Seeing your nest egg shrink is one of the hardest pills to swallow in retirement. Seeing that number go down as you begin to draw on your savings can be alarming.

 

The financial planning process should put your mind at ease. A plan looks at the big picture of your finances and ensures you have enough money to support your day-to-day lifestyle in retirement and to start checking those items off your bucket list.

 

But what about unexpected expenses?

 

A great first step is having a conversation with your wealth advisor. Here are six things he or she should be asking you:

 

What are you using this money for?

 

Understanding the context of the withdrawal is important to determine the best option for you. A one-off expense, such as a home repair, will require a different approach than a recurring cost.

 

We recently received a call from a client. In this high interest rate environment, his adult child and her family were struggling to make their mortgage payments. He wanted to help.

 

During the course of the conversation, we discovered that he was prepared to help his daughter for the next several months. It wasn’t just a one-time withdrawal. That meant that we needed to go back to his financial plan and ensure that he could support his family without putting his own lifestyle at risk.

 

What is your timeline for this money?

 

Your advisor should be asking about the urgency of the need, but he or she should also be factoring in the time of year.

 

If you need to make a substantial withdrawal from your investment accounts in the middle of the year, it is going to be a different conversation than if you need the funds at the end of the year. Mid-year, you will not yet know the total amount of income that you will make from sources like your job, your pension, and your investments. That lack of visibility limits your options to be tax savvy.

 

What are the tax implications of this withdrawal?

 

This is a big one. Most people have different ‘levers’ they can pull when they need money, including savings accounts, non-registered investment accounts, or registered accounts like Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), and Tax Free Savings Accounts (TFSAs). And each of these levers comes with a different tax treatment.

 

Our client was still a few years away from retirement, and was considering taking the money from his RRSP; however, that withdrawal would trigger a 30% withholding tax. We decided that it was not the most tax-efficient way to get the funds that he needed.

 

Do you plan on replacing the money in the future?

 

The unexpected cost you’re currently dealing with may seem like the most important thing right now, but you can’t afford to risk your future for it.

 

As advisors, it’s our job to help our client see the bigger picture. What impact would helping his daughter out financially have on other areas of his life? Would it impact his ability to support his lifestyle in retirement?

 

If he decided to take the money from his TFSA, the withdrawal would be tax-free and could be replaced in the following year. However, taking money from this account could limit his ability to grow his wealth, which could have implications for his retirement down the road.

 

When clients transfer wealth to their children, it’s in everybody’s best interest to ask this clarifying question: Is it a gift or a loan? It ensures everyone has the same expectations and reduces the potential for family drama.

 

Ideally this client’s daughter will be in a position to pay him back one day, but it’s not something he can rely on.

 

As we reviewed his financial plan, he revealed that he will receive an inheritance when his elderly mother passes away and can use it to replace the funds.

 

What is the emotional impact of this expense?

 

Advisors are typically numbers people; they make decisions based on the math rather than on emotions. But if your advisors are not asking you about how money is making you feel,, they are missing a big piece of the puzzle.

 

Looking at the client’s situation from a mathematical perspective, it might not make financial sense to make a big withdrawal now. While he plans to replace the money eventually, we can’t discount the power of compounding interest. It is especially important in retirement when he will need to balance two important, but competing goals: income and growth. If he takes money out today, the risk is that he will be unable to pay for the expenses that come up in the future.

 

Helping his daughter was an emotional decision for our client. He was worried about what would happen to her family if they got behind on their mortgage payments. Supporting her in this way would help him sleep better at night, even if that means he is able to take less trips than he had planned in retirement or he has less to leave behind for the next generation when he passes away.

 

Where should the money come from?

 

Once you and your advisor have talked through these questions, it’s time to make the final decision: Where should the money come from?

 

There is no one-size-fits-all answer, and each option will likely have its own pros and cons.

 

We aren’t sharing the story of our client to advocate for one option over the others. We are advocating for the power of the conversation. If you find yourself in a similar situation, sit down with your advisor. Ask the questions, review your options, and determine the right solution for you.