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Launched in September 2014, Ask the Expert is an on-line library of information providing timely, credible and unbiased information about financial-related matters.  The goal of Ask the Expert is to provide information that ultimately improves the financial literacy of our plan members. Questions can be submitted by clicking on the “Ask a Question!” button above and answers are provided by our subject matter experts

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Questions

Tags: Benefits Budgets Debt Financial Planning Investing Life Events Retirement Saving Taxes

What are the pros and cons of a fixed or variable mortgage?

Tagged: Financial Planning Life Events

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There are several factors to consider in deciding what the best mortgage is for your situation -  the pros and cons of a fixed or variable mortgage is just one.

Variable Rate Mortgage

With a variable rate mortgage, the interest rate is set monthly by the financial institution and fluctuates with the prime lending rate. When the interest rate changes, your monthly payments may stay the same and the amount of interest you pay changes, or your monthly payments may change. There is a higher level of uncertainty that may cause anxiety if rates increase and you’re on a fixed budget.

Fixed Rate Mortgage

With a fixed rate mortgage, the interest rate is set for the term of the mortgage. That means that your monthly payments will be the same regardless of the change in the prime lending rate.  Because there is no uncertainty, it offers you peace of mind and security for the term of your mortgage. However, the rate of interest is usually higher than a variable rate mortgage and the extra interest costs may not be worth the premium.

What factors should be considered when deciding on the best type of mortgage?

Factors to consider include:

  • Your budget
  • Risk tolerance
  • Interest rate fluctuations
  • How long you plan to be in your home
  • Future goals.

Take a look at your budget in order to figure out how much you can afford to pay each month.  The recommended percentage is between 30% and 35% of your take home income.

Tolerance for risk is a very personal consideration.  Do you prefer knowing what you’ll pay each month even if you end up paying more in the long run or can you handle the uncertainty due to fluctuations in interest rate?

If rates are going down, then you may want to consider a variable rate and to take advantage of lower interest costs.  If rates are increasing, then it will depend on your budget and how much additional payment you can afford. As rates increase so will your mortgage.

How long do you plan to be in your home? Based on current interest rates, if you plan on being  in your home for the next five years, a 5 year fixed rate is a good choice.  If you know that you will stay in your home for only a year or two, then a variable rate mortgage may work better because if rates started to increase dramatically, you could always lock into a fixed term at that time.  This would provide you with flexibility when the time to move comes.

What are you future goals? While you’ll always have housing costs, you may want extra cash to put towards achieving other financial goals, such as saving for retirement or a family vacation. In this case, you may want to consider locking in your mortgage to a five year term.  It is important to be able to afford your home and pay off your mortgage but make sure that you are enjoying your journey along the way and not just paying off your debt.

It’s important to work with a qualified advisor to discuss your situation to determine the option that will best suit your needs, both now and in the future.

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What is credit counselling?

Tagged: Debt Financial Planning

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Credit counselling is a service that helps you review your income, expenses, assets and debts (e.g., credit cards, student loans, and mortgages) with the intent of helping you solve your debt problems.  It can improve your finances without debt consolidation loans or consumer proposals. It also provides advice on money management.

If you are starting to notice that you are having trouble with money, the sooner you address the situation the better. You need to be honest with yourself about where you are financially in order to change.  Common signs that you may be having credit issues are:

  • Using credit cards to pay monthly expenses
  • Taking cash advances on credit cards to pay off another credit card
  • Borrowing money from family and friends
  • Worrying about how to pay the bills each month
  • Exceeding your credit card limit
  • Lying about the amount you spent to purchase an item

With credit counselling, it is possible to change your financial direction by developing strong money management skills..  You can get help reviewing your debt and how to pay it off a quickly as possible, how to develop a budget that works for you and allows you to pay off your debts, and how to save for the future and enjoy your journey today.

A budget should provide you with a breakdown of how much money you bring home each month, what your monthly expenses are, and how much is left over at the end of the month.  If you cannot balance your budget then you either need to increase your monthly income or decrease your expenses.

It’s important to understand the terms of all your debts.  In other words, what is the interest rate you are paying, how much are your monthly payments, how long will it take to repay the debt, and if there are any restrictions or hidden fees, such as charges for making early or additional payments.

Once you have your budget and debt repayment under control, part of credit counselling should include how to save for future goals such as an emergency fund, vacations, buying a home or new car.

There are various organizations that provide credit counselling services. Take a look online, ask your accountant, or check with the Better Business Bureau (BBB).  There are many Not-For-Profit organizations that offer credit counselling services.  It’s important to ensure that the organization is licensed in Ontario and that their advisors have appropriate qualifications.

You should be offered an initial free appointment by the organization to explain their services and the options that may be best for you.  Be sure to discuss the fees the organization charges and how they will be paid. You can also ask them how successful they are at educating clients to ensure you don’t get back into the same financial situation that brought you there in the first place.

Working with a qualified advisor will enable you to improve your situation and reach your goals for the future while enjoying the journey each day. - J.R.

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What is debt consolidation?

Tagged: Debt Financial Planning

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Debt consolidation takes all of your various debts, credit card balances and loans, and combines them into one loan with one monthly payment. The intention is to pay off your debt faster with lower interest rates. It’s also about maintaining a good credit rating; your credit score will decline if you miss payments.

Debt consolidation is a good option if you are trying to pay credit cards or other consumer debt with high interest rates and you have equity in your home. It doesn’t make sense to use a debt consolidation loan if you are trying to combine several small loans that already have low interest rates or if you have too much debt.

A debt consolidation loan requires that you are working and have a regular income.  You need to have your expenses under control and are manageable. The bank will review your expenses to ensure that you are within certain limits (e.g., housing costs are about 30% of your take home pay).  Your credit rating must also be at an acceptable level. 

If you have existing assets such as a home, you can use your assets to secure the loan and obtain a lower interest rate. If you don’t have any assets to use as collateral then it may be more difficult to obtain a debt consolidation loan, and if you are able to obtain one, the interest rate may not be as favorable. You may wish to consider having someone else co-sign the  loan or secure it with their assets.

There are times when debt consolidation is a good idea, and there are times when it is not in your best interest.

The advantages of debt consolidation are:

  • All your creditors are paid in full.
  • If you act quickly before missing further payments, you can maintain your credit rating.
  • You have only one monthly payment, which makes it easier to budget.
  • You will pay less interest, which will allow you to pay your debt off faster.

However, debt consolidation has some disadvantages you should consider:

  • You still have your credit cards, so need to control your spending.
  • The loan must be paid regularly, so you’ll need sufficient cash flow to make your payments.
  • If you have a co-signer and you can’t make payments, then the co-signer will be required to make the payments
  • If you have used your home as collateral and you can’t make the payments, it can put your home at risk.

If you don’t qualify for a debt consolidation loan, then a debt settlement or a consumer proposal may be an option.  While they result in a reduction of the amount of debt, they have serious consequences. Both will impact your credit rating for a period of 5 to 7 years. It’s important to get advice from a knowledgeable expert about whether or not these options that will meet your needs. 

I recommend reviewing What is credit counseling? for information about how you can manage your debt to avoid debt consolidation, debt settlement, or a consumer proposal.

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I'm retiring soon. How can I determine what is better for me, an annuity or a RRIF?

Tagged: Investing Life Events Retirement

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The money that you accumulate in your RRSP (Registered Retirement Savings Plan) or other retirement saving plans must be transferred into a RRIF (Registered Retirement Income Fund) and/or an annuity by December 31st of the year you turn 71.  Understanding the differences between them will help you decide which will work best for you.

Annuity

An annuity is a financial product sold by insurance companies that you purchase with a lump sum. An annuity provides steady, guaranteed income over the term of the annuity. Depending on the type of annuity, the income is usually guaranteed for your lifetime or a certain time period, and the income will stay the same throughout this period.

You can’t withdraw any additional money from your annuity.  Once you have purchased the annuity you are locked into it.   The insurance company makes all the investment decisions and you receive the regular payment without having to make any investment decisions.

It is important to understand the rates of returns when purchasing an annuity.  The value for the annuity is set when you purchase it, so in times of lower interest rates, your income will be lower than when interest rates are higher. The timing of when you purchase an annuity can also make a significant difference to your retirement cash flow. For example, an annuity of $100,000 at 2% would provide a yearly income of approximately $5,202 whereas if interest rates were at 5% that same $100,000 annuity would pay approximately $6,760 yearly. Annuities can be purchased at any time and not just when you are retiring.

RRIF

A RRIF is a tax deferred retirement plan that is registered with Canada Revenue Agency and is usually administered by a financial institution such as an insurance company or bank. Investment decisions with your RRIF are made by you and your investment advisor, which gives you control over your money and investment decisions.

You must withdraw money from your RRIF each year and the minimum amount will change depending upon your age. The government provides a table of the minimum percentage you are required to withdraw each year after age 71. Unlike an annuity, there is not a guaranteed amount and the level of income is dependent upon how well your investments are growing.  However, a RRIF provides flexibility because you can withdraw additional money.

A RRIF is set to decline yearly so that at age 95 it will expire.  You can have multiple RRIFs at various financial institutions.

Which one to choose?

If you’re more comfortable with a steady flow of income, you may want to purchase an annuity. If you want to ensure you have access to additional income for future needs, then a RRIF would be best.  Either way, you should consider the tax implications of both a RRIF and annuity. Both are taxable when received.  A RRIF will continue to grow free of income taxes until you withdraw the funds.  The annuity will be taxable in the same amount each year, unless it is indexed.

There is no one right answer and the important thing to consider are your cash flow needs and how to best fund them with the resources you have.  Working with a qualified advisor will help you determine the best mix for your needs.  You can use both an annuity and a RRIF to provide the security of a steady income stream and the flexibility of having cash available if you require it. -J.R.

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What tax write-offs should every midwife take advantage of to minimize taxes?

Tagged: Benefits Taxes

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Writing off something on your taxes simply means deducting an amount -- permitted by the Canada Revenue Agency -- to reduce your taxable income. You can write off numerous items on your taxes, ranging from RRSP contributions to self-employment expenses.

Some tax write-offs also come in the form of nonrefundable credits, which reduce the amount of tax you owe directly. Tax write-offs are beneficial to you as a taxpayer because they can save you money on your tax bill.  The most common write-offs for midwives are as follows:

1. RRSP Contributions: Deductible RRSP contributions can be used to reduce your tax. Generally, any income you earn in the RRSP is exempt from tax as long as the funds remain in the plan; that said, you usually have to pay tax when you receive payments (withdrawals) from your RRSP.

Midwives can determine their RRSP contribution amounts for tax purposes from the receipts mailed to them by Morneau Shepell (for contributions prior to January 1st, 2015) and Desjardins (for contributions on or after January 1st, 2015). You should receive 2 receipts for each calendar year; one for the first 60 days and another for the remainder of the year. Contact the AOMBT if you are missing any receipts.

2. Medical Expenses and Health Premiums: Married or common-law couples are allowed to pool their medical expense claims together. Taxpayers claiming medical expenses should be sure to keep all receipts related to their returns. The expenses eligible for the medical expense credit are quite lengthy. Refer to IT519R2 (CRA website) for a complete list.

You can deduct the premiums you paid for health coverage. Midwives receive a receipt with premiums paid for the previous year every March.

3. Donations: The CRA allows a tax credit on charitable donations of approximately 21% for the 1st $200 (in Ontario) and 40% on amounts over $200, up to a maximum of 75% of net income.

Spouses can pool their contributions to maximize the tax break. Furthermore, contributions need to be included but not be claimed in the tax year they were made, but can be carried forward for up to five years. Donations under the $200 limit can be accumulated and claimed in later years to qualify for the higher credit allowance.

CRA offers a searchable database (http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html) of registered charities permitted to issue tax receipts.

4. Out of pocket expenses not reimbursed by the midwifery practice: According to the CRA, you can write off any reasonable expense you incur to earn business income (on the self-employment statement called T2125). This includes expenses such as:

  • Telephone
  • Internet
  • Courses/development
  • Accounting fees
  • Vehicle
  • Professional fees and memberships

If you are going to write off expenses on your taxes, it is a good idea to hold onto receipts for 7 years as the CRA may request them. The CRA also sets the requirements for each type of deduction and credit, which can be reviewed on their website: www.cra-arc.gc.ca. -S.M.

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How do I manage my investments and assets during retirement? I want to make sure I keep my capital at a reasonable level while still managing to enjoy the money I set aside.  

Tagged: Investing Retirement

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In managing your investments and assets during your retirement, you first need to determine the amount of cash you need for your desired lifestyle.  Once you have determined the amount of cash you need, then you can review your various sources of income to determine the best course of action for your retirement. You can plan the mix of income and use of cash to fund your retirement and minimize taxes to ensure you get the most out of your money.

When you retire, you may have a few different sources of income to report on your tax return, such as Canada Pension Plan, Old Age Security, income from an employee pension plan, and investment income on any assets not invested in a TFSA, RRSP or RRIF.  Understanding the type of income you are reporting on your tax return each year and the related tax implications allows you to manage your taxable income and the amount of income tax you have to pay each year.  The less money spent on taxes allows you to keep more money for your retirement.

Withdrawals from your RRSP are included in your taxable income. It is important to review the amount you are taking out each year and assess the tax bracket to ensure you are paying the lowest income taxes possible. 

You are required to convert your RRSPs into a RRIF by December 31st of the year you turn 71.  A mandatory minimum withdrawal is required every year from your RRIF once you are 72.  This minimum increases every year, and will increase your taxable income. If the value of your RRIF continues to grow, then the income will continue to increase as you age.

It is important to review the value of your RRSP and the minimum RRIF withdrawal that you will be required to take each year once you turn 72.  This upfront planning will allow you to manage your withdrawals before you turn 72 and control your level of taxable income to minimize taxes during your retirement.  You may need to consider withdrawing more than minimum  each year to control the amount of income taxes owing.

If you have excess cash from withdrawals from your RRSP or RRIF, investing in your TFSA is a good strategy as the investment income earned is tax free. Withdrawals from your TFSA are not included as income for income tax purposes.  A TFSA is not a bank account;you cannot withdraw and then put money back in the same year. If you withdraw money from a TFSA – you have to wait until January 1 of the following year to put the same amount withdrawn back into your TFSA.

I recommend working with a qualified advisor to review these areas to ensure you are able to have your desired retirement lifestyle.  A review of your plan should be done at least once per year. -JR

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What are the differences in income tax considerations between when I am working and when I am retired?

Tagged: Financial Planning Retirement Taxes

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The biggest difference between working and retirement is often the sources of your income, which have different tax withholding requirements.

Most often, midwives are self-employed, and income comes from billable courses of care.  Self-employed midwives usually make installment payments each quarter, settling with the government each year when they finalize their personal tax returns. When you are working,  you may be living on 100% of your income – paying for expenses such as taxes, your children’s education, mortgage payments and other discretionary spending.  Hopefully, you are also saving for retirement as well.

On retirement, your income will come from different sources:

  • Canada Pension Plan: you have to apply for benefits, and can do so as early as age 60 (with a reduction) or as late as age 70 (with increased benefits).
  • Old Age Security: you have to apply for benefits at age 65.  Be aware of potential clawbacks; if your total income is too high, you have to repay OAS benefits.
  • Registered Retirement Savings Plans (RRSP) withdrawals: the RRSP money that you have saved for retirement can be withdrawn to supplement your income. 
  • Registered Retirement Income Funds (RRIFs): At age 71, your RRSP must be transferred to a RRIF (which can be an annuity, a stock portfolio, or a variation of both), and a minimum amount must be paid to you each year.
  • Income from non-registered investments like interest, dividends, and/or possibly capital gains.
  • Pensions or other income from your spouse (they may still be employed).

Pension splitting is also available to those who are retired.  This means that you are able to split your pension (and RRSP withdrawals if you are over 65) with your spouse, to minimize the amount of tax that you pay as a couple.

The issue that people in retirement often face is that each source of income assumes that they are your only source of income, and therefore they withhold tax on that basis.  The result is that minimum amounts of tax are withheld, causing large balances of tax owing at the end of the year when taxes are filed.  This may result in requiring to pay tax installments. 

The good news is paying installments is not new for many midwives. Therefore, the main goal is to estimate what your income will be.  A financial planner can work with you to plan and save accordingly.

To learn more about planning for retirement and how your GRSP can help, click here to access a video and presentation from Desjardins. -RMI

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I'm approaching retirement. What steps do I need to take to prepare and when?

Tagged: Financial Planning Retirement

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Retirement planning should be done at all stages of your career.  However, as it draws closer, you need to plan with accurate information to determine if your resources will support the retirement lifestyle that’s right for you.

The first step is to calculate your expenses. Start by keeping a record of your spending for at least six months.  Write down everything you spend, including groceries, utilities, mortgage payments, bank fees, clothing, entertainment, eating out, gifts, etc. A general rule is that your expenses in retirement will be about 70% of your pre-retirement spending. However, there may be other expenses to consider such as:

Debt - a mortgage, credit cards or other debt that has not yet been paid off before retirement.
Health care - extra costs not covered by the government health plan (starts when you are 65).
Income taxes - rate of income tax on your investment income

The second step is to assess your income and investments.  Many Canadians plan on receiving the 2 basic sources of Government support: Canada Pension Plan (CPP) and Old Age Security (OAS). Go to the Service Canada website (servicecanada.gc.ca) to determine what you will be eligible to receive and what options you have. You can also review our library of past Ask the Expert answers about retirement, including information on how to calculate your potential Government benefits and the impact the age at which you retire will have on your benefits here

Where will the rest of your retirement income come from? Do you have a work pension plan? What about your assets, such as your registered retirement savings plan (RRSP), tax free savings accounts (TFSA) and/or other investments? It is important to have current statements to determine your yearly income will be.  Many Canadians consider their home as a retirement asset; however, you still need a place to live and your home does not provide a source of regular retirement income.

A third and equally import step in retirement planning is how you’ll manage your resources during your retirement. You should not only plan for how your assets are invested but also how you’ll be withdrawing them.  Withdrawals will impact the amount of taxes you pay so it’s important to review the various tax treatments and ensure you are minimizing the amount of tax you pay while maximizing the income in your pocket. There also may be income splitting opportunities with your partner.

A few other areas you may want to consider before retirement are:

Do you have family members to support, such as an aging parent or children that are completing their education and/or are not able to fully support themselves?
Have you fully investigated what time and resources your dream vacation or hobby will require?
Have you prepared yourself for what your retirement lifestyle will look like and how you will stay active and engaged in life?

Planning ahead for retirement by calculating your expenses, assessing your income and investments, and knowing how to manage your retirement are important first steps. Working with a comprehensive financial planner will help to ensure that you have covered all areas so you can have the retirement you’ve always dreamed of.  

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I’m a new registrant. One of my colleagues mentioned that she pays her tax in installments. How does this work?

Tagged: Taxes

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http://www.cra-arc.gc.ca/esrvc-srvce/tx/mypymnt/menu-eng.htmlWhen you are self-employed (as midwives are considered), you file a form T2125 with your personal tax return. Your tax owing and Canada Pension Plan (CPP) premiums are due by April 30th. As such, it is very important that you set aside the funds throughout the year so that you can pay the balance owing by April 30th and avoid paying interest.

Tax installments are the process by which the self-employed person pays their tax in installments during the calendar year in which you are earning your taxable income, rather than paying the lump sum on or by April 30th the following year.

You are not required to pay installments if your tax owing in either of the two preceding years does not exceed $3,000. As a new registrant, it is unlikely that you owed more than $3,000 in the two years prior simply because you would have been in school. 

However, you always have the option of paying tax ahead of time. If you choose this option, you claim the amount paid on line 476 when you file your personal tax return and calculate the difference (owing or refund). If you have overpaid, you receive a small amount of interest.

How much tax you owe depends on how much income you earn and specifically what credits you are entitled to. You need to consult a tax professional to assist with your individual situation.

Once you cross over the threshold of owing more than $3,000, you will then be required to pay installments on Mar 15, June 15, Sept 15 and Dec 15. If you file your tax return the following year and did not make the required installment payments, interest on balances owing will be charged from those dates.

As an example, let’s look at a new registrant midwife making $60,000 in 2014 with very few credits. The midwife would be expected to pay tax of approximately $11,167, plus CPP of $4,851, for a total of $16,018. 

In the first year of installments, the midwife must only make two installments of 50%: $8,009 on Sept 15 and Dec 15.

In the second year, if income remains the same, the midwife would be required to make four installments of 25%: $4,004.50 on Mar 15, June 15, Sept 15 and Dec 15.

You can make installment payments through:

If you have questions, you can always call Canada Revenue Agency at 1-800-959-8281, visit the CRA website, or talk with your tax advisor.

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I’m at least 20 years away from retirement. Although I know my goal is long-term growth, I can’t help but panic when I see any dips in my investments. How often should I be reviewing my investments?

Tagged: Investing Retirement Saving

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This is a great question!  Reviewing your investments too often can cause stress and anxiety depending on what is happening in the market place. Your focus should not be just the returns your investments are making, but also your net worth and cash flow. These 3 key areas should be reviewed annually.

What is net worth?  Net worth is calculated by taking all the assets you own (e.g. house, cars, RRSPs, investments, etc.) and subtracting your liabilities (e.g. mortgages, student or car loans, credit card debts, etc.). The goal is to have your overall net worth grow each year. Net worth is a good indicator of your overall financial position.   You could have a great return on your investments of 10% or higher but if your overall net worth is declining, then it’s an indication that you may be living outside of your means.    

What is cash flow? Cash flow looks at all of your income and expenses on a monthly basis to ensure that inflows are greater than the outflows. In other words, is your total income higher than your total expenses? If not, then it doesn’t matter how good the return on your investment is because your overall net worth will be declining. This will impact your lifestyle now and at retirement.  There are lots of free cash flow products available, even mobile apps for your smartphone, to help you review and monitor your cash flow as well as set up a budget.

Having a well-balanced portfolio is key to reducing anxiety due to market fluctuations.  Reviewing your investments along with your net worth and cash flow should be done at least annually.  You may also want to review them before making any major changes in your life (such as starting a new job or moving). When reviewing these 3 areas of focus, it is also important to define what you consider a balanced lifestyle to be.  Is it being able to have an annual vacation with the family or having a larger home?  It is important to enjoy your journey through life and not just focus on how your investments are doing!

Setting a goal helps you to review your net worth, cash flow and investment objectively and, if done annually, allows you adjust your goals based on the overall performance and not what is happening in the markets.  Here are some retirement strategies that can help you achieve your goals over the long term and still have a great night sleep.

  • Pay yourself first:  take the top 10% of your earnings and invest those funds annually. 
  • Set a budget:  determine how you can live comfortably on 90% of your income and still enjoy the fruits of your hard work. 
  • Enjoy the journey:  plan an annual vacation, make a special visit to family or friends or a monthly dinner out or spa treatment – choose something important to you.
  • Review your net worth, cash flow and investments annually:  make it a comprehensive financial review, not just a review of your investments.
  • Be real: set realistic goals every year but live passionately and dream big!
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