The Natural Wealth™ Process: 90-Day Focus Review
The Natural Wealth™ Process is our proprietary financial life planning system. The Natural Wealth™ Process divides financial life planning into five elements: Vision, Wealth, Tax (and Estate), Cash (Flow), and Risk. Vision and goal planning are in constant view through the calendar planning year. We emphasize planning in each of the other four elements in 90-day Planning Focus periods through the year.
In the first 90-day Planning Focus period, from January through March, we emphasize Wealth planning. In the Natural Wealth™ Process, we divide Wealth into three sub-elements: Person Wealth, Portfolio Wealth, and Possession Wealth. As we turn the page on the Wealth Planning Focus period, let's do a quick review of the Wealth element and the nature of wealth in the Natural Wealth™ Process.
In the Natural Wealth™ Process, Person Wealth is defined as your ability to generate wealth from work activity and once retired from your pension incomes. It can also be defined as Human Life Value and is calculated as a present value of the income total received over the period you anticipate an income stream being paid to you.
Portfolio Wealth is all investment wealth whether it is in the form of Registered Retirement Savings Plans (RRSP’s), registered defined contribution pension plans, other registered retirement savings, and income plans, Tax-Free Savings Accounts (TFSA’s), non-registered investment accounts, family-owned businesses, rental real estate and related cash equivalent assets. In short, Portfolio Wealth represents any assets that will generate income without you having to work to generate it.
Possession Wealth is made up of all lifestyle possessions including your residence, recreational (cottages/ camps) or sunbelt real estate and, other lifestyle possessions like vehicles, recreational vehicles, appliances and furniture, art* and collectibles*, clothing, and any other possessions you may own. In some cases, households who own cottages (camps) or sunbelt real estate may rent them during their ownership of the asset, but our experience in working with clients with these sorts of assets suggests the rental income largely offsets expected ownership costs so would not normally be considered Portfolio Wealth. On a case-by-case basis, we may change how we record these sorts of assets in a client household Wealth Inventory, depending on the dynamics of the asset and the objectives of the household regarding holding the asset over the long term.
In the first 90 days of the year, we recommend households build a Natural Wealth Inventory, a modified Net Worth Statement, itemizing the types of wealth they have: Person, Portfolio, and/or Possession. The end of January or early February is often the best month to do a Natural Wealth Inventory because you should have received all your year-end statements from various financial institutions you may hold Portfolio Wealth assets with by the end of January.
The objective of Wealth planning activities in the Natural Wealth™ Process is to maximize household Wealth, particularly Person Wealth and Portfolio Wealth. Possession Wealth is often largely made up of assets that depreciate or require ongoing expenditures to maintain. Some people are confused by why we include residential and recreational real estate in the Possession Wealth category. The fact is that these assets often require ongoing cash flow to maintain and capital expenditures to upgrade and renovate over the lifetime of the asset which is often drawn from Person and Portfolio Wealth.
If you have not already completed a Wealth Inventory as at December 31, 2021, it’s not too late! Please take time to prepare one now. You will need your December 31, 2021 investment and bank statements which you would have received in January of this year along with a list of non-financial assets and a separate list of any debts or mortgages owed as at December 31, 2021. If you need statements from us with info on your investment assets here as at December 31, 2021, please call or email us and we will get a consolidated Portfolio review Statement out to you.
You can estimate your Person Wealth using this online calculator:
Note that if calculating your Human Life Value prior to retirement, input your current employment income and the number of years until your anticipated retirement.
The “Return on investments” rate is a notional number. We normally use 4%. This number is the return one might earn on a lump of capital invested to create the stream on income we are inputting.
You need to contemplate what inflation might be going forward. We are currently using 3%-4% long term inflation rates in our plans. You will also need to make an assumption as to your future anticipated annual income growth between now and retirement.
If you are calculating your Human Life Value post-retirement you can use the same return and inflation assumptions as you would if you were calculating your pre-retirement Human Life Value.
For a post-retirement Human Life Value calculation, you need to estimate your life expectancy which can be done, for the sake of this exercise, using this calculator:
Input the number of years between your age now and the life expectancy calculated in the “Years until retirement” box in the calculator and your ongoing pension income in the “Current annual income” box. If your pension has an indexing provision, you can input the estimated percentage relative to the inflation rate in the “Expected income growth” box.
As everyone can appreciate, estimating life expectancy is not an exact science. The exercise is for framing purposes and to create a basis for discussions on several financial life planning fronts. In financial life planning it is always best to anticipate one will live longer than otherwise anticipated when determining retirement cashflow needs and live shorter when considering post-retirement incomes in multi-person retiree households.
Person Wealth is an important consideration both, pre-and post-retirement in the Natural Wealth™ Process. We encourage clients to work with these calculators to get a handle on how important their health, knowledge and skills, and, connections (family, friends, and network) are both while working and after they retire.
If you have any questions about the Wealth element in the Natural Wealth™ Process or how to prepare a household Wealth Inventory, please email or call us.
In the next 90 days, we will shift our focus to the Tax and Estate element. We will be reaching out with a couple of initiatives that will make it easier for us to provide better advice and improved, more proactive service to you and your household in the future.
Thank you for your ongoing confidence!
David J. Luke, CFP, RFP, CLU, CH.F.C., CIM, RIAC | Financial Advisor
360 Private Wealth Management | Manulife Securities Incorporated
Unit 1 – 25 Scurfield Boulevard, Winnipeg, MB R3Y 1G4
Main Office 204.925.5868 | Direct 204.925.2073| Fax 204.925.2263 | Toll Free 844.688.3656