts to move back up, which is what we can call the depression phase when people say: “Now I regret reacting like that. I regret that I invested. I reacted based on my emotions.” And finally, the markets keep going up and people feel hope. The news is good but they’re going to wait some more before investing.

Martin, is it normal for us to experience that range of emotions? Does every investor go through that?

Yes, I think it’s human nature but, as I was saying, it’s not always easy to realize it. We often do the opposite. The higher the market goes, the more comfortable we feel and we want to invest. The more it drops, we’re more fearful and we think it's going to continue declining. So, just being aware, knowing that it’s going to happen and sometimes trying to do the opposite. When the market is at its lowest, it seems disturbing but that’s actually the time to invest. And when everyone is afraid of missing out on the opportunity of the century, that’s often when you should perhaps take a step back.

In that case, if I understand what you're saying Martin, we need to start by understanding ourselves as individuals and also as investors.

Yes, I think that’s the foundation.

Martin, if we let our emotions guide us and we buy or sell based on market fluctuations, does that impact our investment plan and affect how we achieve our objectives?

Yes, I think it has a major impact. It’s the difference between making or not making money, achieving or not achieving your goals. People tend to minimize. Selling and seeking shelter is a human reaction. The problem is the pressure they create to get back in the market at the right time. When I said it had a major impact, I was talking about double or nothing. If you miss the first 20 days of a market recovery, you reduce your long-term return by 50%. Miss 40 days and you don't make any money.

Wow! So, Martin, I understand it’s very important to manage our emotions but what can we do to control them better?

I’d say the first step to be aware that things repeat. We talked about cycles earlier. There are going to be ups and downs. Every time there’s a decrease, it will because of an event or crisis. Something will happen. Every time, it seems like this situation or crisis is different. We’re coming out of a pandemic. It's the first time we’ve lived through one. Next time, it's going to be a recession or a sudden political change. Something will happen but there will also be a recovery. Therefore, it’s more important to think about what’s going to happen next, what are the trends and what are the differences in the next recovery. Then position yourself based on that, rather than seeking shelter from what you just experienced.

Martin, I guess our rational side needs to prevail over our emotional side. As much as possible, I suppose?

Well, as a portfolio manager, I’m going to agree. But we’re all humans and I think it’s normal. Yes, the rational side, but we have to see the tangible aspect as well.

What do you mean?

People often consider the stock market as something intangible. They say it's going up, it’s going down, but it's not necessarily related to the economy. In reality, it’s directly related. The stock market consists of company shares that we buy. Those businesses are managed by individuals, entrepreneurs who, despite the crisis, will find solutions to make money. Maybe the business will be in the wrong industry but the next one after that will see an opportunity and they’ll create jobs. We need to work and take care of our families so we’ll get new training if we have to. What may be concerning is the time between two cycles or two events. But you have to be confident about life and about human beings who are resilient and who’ll adjust and move on to the next stage.

Yes, sometimes it just takes longer but you also have to be able to picture yourself over the long term and trust yourself.

Yes, that’s what’s hard.

Yes, that's it. The challenge lies there.

True.

Martin, how can we stay focused over the long term?

To think long term, I’d say try to remove the emotion from the process. That means try to be a little more mechanical in your investment approach. For example, invest on a regular basis. By setting aside money automatically, by investing every month, you're not going to wonder whether it's the right or wrong month. You’ll be investing when the market’s up and when it’s down. It's the same if you’re investing annually, when you receive a dividend or make your RRSP contribution. You don't need to wonder if it's the right time, you do it systematically. I'd say the other element is to avoid modifying your portfolio when you’re being influenced by emotions. I often use the example of a home. Let’s say you argued with your neighbour and now you feel like selling. But there’s a process involved. You have to contact a realtor, put up a sign, and that gives you a few days to calm down. You need to do something like that with your portfolio. Maybe not check the account statements for a few months and really take the time to refocus.

Yes, that's it, regain your self-control. OK and other than that?

The other element is diversification. It's seems very basic but people often forget it. If you're diversified, with multiple asset classes and a variety of securities in your portfolio, not all of them are going perform poorly at the same time. That way, you can be confident you won't lose everything.

OK, you said it's basic but does your experience show that most investors succeed in diversifying their portfolios?

Yes, with the help of a portfolio manager or a good advisor, then I’d say yes! It's true, we often forget it.

OK, otherwise are there other tips that can help us stay focused, Martin?

Yes, I’d say you need to respect yourself. As we discussed earlier, your portfolio should be in line with your profile, for example if you're a few years away from retirement or if you're a young investor. When your portfolio closely reflects your needs and profile, you won't feel as much push to make changes. Those are often the people who make changes. Someone who's retiring soon with 100% higher risk investments will feel obliged to make changes because they see themselves with no retirement. They feel they have no choice. If you have the right profile, you’ll be able to resist those urges better. The other element is that thinking long term will be profitable. Time will prove us right. To do that, my best tip is to link your goal to what you want to do with the money. Because the goal isn't to see whether your account has gone up from statement to statement, it’s what you want to do with that money. It's to be financially autonomous, have a good retirement, be happy.

That means making it concrete. So, Martin, it comes back to what we were talking about earlier, making choices in line with our personality and needs. It also comes down to knowing yourself well.

Yes, that's right.

Martin, if we need assistance or advice to better manage our investments and especially to make the right choices, who can we turn to?

A good investment advisor!

Yes, OK, for sure.

All kidding aside, we often think of an advisor as someone who’ll help us choose the right stocks or funds, but it’s much more than that. That’s where there's a long-term impact that makes a difference. It’s someone who’ll support us, act as a kind of coach, be at our side to help us stay on track, help us manage our emotions and stay focused on the long term. And the studies have shown the unbelievable impact of having an advisor to help us. That translates into assets that are 2.7 times higher if you keep the same advisor for more than 15 years. A much higher savings rate. What that means is people save more when they’re supported by an advisor. In other words, they're confident, they feel supported and they know they have a plan and can count on better retirement planning.

Martin, you’ve helped us understand a lot today such as the impact we can have on our long-term investments. Also how much the psychological aspect is important and the impact it can have. What should we take away from all that?

As you mentioned, in terms of the psychological aspect, I've always said it represents about 50% of your financial success and achieving your long-term objective. The second point, which I often repeat, is thinking long term. Bringing your planning and your long-term objectives in line and trying to make it concrete and real so you can stay focused on that financial plan.

Martin, I’d really like to thank you for joining us today.

It's been my pleasure.

Would you like to learn more? Listen to other episodes of Vos avoirs, notre savoir, available at Cogeco’s C23 podcast hub, on your favourite streaming platform or at lesaffaires.com.

Welcome to Your assets, our expertise, the financial literacy podcast from Desjardins Securities. This week, I'm joined by Michel Doucet and Jean-René Ouellet, investment strategists at Desjardins. Michel, Jean-René, hello to you both.

Hello Catherine.

Hello Catherine.

Today, we're talking about portfolio diversification, risk and return. The number of individual investors is at an all-time high in the markets. When deciding to invest, it's important to master a few basics, otherwise it might wind up costing you a lot of money. We've all heard the expression, "don't put all your eggs in one basket." This remains a golden rule in investing. We're going to explore the concept and see how it applies to building a portfolio. Jean-René, I'll start with you. What does it take to be a successful investor?

Well, Catherine, to be successful in investing, it's not enough to find a good investment theme, or one that's trendy or popular at a given moment. Warren Buffett came up with an analogy at the last Berkshire Hathaway shareholder meeting. He reminded everyone that in the early 1900s, the auto industry was very popular among investors. At that time, there were over 2,000 different American car makers. One hundred years later, only three remained, two had gone bankrupt, and there had never been so many vehicles on the road. In short, the timing was good, the strategy seemed promising, but few investors made a lot of money with this investment theme. So it's not enough to just choose a theme. It takes a more comprehensive approach, a good game plan.

Exactly, Michel, I agree with you. What exactly does it mean to have a good game plan?

A good game plan, Catherine, means taking the time to invest in yourself, to ask yourself honest questions. What's an honest question? The first one is: tell me about yourself. What's your view on life? How do you see the future? How do you see your future? Your children's? Ask yourself, "what will it take for me to retire? What kind of retirement do I want?" It's about taking the time to sit down with a professional.

We often forget to do that, don't we, Michel?

I'd say that in the vast majority of cases, people don't invest in themselves, especially entrepreneurs who've worked hard their whole lives without taking a moment for themselves. We often meet them on the verge of retirement and ask them: how are you doing? What's your take on life? They'll start talking about their business, but they've sold it, so I want to know about them.

But the same thing is true for independent investors, people who have a job and are trying to save. People often invest without any guidance. They'll buy shares when they think the market will do well, then they'll try other things when they think it's going to do less well, or invest in cash assets now and then, but I say that's like getting on a plane without knowing your destination. Too many people invest without knowing their game plan, without knowing how much they're going to need. Here's a simple question: we sometimes talk about risk tolerance. What is risk tolerance? Losing percentages is easy, anyone can lose percentages. Michel was talking about entrepreneurs earlier. Ask entrepreneurs, it's not uncommon for them to say: "I succeeded by taking risks. Taking risks pays off, 25 percent, no problem." Losing 25 percent, that means on a $1 million portfolio, can you really afford to lose $250,000?

Okay, so the moment you talk actual numbers, that's a game changer.

Yes, because people have a sense of what it takes to earn capital. A worker thinks in terms of how many hours they've worked, a house builder thinks about how many houses they've had to build, an engineer thinks how many jobs and sites they've had to manage to earn that capital. People understand that hard-earned capital is valuable. Investing isn't a game. You can't invest on a whim. It needs to be rigorous process that starts with a game plan, a point of departure, and that's not easy to determine.

No, that's true. Michel?

Jean-René, what you're telling me sounds like advice your brother-in-law might give you at Christmas, but you shouldn't follow his investment strategy.

Christmas was great last year, he wasn't there. But Michel, as for that brother-in-law's plan, people obviously only talk about their success. If he's 72 years old and he hasn't retired and he doesn't seem to be passionate about his work, maybe it's because his returns aren't as good as he claims.

Jean-René, it's also important to understand why we're saving.

It's clear that we need to understand why we're saving, and maybe what we're talking about is a bit generic. It’s not quite that simple. I compare it to using a notary's services. A notary will ask difficult, complicated questions. We may come out of the discussion emotionally drained, but it's still really useful. When you meet your financial planner, investment advisor or portfolio manager for the first time, you have to choose someone you're going to be comfortable opening up to about your finances, someone who will ask difficult questions. What do you want to do with your money? What do you want for your children? What kind of support do you want to give them? Do you have any philanthropic ambitions? Were you an entrepreneur, have you sold your business and moved from operating a company to managing a financial entity, and do you want to establish a major philanthropic legacy with your children? These are big questions. It's not easy. Everyone will have different answers. You have to take the time to do this work beforehand so that your investment specialist can tailor their services to you, who you are, your needs and expectations.

Michel, I'd like to talk about different assets. If the markets go down, what should we invest in?

It all depends on which asset class is on the decline. Think back to February 2020, when the stock market experienced its 13th historical correction. Since 1900, we've seen 13 corrections. What is a correction? It's when a market declines by at least 20 percent. Within a given portfolio, we have what we call defenders, which can be cash, bonds, certain alternative investments, gold, copper. These products will compensate for losses, because when the stock market corrects as it did, you'll also see the value of your bonds appreciate.

As I'm listening to you, I'm drawing a connection with an expression we hear a lot: the famous 60-40 portfolio. Jean-René, is this still popular, and what exactly is a 60-40 portfolio? Is it a good thing?

A 60-40 portfolio is a fairly generic portfolio in the industry, made up of 60% bonds and about 40% shares. In the past, this portfolio was considered to be conservative, but one that still generated attractive returns. Today, interest rates are very low. But in the past, if you go back 10, 20 or 30 years, if you invested $100,000 in bonds you could generate returns of six, ten or 12 percent, depending on your timing. Today, bonds will generate returns of between 1.5 percent and 2.5 percent, and not much more. Of course, the 60-40 ratio still makes sense, except that the good old 60-40 portfolio will yield lower returns than in the past, and that's why you need to think about reconciling this with your personal goals. Depending on your needs, if a 60-40 portfolio could maybe generate returns in the three and four percent range down the road, would that be okay? If you've done your financial planning and three and four percent fits, then the 60-40 portfolio will work for you.

OK, so is it right for the individual? Michel, would it allow someone to have enough savings in the long run so that when they retire, they're comfortable? Will it be enough?

Catherine, if you were to save $1,000,000 over your lifetime and you tell me you need a $60,000 income to be comfortable, that's a six percent return. Six percent, today I have bonds that yield less than two percent. That means that to generate your percent, your $60,000, you may be taking more risks than you'd like.

I won't have a choice.

You wouldn't have a choice because the reality is, one day you're going to retire and your portfolio has to sustain you. It has to provide for your financial needs. Let me give you a very concrete example: my father. At the start of the 2008-2009 recession, my father was 100 percent in bonds. His bonds, which he bought in the 1980s, were generating between 15 and 18 percent. At the end of the 2008-2009 financial crisis, my father no longer had 100 percent bonds. He had 60 percent bonds and 40 percent shares, because the reality was, at his age, his portfolio was generating enough money to pay his rent and expenses. Which brings us back to the question: is that 60-40 approach out of date? I'd say it's never passé because it depends on who you are as an investor.

Jean-René, considering what we've been talking about today, knowing yourself well, I see that it's a personal thing, because no two situations are alike, so how do you make sure that you have the right strategy? And most importantly, who can we turn to for help?

That’s a great question. It's true that there are many solutions. Your brother‑in‑law's or your neighbour's approach probably won't work for you, because you have to start by sitting down with someone you trust. You have to find the right person. But in order for your investment advisor to serve you well, they need to know who you are, your past experiences and your future expectations. Do you have children? A spouse? Do you own a company with other business partners? Do you want to sell your company and use the capital to create a legacy in line with your beliefs? Do you have any philanthropic ambitions? These are all very personal questions that only you can answer. You need to start by taking the time to find someone you trust and feel comfortable with. Your investment advisor can take it from there. Together, you'll come up with a game plan that suits you, one that takes into account how much you're willing to lose. How much do you need? What is your tax situation? An advisor won't stop there. They'll provide assistance over time and keep revisiting your situation, because there's no such thing as a one-size-fits-all game plan. It needs to be adjusted when major life events occur: divorce, death, accidents, promotions, asset sales, business purchases, these are all milestones in a person's financial life. It's difficult to navigate it alone because it's easy to get lost. Your investment advisor is well equipped to guide you through it all.

That's quite clear. A big thanks to both of you, thank you Michel and Jean-René.

Thank you, see you soon.

Thank you.

Would you like to learn more? Listen to other episodes of Vos avoirs, notre savoir, available at Cogeco’s C23 podcast hub, on your favourite streaming platform or at lesaffaires.com.

Welcome to Your assets, our expertise, the financial literacy podcast from Desjardins Securities. This week, I'm joined by Sophie Sylvain, a financial planner at Desjardins. Hello Sophie.

Hello Catherine.

Today we're going to talk about smart approaches to family wealth planning. Wealth management changes over time, and life's major milestones require careful strategizing to provide financial independence for couples and their children. It's a bit like dividing up chores within a family. The same principle applies to financial management, and that's exactly what we're going to break down today with our guest. Sophie, I feel like we should start by talking about children. Our first instinct is to save for our kids' education, but there's more to it than that. What's important when it comes to planning for our kids' future?

Yes, Catherine, exactly. When we think of children, we think of education. Let's talk a bit about the Registered Education Savings Plan, which is not that well understood by most people. With RESPs, it's easy to focus on the fact that when you make contributions, you get generous government subsidies. But we sometimes forget about the flexibility this plan offers when the time comes to withdraw money. Catherine, did you know that any withdrawal has to be initiated by the subscriber, which is usually the parent?

No, I didn't know that and I have a feeling I'm not alone.

Probably. So, as soon as your child, who is the beneficiary, meets the criteria for withdrawal, that's when you can start choosing from various strategies.

Okay, like what?

The important thing to remember is, withdrawals are made up of three elements. The first element is those subsidies. The second element is the tax-sheltered returns baked into the plan. The third element is the contributions made by the parent, and it's those contributions that give us flexibility.

OK Sophie, what options do parents have when they withdraw their contributions?

I'll give you some examples. There are several possibilities. First, if you withdraw an amount that corresponds to your contributions and you have a younger child, you can contribute to your younger child's education savings plan and receive new subsidies.

That's great. What else?

Well, if you withdraw a sum equal to the amount you contributed, and you have unused RRSP room, you can contribute to your RRSPs and save on your taxes.

OK and what else?

Otherwise, if you want to give that money to your child for something other than education, that's also possible. You could give a cash gift to your child and your child can contribute to their own TFSA, within their limit.

Sophie, do children have the same TFSA contribution room as their parents?

Very good question, it's extremely important to be careful about this. First of all, you have to be 18 or over to contribute to a TFSA, so that's important to know.

Yes, it is.

Second, TFSAs have been around since 2009 and your contribution room accumulates year after year. On the other hand, when we're talking about a parent versus a child, if the child was under 18 in 2009, they won't have the same amount of contribution room as their parent.

That's pretty important. Sophie, if I were to sum it up, investing early pays off.

Investing early really pays off and we often forget that. The best advice I received from my parents was: "Sophie, start investing 10 percent of your income as soon as possible and get used to living on 90 percent. Don't touch it, put it aside, forget about it and pretend you never had it." Another approach could be, if you make my own lunch once a week, you're saving about $30 on that meal. Put that $30 aside, invest it in a TFSA with a pretty conservative return, say 4%. Did you know that after 10 years, you'll have accumulated just over $19,000?

That's hard to believe, but it's true. These habits can benefit you throughout your life.

Yes, absolutely. Once you get into the habit, you forget about it, and you might even decide to increase the amount you set aside.

That makes sense. Thank you, Sophie. So, Sophie, let's talk about a second big milestone: retirement. With life expectancy increasing, we could spend several decades in retirement, so it's important to be well prepared.

Very important to be well prepared. There are several ways to prepare, we'll look at one in particular. When a couple is planning for retirement and looking to increase their wealth, if they have uneven incomes, it's a good idea to consider setting up a spousal RRSP.

OK, Sophie, why is this a good idea?

It's advantageous for several reasons and I can show you with an example.

Go ahead.

Julie and Carl are both working. Julie has a higher income than Carl, and this trend is likely to continue until they retire. Taking into account her maximum contribution room, Julie could contribute to Carl's RRSP. And since Julie is the one who makes the contribution, she gets the tax savings. When Carl retires and starts making withdrawals, these amounts are added to his income. Carl will have to pay taxes, but he will pay less than if Julie had made contributions to her own RRSP, which would add more money on top of her income, which is already higher than Carl's.

Keeping with this same example. Could Julie and Carl be in a common-law relationship or would they need to be married? Because it's not the same thing, right, Sophie?

No, it's not the same thing and the distinction is very important, because income splitting is great, but only when a relationship is going well.

Yes, when things go wrong, that's when it's important to think carefully and plan well.

Yes, exactly. To protect yourself properly, obviously there is a distinction between married and civil union spouses. In Québec, we have this notion of shared family assets. What this means is that in the event of death or divorce, all the RRSP money accumulated while the couple was together will be taken into account when dividing up family assets. For common-law spouses, this notion of shared family assets does not exist.

So Sophie, what do you recommend in this case?

We strongly recommended that you draw up a cohabitation agreement to divide up assets in the event of a break-up.

And does it have to be notarized?

We do recommend a notary, because a notary can advise common-law spouses as they draft their agreement. This helps protect the couple and ensures that the agreement is not open to interpretation.

That makes sense. Sophie, finally, in order to protect and ensure the longevity of accumulated assets, how can we prepare to transfer our assets to our heirs?

This type of planning is very important. It represents yet another milestone. We've talked about ways to increase your family's wealth while you're alive, but these assets must be protected in the event of death. People sometimes worry about how to manage large sums of money they inherit. To ensure peace of mind, there are a few mechanisms available.

Like what?

You can use what's known as a testamentary trust. It's important to remember that a testamentary trust has to be written into the will.

In terms of how it works, Sophie, what does a testamentary trust do?

It gives you the power to control the use, management and distribution of your assets, which are transferred to this testamentary trust.

Why would people choose this option?

Because your bequest is not given directly to your heir, it's placed into the trust. After that, the trust will manage the money and distribute it in accordance with the instructions in your will.

OK, I suppose there could be several different reasons for creating a trust. Can you give us some examples?

Well, off the top of my head, it ensures that a major family asset will be transferred from generation to generation. It's also useful for managing assets inherited by minors or young adults who may lack financial maturity.

To make sure things stay under control.

We don't want things to get out of control. Also, we're talking about all the money you've earned throughout your life. It would be a shame if it were squandered because an heir had poor financial management skills or because they were particularly vulnerable. Another example involves blended families.

Yes, they are fairly common.

Very common. Among other things, a testamentary trust could be set up to pay an annuity to the surviving spouse until their death. Children from a previous union could then inherit the estate upon the death of the spouse.

Sophie, am I wrong, or does this provide a certain peace of mind?

Without a doubt.

Sophie, is this a tool that anyone can use?

That's an important point. There are costs associated with setting up a testamentary trust. There is also the yearly cost of managing it, so you have to have a certain level of wealth to make it worthwhile.

Are you seeing more and more people choosing this option?

A few years ago, setting up a testamentary trust was almost a fad because it was tax efficient.

And now it's less so?

Yes, tax laws have changed which makes it less popular now. However, the main reason for setting up a testamentary trust is to shore up your affairs and truly protect your loved ones.

And that's really what we want.

Absolutely.

So, Sophie, we've covered many interesting topics in our discussion today, but there's one word that's come up a lot: planning. Planning for our children's education and their entry into the workforce, planning for retirement and planning for the transfer of our assets.

Yes, Catherine, that's the key word to remember: planning.

Sophie, how can we take advantage of all these strategies?

It's very simple. Talk to your investment advisor, they're very well supported by our experts.

Thank you very much for being here today, Sophie

Thank you, Catherine.

Would you like to learn more? Listen to other episodes of Vos avoirs, notre savoir, available at Cogeco’s C23 podcast hub, on your favourite streaming platform or at lesaffaires.com.

Welcome to Your assets, our expertise, the financial literacy podcast from Desjardins Securities. This week, I’m joined by Roberto Ménard, a financial planner with Desjardins. Hello Roberto.

Hello Catherine.

Roberto, today we’re going to talk about retirement income strategies because it takes good planning to retire. We’d all like to retire with enough financial resources. Every retirement is unique. It’s important to clearly define your needs and develop a strategy that closely reflects your reality. Many factors come into play in retirement planning. One of the most important is the income strategy (also called a disbursement, withdrawal or payout plan) and that’s what we're going to cover with our specialist. Roberto, please explain to us what an income strategy is and why it’s so important to determine it before we retire.

A retirement income strategy is a concrete guide that indicates where your income will come from for each year of your retirement. The goal is to generate enough retirement income in the best possible way from both a financial and tax perspective. Your retirement income strategy will even estimate the amount of income taxes you’ll pay each year so you can manage them effectively. In addition, a good income strategy will indicate the remaining balances in your investments for each year of your retirement. That way, you can evaluate how much leeway you’ll have in dealing with various unexpected developments.

Please give us a few examples of unexpected developments, Roberto.

There can be different unexpected developments. What comes to mind, among other things, is health care. You could require in-home nursing care for a certain period. It could be your children or grandchildren who want to buy their first home and need some help with the down payment. Or simply renovations that weren't expected. In concrete terms, it refers to all the expenses or payments that weren’t initially projected in your retirement income strategy.

So, Roberto, that means we need to have a cushion or some leeway, no matter what happens to us.

Ideally, your income strategy should set aside a financial cushion but it's only by developing that strategy that you’ll be able to determine how much actual leeway you’ll have each year to deal with the unexpected.

Agreed.

The income strategy also needs to be a flexible tool. It has to be adjusted over time based on the events in your life.

What do you mean by events? Is that something negative?

No, it doesn't have to be negative. For example, it could simply mean selling your vacation property for a certain amount, either higher or lower than initially projected in your income strategy. For someone who owns a business, it could be selling the company a few years earlier than expected, for example, because you received an attractive offer that wasn't initially planned. Or simply what I call a dream purchase, such as a sailboat or a condo in Florida.

Roberto, developing your plan prior to retirement is beneficial. What are the advantages?

First, it enables you to make an informed decision about retiring. You’ll also be able to make any necessary adjustments before retirement. What I have in mind, for example, is your savings habits. You’ll know precisely how much retirement income you’ll actually have before you even make your decision about when to retire.

Roberto, you’re helping us understand that planning is essential.

Not only is it essential, it’s very reassuring.

Great! Roberto, what do we need to take into account when setting up an income strategy and especially to make sure it meets our needs?

First, a good retirement income strategy will be customized to each individual's specific situation. In other words, this is on a case-by-case basis. The strategy therefore needs to take into account various factors. Starting with your family situation, how much you can save before retiring, and your retirement income goals, which will be based on a budget designed specifically for your retirement. There are also your various projects such as buying a motor home or cottage, for example.

OK, Roberto, so that needs to be included in the budget.

Exactly. The income strategy also has to take into account all your income, including investment income, government pensions such as the Quebec or Canada Pension Plan and Old Age Security. If you have a pension plan with your employer, it's taken into account. For people who own a business, it considers whether you have an individual pension plan or investments in a holding company. It should be noted here that investment income in a company is taxed differently that investment income earned by an individual. The possible disposition or sale of assets such as real estate assets and, certainly, for a business owner, the possible sale of the company. Of course, conservative assumptions must be used, especially for the returns on your investments.

OK, Roberto, what would be a conservative assumption for returns on investments? Please give us a concrete example.

It has to be evaluated according to each individual's portfolio. But to give you an example, for a diversified portfolio, a return of 3% net of expenses but before income taxes could be considered conservative. What’s very important here, Catherine, is to be careful to avoid overestimating the investment returns over time. Lastly, you need to take life expectancy into consideration.

Roberto, we’ve observed that life expectancy over time has been continuously rising and, besides that fact, we have to take our health status into account.

Yes, to account for that, it's possible to adjust your retirement income over time. So, let’s take an example, You could choose an amount for your retirement income in the early years, maybe until age 75. You’d like your retirement income to be $100,000 per year, net of income taxes, which will of course be indexed to inflation. Then, starting at age 75, you’re going to reduce the retirement income needed, let’s say, to $75,000 per year. That’s what I mean by adjusting your retirement income over time. You could also consider the alternative of keeping your retirement income at the same level throughout your retirement. For example, $100,000 per year, net of income taxes, assuming that eventually your leisure expenses will decline but could very well be replaced by healthcare expenses.

OK, great. Roberto, when we’re make forecasts and deciding when to retire, we obviously want to get the most from our savings. How do we do that? What strategy do we use to optimize our withdrawals?

Catherine, various strategies can be considered. One of the basic strategies for an effective payout plan is income splitting.

What is income splitting?

Income splitting is a method of dividing taxable income between spouses as evenly as possible. For example, starting at age 65, you could attribute some of your pension income to your spouse. That means the withdrawals from your RRIF, for example, together with pension plan payments, up to a level of 50%, could be attributed to your spouse. Therefore, up to 50% would be taxed as if it was held by your spouse.

OK. What else do you propose as a strategy?

Another approach is to control each individual’s taxable income in order to avoid have to pay back part or all of the Old Age Security pension.

Roberto, what do you mean by control the income?

I mean controlling each person's taxable income to even out the income taxes payable each year. For example, avoid having to pay a lot of taxes one year because you didn't calculate enough income the previous years. Another approach involves managing your retirement income structure. Ideally, part of your retirement income should always be taxable income and part should be non-taxable income in order to control your average taxation rate and therefore control the amount of income tax payable during retirement.

So how can you do that?

For example, your taxable income could be your government pension plan, your Old Age Security, together with the withdrawals from your RRIF. That would be the taxable portion of your income. To complete that and reach your retirement income target, you’d draw on or make withdrawals from your non-registered investments, which by nature would be non-taxable income. In concrete terms, you would generate your retirement income using a portion of taxable income and a portion of non-taxable income, therefore controlling the income taxes payable during retirement.

From what you’ve said, Roberto, it would be by balancing everything.

Absolutely. That illustrates how to plan your retirement income efficiently. The final strategy is for business owners. You could plan to pay taxable dividends for a number of years so the company could initially recover income taxes. When a company pays a taxable dividend to a shareholder, under certain conditions, it will be able to recover the income taxes and therefore avoid having a very high tax bill when the person dies.

Very interesting. So, Roberto, we need to be flexible and also, well prepared.

That’s exactly right. And, to be well supported, consult your financial planner. Your financial planner, in cooperation with your investment advisor, can set up a personal retirement income strategy customized according to your situation and can assist you through every stage of its implementation and execution.

Thank you very much, Roberto, for being here today.

It's been a pleasure, Catherine.

Would you like to learn more? Listen to other episodes of Vos avoirs, notre savoir, available at Cogeco’s C23 podcast hub, on your favourite streaming platform or at lesaffaires.com.

Welcome to Your assets, our expertise, the financial literacy podcast from Desjardins Securities. This week I’m joined by Caroline Marion, who’s a notary, tax specialist and financial planner with Desjardins. Hello Caroline.

Hello Catherine.

Caroline, today we’re going to talk about the executor’s role in settling an estate, and how to choose an executor. It’s not easy to talk about death, especially while you’re still in good health. One of the most common questions that comes up during estate planning isn't the decision about who’s going to inherit our assets bur rather who’s going to be our executor. We’ve all heard horror stories about settling an estate (or liquidating a succession as it's officially known in Quebec). To prevent that happening, let’s turn to our specialist. Caroline, I’d like to start with the basics. What’s an executor? Isn’t the term liquidator frequently used in Quebec?

Yes, you’re right. A liquidator in Quebec is the same thing as an executor. The term liquidator was introduced in English in 1994 when the new Quebec Civil Code came into effect. A few aspects of the executor's role were changed but it’s essentially the same as it was before.

Caroline, I think it’s true that settling an estate (or liquidating a succession) is hard work, not an easy task.

It's hard work indeed. The process is long, complex and sometimes challenging.

Why is it important to have an executor (or liquidator)? I’ve heard people say they were going to let their heirs deal with it and figure it out themselves. I don’t think that’s the best strategy.

There are certainly people who might want to do it that way. Essentially, the purpose of the executor is to protect the heirs. When executors are acting in that capacity, they’re ensuring that the heirs won’t be held personally liable for the deceased person’s debts.

So it’s important to appoint an executor but, of course, there’s a process that has to be followed.

Absolutely. For the same reasons. So the heirs won't have to inherit any debts. By making sure the estate settlement or succession liquidation process laid out in the Civil Code is followed to the letter. That’s how a separation can be maintained between the deceased person and their heirs.

Caroline, if you can, please give us some examples of what happens when those steps aren't followed.

Well, if the steps aren't followed, the heirs could be left with debts amounting to more than the value of the assets in the estate. They’d be forced to use their own money to pay off those debts.

Obviously, we want to avoid that.

We don’t want that. Basically, if the succession liquidation process is followed to the letter and there’s aren't enough assets in the estate to pay off the debts, it’s the creditors who’ll be shortchanged. But at least the heirs won’t be left with debts when they didn’t even inherit anything.

Is it possible for the heirs to protect themselves against that kind of surprise?

As a rule, don't combine your personal assets with those of the deceased person. It's okay to take steps to preserve the deceased's property, but there’s a big difference between putting that person’s vehicle in storage and using it every day to do your own shopping.

That’s right. Does everything depend on the executor, Caroline?

The executor is responsible for the entire estate settlement, so it’s important to choose that person carefully.

Then we should talk about that. We want to be sure we choose the right person. But how do we do that?

Mainly, what you're looking for in a good executor are certain criteria or specific qualities. The first of those is transparency. That refers to the executor's ability to always keep the heirs informed about what’s happening and give them relevant information. It takes time to settle an estate, a lot of time. The executor therefore needs to be very available. If that person is also the CEO of a large company, they may not be the best choice. A good executor needs to be diplomatic. They also need to understand the deceased person’s way of life, how they did things, who they worked with and who their advisors were.

OK then it’s not ideal to choose someone you haven't seen for 10 years.

Preferably not, because it will be much more difficult for that person to track down the information. To be a good executor, it’s also important to have been around for a while.

OK, tell me if I’m wrong but for some people, their reflex is to choose someone in their age group or nearly the same age as themselves. It may not be a problem on its own but shouldn't we choose someone younger? Is that an advantage?

Well, it’s an advantage to choose someone younger because as you get older, your faculties are more likely to decline. Of course, it’s a normal reflex to choose someone the same age because the people we trust will be in that group. However, as we get older, if our executor is the same age and we pass away at age 98 for example, the executor may not have the same abilities they had at age 60 when the will was drawn up.

Are we required to choose a close relative?

Absolutely not. In fact, in some circumstances, it would be better not to do that.

Why?

Because if you chose someone who was close to you, they're going to be grieving. There are so many decisions to be made in the days and months after the death. Those decisions need to be made rationally but your heirs will be dealing with their grief.

OK. Can you appoint more than one executor?

Absolutely. Actually, you can designate two, three, four, ten.

Wouldn’t 10 complicate things?

A little. At the end of the day, appointing a single person can be dangerous because the executor has a lot of power, a huge amount of power. And sometimes, if they’re on their own, they act like dictators.

No kidding. How so? Tell us more.

Well, what that means ultimately is the executor has the power but not necessarily the right to do certain things. For example, an executor could open an estate account. In fact, they're the only one who can do that. Then they could write cheques payable to themself even though they're not an heir. They have the power to do it. No one is monitoring them. They could sell property that would otherwise have been left to the heirs in the will. Of course, the executor will eventually have to give back the proceeds of the sale but maybe the heirs wanted to keep the property. The executor has the power to sell it. They even have the power, but not the right, to avoid providing a copy of the will.

That's quite serious. It could have a big impact.

Yes it can have major consequences, which is why it can be smart to appoint two executors. It could prevent that scenario, but not always. There would be a better chance that at least one of the two would be rational enough to speak up and say it didn’t make sense to do things that way.

What about choosing three executors so you have an odd number? With two, they might not be able to agree. Is three a good choice?

Actually, that doesn’t make much of a difference.

Oh, OK.

It’s not ideal, simply because even when there are three executors, they may not reach a decision. If one says yes, the other says no, and the third doesn’t want to take sides, you have the same stalemate you’d have with two executors. What’s essential is really to have the right clauses in the will for resolving disagreements in order to specify what happens if there's a disagreement and how it can be resolved quickly.

Caroline, after we've made our choice, I suppose the next step (or maybe it takes place almost at the same time) is to speak with the person we’ve selected.

Actually, I'd even say it’s the step before drafting your will. So, after choosing an executor, if you speak with them, you’ll find out if they’re willing to take on the role and if they're ready to go through with it. It also enables you to make sure that person is comfortable with being appointed.

My reflex would be to speak to my loved ones soon to explain my decision. Is that a good approach? Is that how it should be done?

Absolutely. In fact, that’s the ideal way. But avoid talking about who’s getting what. That’s something that can remain confidential until the end, especially if you’re planning surprises for certain people! But you can explain your appointment or choice of an executor and, by doing so, you could prevent some conflicts after you’ve passed away. Explaining why you selected one person over another doesn’t mean you liked them more. In fact, the person you chose may even think it’s because you hated them the most, but that’s not the case! In reality, it’s the person you trust and maybe the one who’s most familiar with our dealings and maybe also who’s most likely to be more rational in carrying out the task.

Does the selected person have the right to say no?

The selected person has the right to refuse when the situation occurs and can even resign during the process if it gets difficult and they're no longer comfortable doing the job.

What happens, Caroline, in the case of someone who doesn’t have anyone they can ask to take on that role?

Well, there are several different options. The first thing to know is that even if you choose someone who may not be entirely capable, that person can get assistance that would be part of the estate settlement costs. So, it would be paid by the estate before the assets are given over to the heirs. It's also possible to appoint a corporate liquidator or executor.

What’s that?

In reality, a corporate liquidator is a trust company. Those are the only companies authorized under Quebec law to act as liquidators. The trust companies’ personnel includes all the necessary professionals with experience in succession liquidation. As a result, they have legal experts, tax specialists, accountants and investment specialists all under one roof. You can also be sure they're super neutral because they aren’t dealing with the emotions of grief.

Can you think of any examples of family situations where that would be the preferred choice?

Certainly. The first example that comes to mind is someone who had a second, third or fourth marriage and has children from those different relationships. Unfortunately, I've frequently seen cases where the deceased person was the one holding the whole group together. The others were careful about what they said as long as that person was alive. But after the person’s gone, sometimes it explodes.

Caroline, we’ve learned a lot today, a lot of interesting content. We understand that choosing an executor is a big decision. We have to set our emotions aside when making that choice. We realize it’s not always obvious or easy. Who can help us make that choice?

I’d say the first person to turn to is your investment advisor or financial advisor. Those advisors are basically very rational about managing our money and they have the ability and knowledge to guide us in choosing our executor. You can test your options with them or even ask for their advice.

Caroline, this has all been very informative. Thank you very much for being with us.

It's been my pleasure!

Would you like to learn more? Listen to other episodes of Vos avoirs, notre savoir, available at Cogeco’s C23 podcast hub, on your favourite streaming platform or at lesaffaires.com.

Welcome to Your assets, our expertise, the financial literacy podcast from Desjardins Securities. This week, I’m joined by Patricia Girard, a financial planner with Desjardins. Hello Patricia.

Hello Catherine.

Patricia, today we’re going to talk about the importance of estate planning. Estate planning is often neglected. 70% of Quebecers don't have a will, according to Les Affaires, either because they're not interested or because they don’t want to have those kinds of conversations that can be difficult and uncomfortable. Estate planning is essential but often neglected. It's a mystery for anyone who’s not familiar with it, which is just about everybody. It can be very confusing and that’s why many people give up. Since we don’t want that to happen, we’re going to take a closer look and demystify what it’s all about. Patricia, to start, what's the purpose of estate planning? What does it cover and how should we go about it?

The first purpose is to get an overview of your situation in case you were to die suddenly. That allows you to see if you family is well protected. Before putting your wishes down on paper, it's important to evaluate the financial and tax aspects. That starts with an estate inventory. You determine what you own as assets, including your home, cottage, condo in Florida and RRSP, and you see whether you have debts on those assets. Is there income tax to be paid? We often forget that when someone passes away, they’re presumed to have disposed of their property.

OK, and what does that mean when the deceased person is presumed have disposed of their property?

It’s as if, just before they passed away, the person had sold all their assets and cashed in all their investments. But doing that all at once generates a big income tax bill. The property inventory gives the executor (or liquidator) an overview of the situation and makes their job easier. They won’t have to search everywhere. After estimating the income tax, they can check whether the available cash will cover the taxes payable.

OK, now Patricia, what if the available cash doesn’t actually cover the estate’s income taxes? What happens then?

The executor will have to sell some of the assets, which may not correspond to what the deceased person wanted.

Clearly. Patricia, during all those steps, our reflex would be to say we need a notary. How important is it to use the services of a notary in Quebec?

Once you have an overview, you can start thinking about meeting with a notary and drafting a will that reflects your values and indicates how you want your assets to be distributed to your heirs. For example, our team of notaries makes sure your legal documents, including your will, protection mandate and power of attorney, accurately reflect your wishes. The notary takes an advisory approach with a view to giving you a second opinion or supporting your thought process to ensure your legal documents are in line with your situation and estate planning wishes.

Patricia, am I right in saying there are different kinds of wills? Please tell us about them. Which one is most often recommended?

Yes, there are different types of wills. There is the holographic will written by hand. There’s the will made in the presence of witnesses. And there’s the notarized will. The will prepared by a notary remains the best recommendation because it's the only one that’s registered. It therefore can’t be lost and the process after the person's death is simplified with a notarized will. The two other kinds of will are subject to probate (or homologation) and that legal process can be longer and more costly for your estate than if your will had been prepared by a notary.

Patricia, if I understand correctly, with a will prepared by a notary, I’ll be better protected and my heirs will be too.

Well, with a notarized will, you’ll feel more secure and the estate will be administered better.

Agreed. Patricia, here’s a situation that affects many people: what happens if the person dies without having a will?

That’s a great question because many people don't have a will and it’s really important to think about what happens when a person passes away without having one. Let’s take the example of Marie-France. She’s a client who came into our office during the pandemic and was very upset. Her common-law partner had passed away without a will. So you can imagine: your partner has died without a will and your home has suddenly become an asset that’s co-owned by you and your partner’s brothers and sisters. Assuming you and your partner owned the home 50/50, this certainly isn’t the situation you and your partner would’ve wanted but those are the rules under the Quebec Civil Code.

Patricia, you mentioned Marie-France, who wasn't married, and that seems to have made things more complicated.

Yes, that's right. A common-law partner (or de facto spouse) who dies without a will is the worst scenario for the surviving partner because the deceased person’s assets go to the immediate family. In this case, that’s Marie-France’s in-laws. Keep in mind that under the Quebec Civil Code, a common-law partner is not recognized as an heir. As you can see, this is another reason why it’s important to prepare a will. If the deceased person didn't have a spouse but has living parents as well as siblings and/or nieces and nephews, the assets are divided in two. One half goes to the parents and the other half goes to the brothers, sisters, nieces and nephews. In Marie-France’s case, the parents weren't alive so all the assets were divided among the siblings.

So, Patricia, it’s clear when someone dies without a will, things are more complicated for the person's loved ones.

Definitely. It would’ve been so simple with a will. Everything would’ve been less complicated. Estate planning also includes verifying your legal documents. A notary can assist you with your questions and concerns but will certainly help you understand the importance of a will. For Marie-France, especially as a common-law partner, her situation would've been much simpler with a will.

Patricia, you’ve told us about Marie-France, who had a common-law partner. Is it different for married spouses?

Married spouses have a certain level of protection but if they don’t have a will, they could be in for some surprises. Under the Quebec Civil Code, the married spouse of someone who dies without a will isn't necessarily recognized as the only heir. The Civil Code determines who inherits in addition to the married spouse. It’s important to draw up your will.

That’s clear. Patricia, as I’ve been listening to you, I’ve had a question in the back of my mind. When is the best time to do your estate planning?

Today.

OK, right now.

You shouldn't delay in addressing your questions and concerns. You should do your planning while you’re in good health because part of estate planning is really about incapacity and failing health. That means having the right legal papers such as a power of attorney or protection mandate in case you’re no longer able to make decisions about your health and finances. You’ll have true peace of mind.

Patricia, I understand we shouldn’t wait until we’re ill before doing our planning. We should do it now. You and I both know there are times in life when you need to make adjustments or updates. Can you give us examples of circumstances when you have to make those kinds of adjustments?

Estate planning is an ongoing process of re-examination as your situation evolves or gets more complex and your goals change.

Can you give us some examples?

There are situations where you need to update your estate planning. For example, it may be necessary if your spouse passes away, you get married or remarried, a child or grandchild is born or a beneficiary dies. It also applies if you buy or sell a business. Plus, if you have a beneficiary with special needs, such as a child with an illness or disability, you’ll need to do some specific estate planning. And if your designated executor passes away or if you buy foreign property.

So, we need to be flexible, Patricia. We have to expect that updates will be needed, maybe a few times at least?

Yes, you have to be ready to modify your estate planning based on how your life evolves.

In short, Patricia, you’ve raised many important and interesting points. We’ve taken note of what you’ve discussed today but throughout this process, if we’re looking for guidance, which I think is important, who can we turn to?

It’s important to understand that meeting with an investment advisor is much more that just a talk about investments. It’s personalized support to optimize your financial situation and your assets. Estate planning is a way to set up a framework for your wealth management. It’s easy. By scheduling an appointment with an investment advisor, you’ll be starting the process.

Patricia, what I understand is that good estate planning ensures there won't be complications for ourselves and our loved ones. So we should turn to an advisor to meet our needs and also to give us some reassurance.

That’s correct.

Thank you very much, Patricia

Thank you, Catherine.

Would you like to learn more? Listen to other episodes of Vos avoirs, notre savoir, available at Cogeco’s C23 podcast hub, on your favourite streaming platform or at lesaffaires.com.