February 2009: by Darrell Nordstrom

Balancing Financial Risk in Business and Personal Life

Operating your business is like jumping out of an airplane everyday because the thrill is worth the RISK. Most days you find that risk truly is a four letter word.

The problems are obvious, and finding help to ensure that your parachute is packed properly for a safe landing for your business and for you is critical. Let's examine both.

The most important thing to consider is that risk is necessary in both personal and business life in order to provide healthy returns.

As business owners, you are inclined to focus on the business and concentrate financial resources into the daily operations because of high returns, perceived control, and the dedication to the success of your business. Many rely on selling the business as main source of retirement income. This is what creates the problems.

What happens if you or your business partner become permanently disabled or die prematurely? What do you do if revenues slow down and the bank calls your over-extended line of credit at precisely the worst time? If you are fortunate (unfortunate) enough to be dealing with foreign customers, what do you do when the Canadian dollar increases to $1.10? If you are lucky enough to become the victim of your own success, how do you find anyone with sufficient funds to purchase your operation? Liquidity can be an issue.

The other side of this coin is the effect these issues have on your personal life. Stock markets may go up or down, and investment in your business sometimes pays off and other times does not provide a return. However, the most important thing to consider is that risk is necessary in both personal and business life in order to provide healthy returns, and solutions do exist to act as parachutes and help address the problems caused by risk.

Risk
You do not have the luxury of a guaranteed pension and you are on your own when it comes to retirement savings.

Parachute
Establishing an individual pension plan allows your corporation to make tax deductible contributions into a pension plan in which you continue to control how the assets are invested.

Risk
Cash is "trapped" in your corporation and you are only familiar with receiving salary as compensation.

Parachute
Consider how the use of a holding company or a family trust can facilitate income streams to family members on a tax efficient basis.

Risk
You do not know what retirement benefits you are eligible for when it comes time for you to leave the business.

Parachute
Consider the advantages of being paid a retiring allowance (tax deferred transfers to an RRSP are permitted up to $2,000 for each year of service before 1996, plus $1,500 for each year of service before 1989 for which an owner/employee has no vested rights in a pension plan).

Or consider the greatest risk... you have created a business that is worth less than you think and you will not receive "fair value" because of a variety of negative influences. In this case, get the largest parachute possible by structuring your long term retirement income from several sources. These may include:

• restructuring investments to make interest deductible
• buying real estate, creating rental income
• establishing an emergency fund
• designing an investment portfolio of quality securities
• investing in tax efficient vehicles, such as tax free savings accounts (TFSA).

These issues are all about providing a safe landing. A successful parachute jump requires a well maintained aircraft, a qualified pilot, proper skydiving instruction, and immense attention to detail. In our business and personal lives, it's not much different. There is no end to the risks and there are many solutions to consider. It's critical that expert advice is accessed regarding tax planning, risk management, investment strategies, succession planning issues, and all related matters. Proper financial advisory services include the effective coordination of all these areas on a regular basis.

. . .
About the author
Darrell Nordstrom, CFP, RFP, CLU, CHFC, is a Senior Financial Advisor with Regency Advisory Corporation. He can be reached at 1-800-465-2100 or 665-3244, or click to email Darrell Nordstrom.

Disclaimer
Please contact a professional advisor to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources, however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances.

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