COVID-19: Finances, Retirement, and the Impact on Small Business Owners

Not to assume I speak for all my readers, but my guess is that many of you are feeling like I do, knocked off kilter by limited social interaction, restricted working conditions and the disconcerting feeling of watching your retirement savings dwindle and finances sag.

I have not even mentioned the most serious issue: health. You or a family member may have contracted the new coronavirus. And if you have managed to avoid it, you may still be concerned for yourself and your loved ones, some of whom may be especially vulnerable.

Financial concerns

The financial concerns because of this virus are real. Whole industries such as travel, entertainment and oil have been hit extremely hard. Financial transactions have slowed or ground to a halt in certain industries. Many if not all businesses will be impacted by the economic consequences to fight this virus. Some will bounce back quickly, others more slowly.

We are impacted as employees, small business owners or retirees vis-a-vis the security of our jobs, the stability of our businesses and how we fund our retirement (with retirement funds down 10-30% depending upon your asset mix, in a matter of weeks). The anxiety we all feel is rooted in a reality that will not be fully measurable until the virus recedes and normal life resumes. But normal life will eventually resume, and we can take action now and in the future, to put us in the best position to rebound from the financial challenges of coronavirus.

I have received various questions from individuals and business owners. I will address those questions in this post.

Individuals

I have been asked two questions in particular by individuals:

1. Should I reduce my equity exposure to limit my stock losses?
2. I am near retirement - should I delay my plans?

Equity Exposure

In a perverse way, COVID-19 has forced many of us to learn about our risk tolerance and ability to handle the volatility of our current investment allocation; that volatility is often correlated to the level of equity we hold. If you cannot sleep at night with your current equity or investment allocation mix, then maybe you have too much investment risk and you need to speak with your investment advisor.

This discussion should revolve around whether your equity allocation truly suits your investment objectives and whether the potential volatility of your equity holdings is appropriate for your risk tolerance, now that you have been on the roller coaster ride and can quantify your risk aversion.

You will have noticed I have not directly answered the "should I reduce equity" question. That is because (1) as an accountant I cannot provide investment advice and (2) the answer is really based on your risk tolerance and other factors specific to your own situation. 

As a side commentary, while a requirement of the investment industry is to determine a client’s risk profile and create a portfolio that suits that profile, I would suggest this risk determination is often superficial. Most of us do not understand our true risk tolerance until a situation such as the markets’ rapid reaction to the virus knocks your portfolio down 25% in a matter of days.

The better investment managers I deal with, not only determine your risk tolerance through an interview process but also back-test your tolerance for that risk over the markets for the last 30 years or so. They do this before they invest your money. It would be interesting to see who has been more stressed recently, those with risk tolerances determined purely by questionnaire and discussion and those who also back-tested before they invested. I would guess the latter.

Retirement Plans

It may or may not be too early in this ordeal to alter your retirement plans. We have previously discussed how the sequence of returns can affect your retirement. While sequence of returns technically deals with your investment returns when you start retirement, the reality is that whether practically or psychologically, this significant drop in our retirement savings could impact when we start our retirement.

There is no one-size-fits-all answer to this issue as it will be very fact specific. If you have a pension from your job or some other anticipated flow of funds in retirement, a stock market decline may not be a large longer-term issue assuming the market bounces back at some point like it has done historically.

However, if you were going to draw on your retirement funds immediately upon retirement, the reduction in your nest egg in this bear market could severely impact your retirement plans.

My suggestion is that once things settle down, you review your plans (including the preparation of an actual financial plan or a review/update of an existing plan) with your financial planner, financial advisor or accountant. You will then have objective valuation of whether your retirement date may need to be pushed back a year or two.

Small Business Owners

Small business owners face a whole bunch of concerns sparked by COVID-19 that employees don’t need to manage. These fall into both short- and long-term buckets.

Short-term concerns

Short-term practical concerns include items like how you manage your cash flow, will insurance cover any of the lost profit or expenses and what are business owners’ employment responsibilities.

Many small business cash flow issues are addressed in this document.

I have been informed by colleagues at my firm who deal with preparing insurance claim reports and the related costs that there is no standard answer to whether a company’s insurance coverage will cover any of their losses due to COVID-19. Each claim will come down to the specific wording of the policy and how that policy deals with such terms as “pandemic,” “infectious disease” and “business interruption.” A legal interpretation may be required in many cases.

The employment law questions are complex and unique in this current situation, and unfortunately, I tell my clients they need to talk to their employment lawyer.

Clients are also asking if Ottawa or provincial governments will provide aid to help keep their businesses afloat. This is a fluid situation. The feds have announced a robust stimulus package, with many details still to follow. [ Note: after publishing this post, the Emergency Care Benefit and Emergency Support Benefit were subsequently rolled into the Canada Emergency Response Benefit (see details here)]. The provincial and territorial governments may also chip in to help their constituents.

Longer term concerns

As discussed earlier, certain industries and businesses have been hard hit by the economic slowdown caused by the virus, and almost all businesses will suffer to some degree – Netflix and Amazon are likely two of the high-profile exceptions. For a couple of the business owners I work with who have been considering selling their business, this sobering event has crystalized the risk of having their retirement concentrated on one major asset: their business. This is known as concentration risk.

They have now come to realize that almost any type of business could be severely impacted by a black swan event such as COVID-19. The risk to their retirement is significant if the concentrated business asset loses value due to an unanticipated event, especially close to their retirement date.

I think once the dust settles, some business owners may get very serious about the process of getting their business ready for a sale, whether in a year or over a couple years. As part of that process, they may undertake a value enhancement process to increase the sale price, by taking the necessary management, technological and other steps to become more attractive for a buyer (unashamed plug, BDO has specialists that assist you in achieving this value enhancement and others that can then take your business to market once the enhancement has been accomplished).

Tax considerations for difficult and uncertain times

Here is a link to a BDO publication released on March 16 about tax considerations for difficult and uncertain times. It is a good read.

A final note on the personal side of coronavirus

This was not a blog post I expected to write. Typically, at this time of the year, I write about how tax season is going. Coronavirus has disrupted our lives, sometimes in small areas that punch way above their weight.

Let me say upfront, I understand restricted social interaction including the cancellation of most sporting events is a minor inconvenience to help slow down the spread of the virus. In comparison to those who have fought wars or escaped warzones or been subject to other horrific issues, social distancing does not compare.

That being said, as most readers are likely aware, I am a big sports guy and I follow the Leafs, Raptors, Blue Jays, NFL football (sorry, CFL fans, I used to love the Argos, but that was many moons ago) and golf, among others. Like many of my friends, I have been shocked by the void of not having sports available to take our minds off the coronavirus as we have had during other economic downturns or communal crises, like SARS or even 9/11. The social distancing that is saving lives has also taken away a diversion that could help sustain everyone’s mental health.

I had never given it much thought, but when I went to my computer to surf and get my mind of the virus issues, I quickly realized the majority of my internet favourite list is made up of sports and investment sites. With no sports to write about and no desire to hear more bad investment news, my internet surfing has ground to a halt. Amazon is now the beneficiary of my increased Kindle book downloads. Probably a better thing intellectually, but I still have a sports void.

For those of you who expected this week to see Part 2 of the excellent series on Alter Ego and Joint Partner Trusts by Katy Basi, I hope to bring that to you in two weeks or when current events dictate. We are living in strange times, and I’ve always taken pride in The Blunt Bean Counter being a living blog, one that responds to events in the market and in our lives. It’s not business as usual for any us, but together we will get through this. I wish you and your families the best of health and a quick financial recovery.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Should I pay for my child’s university education?

Numbers are typically the focus of retirement planning. Will I have enough of a nest egg to support myself? When do I withdraw my retirement savings? Should I start receiving my Canada Pension Plan benefit early, before turning 65? These questions are easily answered by an advisor — preferably one who is good with financial planning software.

But advisors and clients often overlook the softer side of retirement planning, where human relationships and feelings come into play. One common issue on this front is adult children and their continued financial dependence on their parents – especially when deciding how to pay for a child’s post-secondary education.

This week BDO Canada LLP senior wealth advisor Carmen McHale explains why this common dynamic can be so fraught from both an emotional and financial point of view – and how to tackle it.

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By Carmen McHale

Most parents I work with have a hard time saying no to their children – their car payments and cellphone bills are covered by Mom and Dad well after the children are working and bringing in their own money. Parents pay for the wedding, help with the down payment on the house, pay for the master’s degree that never seems to end. They often ask: Should I keep my kids on the family payroll?

A recent survey by FP Canada found that more than a third of Canadian parents with children 18 or older have helped their children pay their rent.

The problem with this is twofold: first, your kids do not learn responsibility and are unable to budget for themselves because they have never learned the value of a dollar. The other problem can be much serious – you have spent so much money on your kids that you have put your own retirement in jeopardy.

As an example: The same FP Canada study reports that while less than 10% of parents with older children have used retirement funds to help them purchase a home, almost 40% of parents with children under 18 expect to postpone retirement to help their children purchase a home.

A report from Merrill Lynch also has some stark data points for parents to review. The study found that parents are spending twice as much on their adult children as they are putting away for retirement. Overall, it said, 79% of parents continue to give money to their adult children age 18 to 34.

What about the master’s degree? Most parents I work with want to pay for their children’s education, but covering costs for more than the four years of undergraduate studies is another story.

Multiple children, multiple tuition bills

I frequently run across a situation like this: the oldest child has just finished a seven-year post-secondary program and now the younger sibling wants to go to dental school (which would bring to eight the tally of years in school after graduating high school). I will assume for purposes of this discussion that any RESPs will be used for undergraduate or have been exhausted already.

Couples are often not prepared for these expenses, and now there is a dilemma. They have already covered all expenses for their first child, which could be upwards of $350,000 including living expenses (yes, $50,000 per year for seven years). Parents often feel guilty if they don’t treat their kids equally – what if they can’t afford the second child’s education? They have already paid the full way for the sibling. What does the couple do? They will be delaying their retirement by several years by funding the full bill. Will Mom and Dad have to delay their retirement? Even with this knowledge, they feel they are in a situation where it is too late to change course – family harmony is at stake.

Parents can handle this type of situation in a few ways. Sometimes they can guarantee loans for the dental school costs for the child. They can also equalize the extra school costs in their will or by reducing their financial assistance for the first child in other areas – like their wedding or house purchase.

Two overarching rules will ease the challenge. First of all, plan your approach in advance. And second, commit your resources responsibly. There is nothing wrong with pitching in to help our kids financially as they move through key stages in their life. Housing costs continue to rise, especially in many urban areas, and some courses of studies end up burdening students with significant debt loads. But parents also need to reality-check their financial support – and make sure it won’t put their own retirement at risk.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

BDO Canada LLP Retirement Survey Report - More Financial Survey Results

You may remember my November post highlighting the initial results of a financial survey conducted by BDO Canada LLP. These findings offered a trove of valuable information on the wealth management journey for Canadian business owners. They confirmed much of what I had been hearing in conversation with clients but also offered important new insights.

The financial survey produced such robust data that BDO created two reports. The second one — The Retirement Planning Report — is now available as a free download and reveals additional insights on how all Canadians manage their wealth and plan for retirement.

The survey that produced these two reports has strong ties to The Blunt Bean Counter. Many of you took part in this study — thank you very much for your tremendous participation and input. Some of you received a free copy of my book Let’s Get Blunt About Your Financial Affairs as a token of thanks for responding to the questionnaire. In total, almost 1000 Canadians took part in the study.

Summer beckons from just around the corner. For those taking time away from the office, the break provides a great opportunity to reflect on the big picture: how we envision retirement, how our finances align with that vision, and where family fits into the picture.

This new BDO report will help you focus on what matters to you in retirement and on your preparedness. Jonathan Townsend, the National Wealth Advisory Services leader for BDO Canada LLP, provides a synopsis of the report in his guest post below.

In conjunction with the BDO report, you may want to read, re-read or reference the six-part series I had on "How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!" The links for the blog posts are down the right-hand side of this page under the Retirement heading.

Retirement Planning Report   By Jonathan Townsend

Retirement sometimes appears to Canadians as a moving target. Like all plans for the future, it depends on variables that we can’t fully control. We do our best to cover all the circumstances, but life intervenes and renders our financial plans out-of-date.

“How much do people actually need to save?” Mark Goodfield in the report says the following: “That is the million-dollar question — with no clear-cut answer. At the end of the day, Canadians need to evaluate their individual needs with the help of a trusted advisor.”

That is why expectations play such a large role in successful retirement planning. In the 1980s, many Canadians believed their investments would support retirement at 55. Today’s pre-retirees have adjusted their retirement dates upward to fit the changing times. The average age of retirement climbed from 61 in 2005 to 63 in 2015, according to Statistics Canada.

BDO’s new Retirement Planning Report reveals valuable data on a topic that can be difficult to access: how Canadians themselves see retirement. By turning the spotlight on expectations, we can better understand the entire planning process.

Here are some key report findings that caught my attention:

• On preparedness — About half of survey respondents have prepared a financial plan. Of those respondents with a plan, almost three-quarters had a professional advisor prepare the plan.

• On health care — Long-term health care placed second on the list of respondents’ retirement concerns, but almost 4 of 5 of respondents have done nothing to prepare for health care costs in retirement.

• On family — Canadians in the so-called sandwich generation raise their children while looking after their parents. Fifteen percent of respondents in our study say they are supporting their parents financially. As longevity continues to increase, Canadians may need to calibrate their retirement plans to account for both slices of bread in the family sandwich. Rob Carrick of The Globe and Mail found this topic of interest, especially the fact that 10% of Canadians support both their parents and children and discussed the study here in his Carrick on Money newsletter.

• On pension plans — Companies have shifted more of the savings burden to employees by moving to defined contribution plans. In the longer term, more and more Canadians may have no employer-sponsored plan at all. Contract and part-time work are accounting for a larger share of the labour market.

The findings and strategies highlighted in the report provide actionable tips that you can incorporate into your own successful planning. I invite you to download the report here.

Jonathan Townsend is the National Wealth Advisory Leader at BDO Canada LLP. If you have any questions, please contact him at 519-432-5534 or jtownsend@bdo.ca.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Retirement Planning Spreadsheet

I often receive insightful and enlightening comments from my readers. I received one such comment in respect of Part 6 of my series on “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!".

When you read the comment (reproduced below), you will note the thought and detail provided. In the last paragraph of the comment, the reader discusses a retirement spreadsheet he created and he suggests that “there ought to be one in the public domain”.

I thought to myself, a reader who appeared so detailed and thorough, must have a pretty good spreadsheet, and thus, I asked him if he would be willing to share his work with others in the public domain.

The reader has agreed to share his retirement spreadsheet so others may benefit from it. I am providing a link at the bottom of this post to his spreadsheet. Please keep in mind that I have only played with the spreadsheet and have not rigorously tested it and any use of the spreadsheet is undertaken at your own risk.

The Reader's Retirement Experience

The comment as initially emailed to me and then subsequently posted on my blog is copied in full below; I find it quite insightful:

At Marks' request, I am posting my previous email to him. I would like to share my experience:

Ten years ago I figured that I could retire. I created a spreadsheet that calculated, year after year, investment return, expense adjusted for inflation, income tax, and remaining capital. The assumptions I used were:

- 2% inflation
 - 4% investment return net of management and trading fees; the entire return fully taxed

- income tax rates remained the same, but brackets adjusted for inflation

My registered accounts were fairly large, so I was careful to calculate each year the minimum withdrawal and the resulting income tax. In fact, one main reason I created this spreadsheet was so that I could play around with registered account withdrawals before minimum withdrawals kick in, to see which strategy would work best.

I did not factor in OAS or CPP (there is always that sticky OAS clawback, and even the Service Canada website cannot give you an accurate CPP amount in a future year when you actually start drawing on it). And I did not factor in my house. Bloggers note: The reader provides for OAS and CPP in his "other income" column.

The expense number I used to start was simply my previous year’s actual expense. In the model, I just ran with this expense, adjusted for inflation. Starting from age 50, it turned out that my withdrawal rate was 3% (excluding income tax), and the money ran out after 45 years. That was how I concluded I could retire.

(It turned out the best withdrawal strategy from registered accounts is to leave the money there as late as possible. The tax savings and resulting returns from these earlier years seem to offset higher income tax during the requisite withdrawal years.)

Here is my experience so far:

- My actual income tax has been lower than calculated, probably because of dividends and unrealized capital gains in my unregistered accounts.

- My actual return on capital yearly had been: 6.62, 6.82, 3.79, -7.27, 11.31, 8.32, 6.12, 6.20 and 7.78%

- My actual expenses (excluding taxes) had fluctuated from year to year, but over 10 years, the actual total expenses are 4% less than the projected total.

As a result, I am ahead of the model I that ran 10 years ago. Every year I update the spreadsheet with actual numbers, so that I can compare where things differ, and also see how the projections change. (I don’t bother updating the tax brackets or the expense projections.) Currently, the projections show that there will be quite a bit of money left after year 47.

Just for curiosity, I plug in a hypothetical withdrawal rate of 4% at age 65 into the spreadsheet, and let it run. Money will run out at age 95. So a 4% withdrawal rate excluding income tax is probably OK but I would be cautious of it.

On the other hand, I did not include OAS and CPP. Also, my situation is a two-income family.

This spreadsheet has been one of my most important financial management tools in the past 10 years. It is not that hard to create a spreadsheet like this where one can fill in one’s numbers and assumptions and see the projections; there ought to be one in the public domain.

Retirement Planning Spreadsheet

Here is the link to the Retirement Spreadsheet (Note: The screen will look haphazard, just go to the top left corner, click file and then click download). My reader has provided instructions on page one. I thank this reader for his selflessness in providing the spreadsheet to others.

The above spreadsheet is for informational purposes only. Both I and the creator of the spreadsheet make no representations and warranties as to its accuracy, completeness or use and you use the spreadsheet at your own risk.