Executives might earn hefty pay cheques that fund enviable lifestyles, complete with big homes, vacation properties and luxury vehicles, but visible wealth does not necessarily translate into significant savings and bulletproof retirement plans.
A lot of Canadians live on financial autopilot, not thinking too much about budgeting, saving or investing for post-work life. Despite more money coming in each month, high-income earners can also have too much debt and they may not be prepared for a potential job loss, a premature death or disability, or a comfortable retirement.
What they face are unique challenges: they typically pay the highest tax rate, they have higher expenses for homes, vacations and entertainment, and they are often paying for expensive private schools for their kids. Their job tenures can be riskier the higher up the corporate ladder they rise, and unpredictable bonuses or stock options can comprise a large part of their compensation.
These realities, along with rising interest rates, falling markets and recession concerns, have resulted in more high earners seeking financial advice.
“Frankly, I cannot keep up with it, we are doing two retirement plans a week right now,” says Kurt Rosentreter, a portfolio manager with Manulife Securities in Toronto.
He often finds it’s a trigger such as hitting a milestone like age 50, or declining value in an investment portfolio that prompts a visit to his practice.
“They have big incomes and big expectations. If they are making $300,000 gross, $200,000 after tax, they are spending it all,” he says.
That high earner may be maximizing RRSPs and TFSAs, but it’s not good enough, the advisor warns. Those savings plans are “not designed for someone making $300,000,” he explains.
“I do a full-blown retirement forecast and tell them they need $3-million to $5-million before they retire and they look at their savings and say, ‘I’ve got a million,’ and I say ‘keep working.’”
Ideally, high-income earners should put aside more than Ottawa’s annual limits for tax-sheltered investments, they need to resist the urge to live large, and they should have clear retirement goals.
“Executives are like everyone else. There are some savers and there are some spenders,” says Benoit Poliquin, founder and portfolio manager of Exponent Investment Management Inc., in Ottawa.
His firm has attracted high-income earners from a diverse group that includes Alberta’s oil patch, Ottawa’s tech industry, and Montreal’s business executives.
He also finds major life events lead executives to seek investment advice. That can be a job change, a decline in a company’s fortunes, or a divorce.
“Something happens in their life that scares the bejesus out of them, and their financial house needs to get in order. Because they are type-A personalities, they want to get it done and get it done right.”
For Mr. Poliquin, a “handful of decisions” determine whether high earners end up wealthy or struggle. Those include how they take control – or don’t – of their biggest expenses such as their home, second property, travel, and spending on children.
He cites a senior-level client “whose house was not in financial order” due to outsized travel and over-generously supporting family. Reining in that spending dramatically turned around his financial outlook.
“He is really into cars and motorcycles. But the man lives in the same house he bought when he was not an executive. The house has been paid off for 20 years and costs next to nothing to run and he is super happy. His life is simple.”
The current economic mix of rising inflation and interest rates could extend for years. That could mean piggybanks such as tax-free savings accounts might need to be used to cope with higher inflation, rather than for healthcare or other urgent needs in retirement, says Douglas Nelson, president of Nelson Financial Planning Corp., of Winnipeg.
To ensure clients don’t run out of money, his firm looks both at current and future spending and how to pay for it through retirement income from sources such as private and government pensions, registered and non-registered accounts and income splitting.
“The goal is to always have two equal incomes in retirement, so the income plan needs to be well thought out in advance of retirement” and also structured so it is withdrawn in the most tax-efficient way, he explains.
Mr. Nelson says the difference between the haves and those that don’t have enough comes down to a bit of planning and discipline.
The haves “are the ones who are forward thinking and who pay attention to the details, especially when it comes to managing their tax picture,” he says. “Those who don’t do these things always end up with some type of financial dilemma that sets them back unexpectedly.”
If this all seems overly pessimistic for high-income earners who are currently well off meeting their retirement goals, it’s not all doom and gloom.
“With the money they make, they are in the best position of anybody to fix this because they have the cash-flow firepower,” says Manulife’s Mr. Rosentreter.
Executives and other high-income earners face the prospect of the highest tax rates in Canada, however there are steps they can take to mitigate them, says Paul de Sousa, senior investment advisor at Sightline Wealth Management in Toronto.
The first tier starts with maximizing RRSPs and TFSAs, followed by income splitting to even out spousal incomes, spousal RRSPs, potentially making low-interest spousal loans, and maxing out RESPs for children. “I find even those are table stakes, it is not always a forgone conclusion that these are all maximized,” he says.
Beyond those tax reduction strategies, Mr. de Sousa also recommends executives consider investing in tax-deductible flow-through shares because “the macro tailwind behind resource companies is very favourable.” He also advocates for creating family trusts, which offer benefits such as tax reduction and income splitting.
Executives also almost always need to increase their insurance coverage to replace their income should they die, fall ill, or get injured and are unable to work.
“If we had a machine that produced $750,000 a year, we would insure that machine. I find people woefully under-insured and relying on their corporate plan, which does not come near to replacing their income,” Mr. de Sousa says. “They are basically hoping that nothing goes wrong, and hope is not a strategy.”