Money management for seniors

joyfulguyJanuary 18, 2004

Some time ago a financial advisor dealing with retirement was on a phone-in program on our national radio.

Many financial advisors suggest that seniors should put most of their assets into investments which vary only slightly in value, that is, they are largely guaranteed. Such investments usually pay only a small rate of return, especially recently.

As a professionally trained personal financial advisor with nearly 20 years' experience, I have disagreed, for a number of years.

I say that there are two rats that eat our cheese:

First rat? Income tax

Each year the income tax people want to talk to us about our current income. Here in Canada, not all of our current income is taxed at the same rate.

Interest earnings are taxed at the top rate, as are employment earnings.

Dividends on Canadian stocks (which few low-income people own) are taxed at a low rate.

Capital gain on assets which we own are taxed on the amount of the gain, but at a lower rate, when the asset is sold - or we die. Capital gain on increased value of owner-occupied home is not taxed.

I bought bank stock 35 years ago at about $2. or $4. a share (depending on whether I took a split into account). A few years ago each share was "worth" $56., then after about a year, $24., then $35., $40., $50., etc., currently $67.50 (I had to look it up in the paper - hadn't checked for a month or so).

I haven't had to report that gain to the tax people, and won't until I either sell them or die - and don't expect to do either, this week or next.

Second rat? Inflation.

If I own a bond, Guaranteed Certificate, etc. or other interest-earning instrument, usually they are not expected to increase in value.

As we all know, $10,000. now won't buy as much goods or services as they would ten years ago.

So I must take part of current interest earnings to add to my principal in order to maintain purchasing power.

Remember - the rats eat first.

After their depradations are finished - I get to keep what's left. In recent years, interest rates having been what they are, that was little or nothing.

Some folks chortled as they told me how they earned 19% on government bonds about twenty years ago.

They were filled with disbelief when I told them that they were lucky if they ended up keeping 3%. If they lost about 30% to tax, that brought their after-tax retention to about 13%.

Did the know what the rate of inflation was that year? No. About 12%. So - though their savings account showed a nice rate of growth, the amount that they were able to keep was much smaller than it appeared on the surface.

I told the financial advisor on the radio that, at age 65, I had possibly another 35 years to live, or 7 blocks of 5 years each.

I felt that it would be wise to have money that I might need in the next five years in asset class where principal was fairly stable. But - I should plan to use only a very small portion of my total asset in the first 5-year block, for it wouldn't be there to earn income to support me in later years.

Perhaps it would be wise to keep money that I expected to use during the second 5-year term in an asset where the principal value was quite stable - but there, again, I should use only a very small percentage of the total asset in that period.

If I were to use more than about 5% of my total asset during that 10 year period, I ran the risk of running out of money before the end of life.

I was fortunate in being able not only to live comfortably, if frugally, on my current income from pensions, which are partially indexed, but to retain some of the income to add to investments.

Which means that I need be more relaxed about perhaps carrying part or all of that portion of my total asset in equities, which are liable to fluctuate in value, as I do not expect to need to draw on investments during the next few years.

Now, about to be 75 in two weeks, I'm still living on pension income and managing to add some to savings/inverstments.

As for money in the third to seventh 5-year blocks, I felt that it would be wise to carry them in an asset where I could expect current earnings to be rather small, and preferably of a tax-advantaged type. If I could have them in assets where value was increasing, over the long term, but the increase did not attract tax until liquidation, that suited me fine.

He said that sounded like a good course to follow.

Still sounds like a good diea, to me. Despite the major losses in the market during the past sthree years or so.

Recent comers to equity markets have been only slightly aware that there have been major corrections in those markets on a number of occasions in the past, and regularly. So they should not have been surprised.

Yes, the losses were precipitous in the Information Technology areas - but they were heavily overblown for some time and were due for a major drop.

Anyone who held a major portion of total assets in that field had cheese for brains.

Good wishes for all for a healthy, prosperous retirement, with good friends and interesting things to do to help make our communities better places in which to live.

May this New Year bring the fulfillment of soeveral of your worthwhile dreams - and thevisioning of some new ones.

joyful guy/Ed

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It has always been my opinion, at our ages the principal is more important than the interest. I have our money in the bank in savings and CD's. My friends and family lost far more money in the market than I lost in interest by playing it safe. My sis and her husband lost $55,000.

BTW, We have spent half of our savings, if we don't enjoy our hard earn money our kids will.

    Bookmark   March 4, 2004 at 6:53PM
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Joyfulguy - I live in Canada as well and am 73. I recently found this site and I want to tell you that I was pleased to read your posting. I think your advice is very, very sound. I'm on a very limited income but do feel there are still good ways to invest for our remaining future. Thanks for your input

    Bookmark   April 23, 2004 at 8:01PM
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Joyfulguy. I just read your "page" I am also from London. Wouldn't it be strange if we were neighbours?

    Bookmark   April 23, 2004 at 8:08PM
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Greetings again, folks.

Some time after this earlier post, we found that Iva Mae and I attend the same church.

One morning after service, during coffee hour, I asked the minister whether Iva Mae was there that day.

Looking at me rather strangely, puzzledly, Anne pointed to a lady sitting in a chair (I was standing) about a metre from me.

So - we had to explain to Anne how it was that we'd met on the internet and found out that we lived in the same city ... and after some time that we even attended the same church!

Anne was, shall we say, surprised.

Since then, we've met some other Gardenweb frequenters in our city, and another not far away.

We get together occasionally and have become friends.

I hope that you find someone as pleasant, not far from your location.

It adds another dimension to the internet.

ole joyful

    Bookmark   July 21, 2007 at 12:17AM
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That is great OJ Nice to make new friends

    Bookmark   July 22, 2007 at 1:06AM
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When I said that we'd met others in our city, I meant others from elsewhere whom we met here by prearrangement.

Nicole nd Claude, Sophie and Ben, and them some of Nicole's family met in a nearby city, later.

o j

    Bookmark   July 24, 2007 at 5:58PM
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This has been around for some time - but I still think that it's valid, though I'm now crowding 80.

I'm still living on less than my two public pensions, one of them contributory, and one private, plus a small annual payment from my tax-deferred retirement account (Registered Retirement Income Fund - RRIF, in Canada).

When I was contributing to its predecessor tax-deferred retirement account, RRSP, where I chose the investments, most administrators usually charge an annual admin. fee, but I'd had one at no fee for some years.

When I turned the RRSP over into a RRIF ... the same administrator said that there'd be an admin. fee, and my objection carried little weight.

So I talked to some other financial agencies and found a couple who would administer it at no fee. When I told my current admin'tor of that, and that I was thinking of moving my account ... they found a means by which they could manage it without a fee, as well.

I didn't find it necessary to notify them that I much preferred their system to either of the others. My Grandmother used to say that one should tell the truth ... but that she did not feel it necessary to blab and tell all that one knew.

The bank stock that I referred to above had share price move up to $106. last May, but since has slipped substantially, as they had substantial direct exposure to the U.S. sub-prime mortgage interest debacle ... plus were backing an insurance company that was insuring many of them ... so the share price has skidded to about $62.50 - slightly below where it was when I made the post above.

When I bought them 41 years ago for about $4.00 and change, they were paying about a dime per share in annual dividend, which in Canada is tax-advantaged (interest earnings are taxed at top rate). I'm not sure what dividend rate they were paying in early '04 when I made the original post, but probably about $2.00 per share, about 3%. A while ago the dividend rate was $2.80, then $3.08, and in the fall was raised to $3.48. They may reduce it somewhat, or may try to maintain it, for dropping it will hurt the stock price even more.

Increasing from about a dime to over $3.00 per year is quite an increase ... do you think that I would have developed any such an increase, using GICs? And certainly the GIC value wouldn't have grown from $4.00 to over $60.00, let alone the $106.00 that I could have sold each share for, last May.

And if I die before the stock recovers?

My executor will likely just transfer the shares into the name of a beneficiary, who doesn't need the money, so would wait for them to recover.

Were I in a position where I needed to liquidate some of the asset annually, I wouldn't want to liquidate more than one of those 5-year blocks that I referred to in the original post during the first 10 years, for two reasons:

Once each dollar of asset is liquidated, it isn't there to earn or grow any more. And the erosion that inflation inflicts on the value of each of one's dollars annually means that one needs to preserve the assets, to earn those larger payouts that'll be required in future.

That's especially true where people are required to cover a substantial portion of their medical/hospital expenses, I think.

I prefer to run out of days before I run out of dollars, rather than run out of dollars while I still have quite a large number of days left to travel this old world.

I await your comments, folks ... and hope that you are enjoying an interesting weekend: we have a blizzard running around the countryside at present, though it has stopped snowing.

ole joyful

P.S. Did you note how calculations work? When shares drop from 106 to 62, that's more than 33% reduction (41.5%, actually), based from the 106. But when, based on 62, they rise ... they must rise more than 50% to get back to where they started (70.9677%, actually).

Some difference!

o j

P.P.S. Back in the summer I had about 80% of assets in equity-based investments, something under 10% of assets in near-cash, and something over 10% in a fairly stable asset ... a mortgage fund, as a matter of fact!

I have purchased stocks on three occasions since, so my near-cash asset is substantially depleted and the stable asset has increased about 2.5% (internal) and I have about 5% in near-cash in the retirement fund: annual payouts required.

One stock (including Canada's largest phone company) is due for obligatory liquidation within a few months, as it is being bought out (and taken private), so I will have more funds available then.

o j

    Bookmark   March 9, 2008 at 5:59AM
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An economist who won the Nobel prize for economics a few years ago (I forgot his name) demonstrated by careful analysis of the numbers in the markets that the single most important thing in wealth management is ASSET ALLOCATION, the percentage of your nestegg that is put into stocks, bonds, and cash equivalents. Asset allocation is the number that defines your risk tolerance. For example, if you need to withdraw only a small percentage of you nestegg each year for living expense, then you can afford to tolerate some declines in the value of your stock holdings because you're not going to sell tham at a loss. For you're living expenses you'll either sell bonds or use a money market account. You can "ride out" the dips in the stock market. Eventually, the market will bounce back and go even higher, and will over the long term compensate for the eroding effects of inflation. As a general rule of thumb, 4% of your nestegg is the maximum amount you can spend annually from your nestegg and still not incur a risk of running out of money.

Over a 20-30 years period of retirement, if you are TOO CONSERVATIVE, and put all your money in "safe" bonds, you are not taking into account what inflation is doing to your nestegg.

OK, so you need some money is stocks. Questions like how much, and which stocks: The cheapest and in the end safest way is to put that money into broadly diversified index funds, so that you expose yourself to the long-terms growth potential of all segments of the stock market. The other reason: even highly experienced money managers do not consistently beat the indexes in the long-term.

How much you put into stocks depends on how much money you need from your nestegg on a yearly basis. If it's a small percent, then put up to 50% in stocks. But if that makes you nervous, put in less, so you sleep better, but remember, the less you put into stocks the more your nestegg will be eaten by inflation. As a rule of thumb, if you can "ride out" a five-year downturn in the market by relying on other assets to use for living expenses, that's the amount you can put into stocks.

    Bookmark   March 16, 2008 at 10:46AM
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Have you ever wanted to live like a Saudi prince?

While the U.S. buys some oil from the Saudis, I doubt that they'll let you buy shares in Saudi oil companies.

Where do the U.S. petroleum people go to buy more foreign-sourced oil than anywhere else?

Canada, that's where.

Is Canada a stable country? A great deal more so than many others.

Is accessability a problem? Not really.

Can you buy shares in Canadian-sourced oil?

Yes - our oil companies, thus future reserves have been being bought up throughout a number of decades by many, including foreigners.

As a matter of fact, U.S. leaders are unhappy that the U.S. bonds that the Chinese gov't. gained when U.S. folks bought more of their country's goods than the Chinese bought of U.S.-sourced goods ...

... are being used to buy Canadian oil companies (among access to reserves of many other resources, worldwide) ...

... and there are proposals to build pipelines to the Pacific ports rather than more to Chicago, or San Francisco.

You could have bought shares in one major Canadian oil company, that has activities in the tar sands (a major polluter) for around $25. about five years ago, and a couple of years ago its shares were worth something over $80., recently have been around $100. each.

They pay about 40 cents dividend.

That'd be fine with me, if I owned any - I'm living within my pension income, and I'm pleased with that rate of dividend, paid now and taxed now ...

... and at that rate of growth, developing over a number of years, but not taxed at that time ...

... which won't be taxed till I sell the stock, or die, and then only on half of the gain - but I get half of the gain free of tax.

So I'd get not only deferral, but a reduced rate when I withdraw the asset.

But - five or six years ago, when I bought U.S. currency, when I gave them CA$1.00 they gave me US 65 - 69 cents.

Now, when I give the exchange people CA$1.00 ... they give me US$1.00 plus, in the past few days, a penny as a bonus.

That means that your US$16.00 - 17.00 - 18.00, used to invest in a share of that oil co. stock at CA$25. - 30. five or six years would have grown to about CA$100.00 now ... but equal to US$140 - 150., including gain on exchange.

When you consider the huge U.S. debt, plus major annual deficit (some of it to finance tax cuts, mainly benefitting the wealthy), plus the current housing crisis and the Fed adding more credit, recently, and likely to add more, soon.

That is, printing money.

Plus a major U.S. bank almost going bankrupt.

I doubt that U.S. Dollars will buy more solid assets, especially foreign assets in future than they'll buy right now.

Or domestic goods, either - guess what happens to prices when $5.00 was chasing a certain amount of goods two or three years ago ... and now there may be, e.g $10.00 chasing that same amount of goods? And if those goods were imported, it'd take more (depreciated) U.S. Dollars to pay for the same amount of replacement goods in future.

Some years ago, when I lived in a society where inflation was high, people wouldn't put money into the bank (or a bond) ...

... they'd buy assets.

A family saving for a bicycle (to haul their produce to the town market) would take some savings to the cloth merchant and ask him if he needed more cloth in his tiny shop - yes, he did.

So they gave him 300 Hwan ... and he figured that to be 1/10th the value of a bolt of whatever kind of cloth, so that's the credit that they arranged.

Next year, 400 Hwan ... third year, 520 Hwan ... same thing.

After three or four years, that value of half of a bolt of cloth that they'd built up credit to amount to would buy a bicycle, so the cloth merchant gave them the value of the half bolt of cloth (far more than the total amounts that they'd given him, due to inflation), and they bought their bicycle.

In an inflationary economy - own stuff, especially stuff whose value will increase over time ...

... but - not the depreciating-value currency, certainly not that currency. Or its equivalents: money market funds, GICs, CD, bonds - all denominated in that depreciating-value currency.

When I sold mutual funds, about 25 years ago, some (mostly seniors), chortled to me about how they'd made 19% on Canada Savings Bonds a while before (about 1981-2).

I told them that if they were in 20% tax rate - that took their after-tax rate of return down to slightly over 15% ...

... and did they know what the rate of inflation had been, at that time?

No, they didn't ... subtract about 12% ... leaves just over 3% real rate of return, at that time.

Good wishes for good health (especially U.S. folks, for reasons of direct cost), plus increasingly wise management of your income and assets.

ole joyful

    Bookmark   March 16, 2008 at 10:47PM
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When I worked as a personal financial advisor, I recommended that my clients have 3 - 6 months' worth of income available as an emergency fund, available in case of need. If they could survive for a year without any income ... so much the better.

But ... I didn't have that, myself, and haven't for a number of years.

And as my clients became more knowledgeable about how money works, I explained to some/most of them how I operate, with my reasons.

For working people, they must continually be in sufficiently good physical, mental and emotionl health to go to their workplace and carry our their required tasks there ... or they don't qualify for that essential paycheque! Plus ... hope that their employer doesn't go broke, close the business, shift work offshore, or get amalgamated with another company, merging the employee's work into the other home office, etc.

Now, as a senior, in receipt of two government pensions, one of them contributory, plus a private pension, plus a tax-deferred retirement account that requires an annual withdrawal amount of about 7% up to 10% or so, increasing with age to 20% at age 90), plus I can withdraw more, if I choose (but every dollar taxable) I do not have such a requirement.

All that I need do to qualify to continue to receive my pensions ...

... is stay topside the grass!

So - I have darn near a guaranteed income ... till the day of my death. Quite a comfortable position in which to operate, I figure.

Sometimes I have some readily-available cash, sometimes not ... but that doesn't trouble me.

I carry a credit card. If I have an emergency, I'll use the card to pay for whatever I need.

I have a Line of Credit, fully secured by mutual fund and stock certificates, that sits unused, most of the time. There was no set-up fee, and there is no maintenance fee if I let it lie unused.

Its main purpose is to use when it suits me to purchase investments, if I lack the cash at the time.

If I were to use it for funds to be be used in an emergency, most of the uses being not deductible, I would set up a separate line of credit, having certificates issued as needed, to provide the security, so that I have one fund for deductible situations, one for non-deductible emergency use.

When I receive my account next month from the credit card agency for the amount owing, I draw a sufficient amount from the non-deductible line of credit to pay that amount in full, thus avoiding interest cost re the credit card. Interest on the line of credit now is 5.25% ... and I'd try to pay it off from current income as quickly as possible.

And leave the line of credit that I use for purchase of investments, making the interest cost deductible, uncontaminated by a loan used for non-deductible purposes.

Also, I feel comfortable, as I approach age 80, at carrying 80% of my assets in equities.

As you know, the stock markets are down, now. Suppose I have an emergency develop tomorrow that requires a substantial amount of expense.

Would I sell some of my equities, probably at a lower price than they usually run?

Sometimes some of the market is down and other parts are operating at approximately their usual levels. If there were some parts that I might consider to be not undervalued, I might liquidate some of them.

But probably I would not. I might liquidate some mutual funds, as I have grown increasingly unhappy with them over recent years. If I sell some stocks, there's the commission to sell them. Then, if there's been a capital gain, I must pay the income tax people a portion of that gain, next year. Then, when I accumulate funds to purchase more stocks, there's commission to pay once more on my purchase.

When one considers those costs, often its wiser just to initiate a temporary loan to deal with the emergency.

Not only that ... it has been my experience that, after a period when stock markets were undervalued, when the recovery takes place, there is substantial increase in value within a year or two or three following that low market period.

I would very likely make a loan, pay it off in part over the intervening period and liquidate some assets as needed after the recovery in order to discharge that loan. If I can make 25% more on an sale of an asset over a couple or three years ... I don't mind paying 5.25% annual interest.

I don't have large worry over medical and hospital costs ... if I were a U.S. resident, with higher potential medical and hospital care costs, I might evaluate the situation differently: but possibly not much differently, even so.

I hope that you've found this explanation understandable ... and interesting.

I am interested to hear your comments.

I hope that you are enjoying this beautiful spring weekend ... my multiple-trumpet daffodils are out!

ole joyful

P.S. If you use this idea and it earns you, say, $300. ... you owe me 10%, right?

o j

    Bookmark   April 19, 2008 at 5:45AM
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