Money management for seniors
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.