Personal Finance When Life is Short
Financial planners often encourage their clients to think long-term. We are more cautious about the risk of living too long, longevity risk, than we are about dying young.
I subscribed to the print version of MoneySense magazine for many years before it went fully online. I occasionally go through those old magazines looking for topics that might benefit from being revisited. This time I came across an article by Tim Whitehead, an economist and regular contributor to the magazine, that was published in the February/March 2006 issue. He wrote about his diagnosis of esophageal cancer when he was 49. The odds of survival for Tim were not good, but at the conclusion of the article, chemotherapy had shrunk the tumour and provided the opportunity the doctors needed to have it surgically removed.
In that life-or-death period, Whitehead gained a new perspective on personal finance. What follows are the seven new things he learned, followed by my observations updated for 2021.
1 Not all personal finance issues are equal.
Never once when I was sick did I worry about what was happening with GM’s next quarterly earnings report or the outlook for gold prices. What I did think about was my family and how they would fare after my death.
Some people are passionate about investing. They pore over quarterly and annual reports, they read all the analysts’ papers, and they dedicate themselves to investing. If you are a professional analyst in the investment industry that makes a lot of sense. Most of us are not, however. Getting that edge, trying to beat the market, is not easy, and for the most part, it doesn’t matter. Invest in a low-cost, broadly diversified portfolio from around the world, with a portion assigned to fixed income (aka bonds) in keeping with your risk tolerance, and call it a day. Doing so will give you investment returns that will beat a lot of other investors and will let you deal with the more important things in life.
2 One of the biggest favours you can do your family is to keep your papers in order and to ensure that your spouse is fully informed about your finances.
You should have a will and keep it up to date. And you should keep a statement of financial affairs with your will that lists your bank accounts, brokerage accounts, other investments, and any other information that an executor might need.
This is “evergreen” advice. A useful tool to help with this is The Family Inventory available online from RBC Wealth Management. If you want more detail on funeral arrangements, Eco Cremation and Burial Services also has some helpful guides. If your estate is reasonably simple, two online will options to consider are Epilogue Wills and Willful.
3 Teach your children to handle money responsibly.
It’s never too early or too late to begin.
You may live your financial lives differently, but I rarely use cash. Last winter we sold some old tire rims for a car we no longer had. The buyer paid in cash. That cash has been sitting on the table beside my bed for months; I have no use for it.
Money is a pretty abstract idea in the first place. The disappearance of physical currency from daily use has only added to the abstractness, making it that much more important to teach about. A recently published resource on this topic is The Wisest Investment, by Robin Taub.
4 If you think your children will continue their education after high school, contribute to RESPs for them.
You will receive a government grant on top of your own contribution, which makes these savings vehicles almost a no-lose proposition.
I have written here and here about Registered Education Savings Plans. Government sites are also helpful. Many seem to associate RESPs with university or 2-to-3 year college programs, but there are many different qualifying educational programs for which your children show aptitude or interest. Consider using this resource, especially when the money you contribute can grow tax-free and be matched by government grants. Why turn your back on up to $7,200 of free money for each of your children? And if you find yourself in a low-income situation, open an account and apply for the Canada Learning Bond. Your child can receive up to $2,000.
5 Consider your insurance needs.
In nearly all cases, term insurance, which covers you for only a specified period such as 10 years, is a better deal than whole or universal life. Consider disability insurance, too. This will provide your family with an income if you fall sick or suffer an accident that leaves you disabled.
I’ve written about life insurance here.
Whole or universal life insurance, broadly known as permanent insurance, is meant to last for your entire life. Premiums are much higher, but there is a guaranteed payout at the end of your life. In that respect, permanent insurance can be thought of as part of your estate plan, as an inheritance for your heirs.
Term life insurance policies have lower premiums, especially when you are younger, but will go up over time. It is usually meant to insure against a specific time-limited risk. For example, if you have a house, you may want to have an insurance policy in place that will pay off the mortgage at death. Once the mortgage is gone, that insurance is no longer necessary. If you have dependents, children, and a spouse, you may wish to have insurance that will make up for the income that will be lost if you were to die prematurely. You may also want a certain amount of an insurance payout to fund an RESP since your income will no longer be available.
6 Saving for retirement is a good thing to do.
But keeping balance in your life is also good. If saving for retirement keeps you from enjoying life, remind yourself that the future is uncertain and that you might not make it to retirement.
Saving for retirement, whether through a portion of your earnings going to the Canada/Quebec Pension Plan, a private pension plan, or personal savings via an RRSP or TFSA (the latter being a new option since Tim Whitehead wrote his original post) was never about spending as little as possible in your younger years so that you could spend extravagantly in retirement. Rather, it is about smoothing your income and expenses so that you can maintain a similar standard of living throughout your life. Sure, the F.I.R.E. movement (another idea that has developed since Whitehead’s original article) has emphasized extreme frugality now to live freely in long-term “retirement” later, but for most, this is not a desire. The whole of our lifespan has value, so saving a portion now allows us to spend more than we otherwise would later.
I’ve written about retirement planning in multiple blog posts, starting here. Economists say retirement is one of the most difficult puzzles to solve as there is so much uncertainty, especially about the future, as Yogi Berra might say. Course corrections will inevitably be necessary, but uncertainty doesn’t mean that we should just give up saving. Nor does it mean we should give up living right now. As Whitehead writes, balance is important.
7 Consider keeping an emergency savings account.
Just as you never know when the car’s transmission might go, you never know when your financial underpinnings might take a beating. Having a little put aside can be a big comfort in the early days of uncertainty.
These words of wisdom were never truer than they were last year. While epidemiologists and public health experts knew that a pandemic was inevitable at some point, it’s probably true that most of us never expected it to last more than a few months or to affect us personally. And yet, over 25,000 people have died in Canada, with estimates of over 4 million dead for the entire world. Even if you didn’t fall ill, you may have lost your job. An emergency fund would have come in handy.
How much should you have set aside for these sorts of contingencies? The rule of thumb taught in personal finance textbooks for years has been to set aside 3 to 6 months of living expenses. Given the lessons learned from COVID-19, I’ve read that many financial planners are now recommending that 6 months be the minimum and that a good emergency fund should cover up to a year’s worth of living expenses. That sounds like a real challenge for many, but I would still suggest that as a target to which you might aspire. Put that money in an online bank like EQ and you will even generate some interest on your savings.
When I read Tim Whitehead’s article, I wondered what had happened to him. Had he fully recovered? Sadly, I found a website with some pages dedicated to Tim. He had died a few months after this article was published. You can read a brief obituary here as well as links to some of his other writings.
Tim Whitehead’s seven points were in some sense about leaving a legacy. Some people think that, after they die, it doesn’t matter to them, so they don’t bother making a will, organizing their information, or planning for their surviving family’s future. I cannot help but feel sad about his early death, but I am grateful that, in the middle of a very difficult situation, he found the time and energy to reflect on his circumstances and write an article that would be beneficial to his readers. That is a fine legacy to leave.
This is the 106th blog post for Russ Writes.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.