Investment concepts as a senior

joyfulguySeptember 21, 2006

Many people won't touch the stock market with a 10 foot pole, as they've heard of people who have lost their shirt, etc. (or did themselves).

You spent many years in school learning about a variety of issues about living, and you've taken training throughout your life in the school of hard knocks, so you've learned a lot since school days.

You wouldn't go on vacation to a strange place without checking it out ahead of time - but many people spend more time planning their vacation than they do how to manage their money.

Many haven't learned a lot about effective money management, however. How come - that's certainly an important part of one's life experience? I think that many people find it rather intimidating.

Several years ago, about the time that I stopped part-time employment, at age 70, they had a personal financial advisor as a guest on a province-wide phone-in radio show on our national broadcaster that operates five days a week.

I told him that, though many financial advisors recommend that as people become seniors it is wise for them to invest a substantial, and often increasing percentage, of their assets into investment where the value of the asset is very safe, usually stuff earning interest, where the principal is guaranteed, there were other legitimate viewpoints. The argument for it being that, should some of the principal be lost, it's almost impossible to replace it. That one should not invest in equities where one expects to need the money in the short term, etc.

But that I disagreed.

I figure that, at age 70, I want to fund my advancing years to age 100, as I prefer to be still able to eat, in a warm shelter, should I achieve that age.

I consider that fund in terms of 6 blocks of five years each.

As I don't expect to need 4 of those blocks during the first ten years, I feel that it would be wise to invest a substantial portion of that part of the asset into equities.

Especially since, in Canada, if I buy stock in quality companies, which is the ones that I, as a senior, feel that I should use for most of my core asset, the dividends that they pay, though usually at a rate slightly below the rate of interest that I earn on guaranteed certificates, bonds, etc. (which is taxed at top rate) is taxed at a much lower rate - so I must earn about 4% on bonds in order to equal about 3% in Canadian dividends.

Though the value of my stocks has fluctuated substantially over the past 40 years or so (I didn't have a mortgage, as I lived in a home provided by my employer in the early years), the general trend over a number of years has been upward.

When I choose to accept the investment covered by the bank's highly-touted guarantee that they'll give me back every dollar that I lend them at the end of the contracted period, many don't pay any attention to the other guarantee that they never mention: apart from the rent on the money (interest) ... they won't pay me one dollar more at the end of the term, either. But the value of each of the dollars that I lent them has been eroded each year that they held it, due to inflation. If I gave them $10,000. on a 5 year contract, 15 years ago, and renewed it twice since, that $10,000. would have bought a decent car, 15 years ago. Not now. Prices have gone up - but the number of dollars of my principal didn't.

I say that there are two rats that eat my cheese: the Canada Revenue Agency wants to talk to me about each dollar of my income, each year - and they want part of it.

If I earn employment income, or the pension that may result, or interest on invested principal ... they tax those types of income at top rate (except for a deduction on part of my pension income). Those are the types of income that the large majority of the population earns.

But if I earn dividends on Canadian stocks, the tax rate on such income is much, much lower.

As the value of your principal, since it can't shrink, can't grow, either ... the only income that your principal is going to produce with regard to this year's business is produced now. And is taxed now.

The other rat?

If you have $1,000. and stick it under your mattress, then leave it there for 5 years ... it'll buy a lot less when you pull it out that it would have, now.

Inflation erodes part of the value of each dollar of your asset, every year - since the Great Depression of the early 1930s.

So - you must take part of your interest earnings each year to add to your principal in order to keep the purchasing power of the dollars in that asset intact, not eroded.

In recent years of low interest rates, after one deducts the income tax from one's interest earnings, and deducts again an amount to add to principal in order to maintain purchasing power ... there was little or none left.

And - do you know what?

The rats eat first!

You get what's left - if there is any.

I don't like having others use my money, but it making nothing for me.

Not only that - while you know what interest rate is available on your asset now ... you have no guarantee as to the rate that may be offered at the end of the term that you choose to lend it. But it usually isn't a lot higher than current rates.

But dividend rates tend to rise with the price of the underlying stock, so that the percentage remains more or less constant.

A stock of a major Canadian bank that I bought 39 years ago for (I think) about $4.25 can be sold now for slightly above $80.00 per share. I have not been required to aqnswer to the Canada Revenue Agency with regard to that increased value up until now (but I was able to earn that capital gain tax-free until 1994, and locked in the gain in value prior to that at that time). I will not be required to report such increased values until I either sell the stocks ... or die (in which case it is deemed that I sold them the day prior to my death, for tax purposes) ... and I don't plan to do either, this week or next.

At the time that I purchased the stock, the annual dividend rate was about 6 cents or a dime, a few years ago it was 80 cents, then a dollar. As of recent months, it's been $2.80, and the dividend rate usually increases every year, or two, or three.

Interest rates haven't done anything like that in the last 40 years, have they?

The financial advisor on the radio phone-in agreed with my ideas about the situation.

That was 7 years ago (and the prices and dividend rate that I quoted here on that stock are current, not the ones that I gave him 7 years ago)- but I still feel the same.

And - you realize, of course, that the banks know a lot more about the management of money than you do.

There's more - but that's (more than) enough for now.

Have a great week - managing your assets effectively (for you, rather than mainly the guys that you let use it). It is rather a shame if the guys using yur money make more on it than you do, don't you think?

ole joyful

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Keep posting ole j
I learn something new everytime you do!!

I did learn by watching the Suze Orman show never to co-sign for anything (in case someone wants me to)I think that's a good show for any age to watch. I think she is on MSNBC on Sat nights.

    Bookmark   September 22, 2006 at 6:02PM
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There's more relative to the six blocks of 5-year periods that I mentioned about, covering the time from my age 70 till 100.

I need money to live on each year as I go, as I have through the years of my life since I became independent.

I get two gov't. pensions (partly indexed) and a private pesion covering about half of my working years (also partly indexed).

As for any more money that I need for expenses, there's something that I need to remember.

Of those six blocks of five years of time, as of that date, all six were earning income (whether current or deferred) that was available for me to use.

Suppose, however, that I choose to eat up all of one of those six blocks of funds in the first five yers.

Then - there are only five blocks of money left to earn money, so they'll earn quite a lot less in the next five year period.

But my costs of living may well increase over that time, for medical services usually cost a lot in our last year or so of life (maybe longer).

And if I need to go to a retirement home, or a nursing home, the fees there are high, much more than it costs me now to live in my own home.

Which meant, as I told the financial advisor on the radio, that I did not want to eat up all of one of those six blocks of asset during the next five years of my life, as the amount that it could contribute to fund my ongoing retirement during the remaining five-year periods would be zero. So I did not want to eat up more than half of that block during that first five-year period ... preferably even less than half. I wanted to preserve a good part of it to go on earning to fund my later costs (without causing me to chew my finger nails).

Or hit up my kids for a subsidy.

The advisor agreed.

I prefer to run out of life before I run out of dollars, rather than the other way around, thanks very much.

And now, 1-1/2 of those periods later, I consider myself fortunate to have more assets than I did back 7-1/2 years ago when I was doing that talking.

I hope that you're enjoying the physical, mental, spiritual and social aspects of your life, and doing some things to help others. Plus doing things to enhance all of those aspects of your life, as you go.

Use it - or lose it.

ole joyful

    Bookmark   September 28, 2006 at 4:04PM
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How do you manage your taxes on all your investments?

    Bookmark   October 9, 2006 at 1:23AM
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jane ny,

So far, my annual tax bill has been low.

Partly because I don't have a large number of investmetns, and partly because I seldom sell any so have not had to answer to the Canada Revenue Agency on the increase in value ...

... and won't, until I either sell them - or die - neither of which I intend to do, this week or next.

However, there's another possibility, detailed below, which triggers a capital gain - but not at a time of my choice.

With regard to distributions from my equity-based mutual funds (which most of mine are) they are re-invested, and I pay tax on those amounts annually - but at varying rates.

I goofed - I should have kept track of the annual amounts over the years, which is over 20 years for some of them, for I need those amounts to add to the amounts originally invested in order to calculate my adjusted cost base, which I need when I sell them (or die, at which time is is deemed that I sold all of that kind of stuff the day before, so become tax-liable on the whole of it in that year ... which my executor has to figure out). I deduct that amount from the value at the time, in order to calculate the amount of my capital gain - taxable, but at a reduced rate.

And if I give the certificates to a charity, there is no tax on the capital gain on that portion of my asset.

As for foreign-based stocks, on some of them I am taxed in the originating country, and usually there is a tax treaty with Canada and I get a credit here with regard to that amount; if they are U.S.-based companies, I must declare full amount here and can claim credit with regard to that amount withheld and paid to the foreign country - I used to find that for $3.00 paid to I.R.S., I'd get about a $2.00 credit from the Canada Revenue Agency.

When I own Canadian stocks that pay annual dividends, I pay a much reduced rate on those dividends, at that time.

For some of them, they have a Dividend Reinvestment Plan (which I have not used, but should have). In that case, I need to keep track of annual payments which were used to buy more shares, to calculate my adjusted cost base when I sell them.

When I sell a stock, I need to deduct the amount that I paid (adjusted cost base), in order to calculate the capital gain, then I pay tax at regular rate on half of that amount.

I've been wondering whether I should sell some, then buy them back (or of a similar company) in order to crystallize the capital gains now, and be taxed now, but at a lower rate, as I'll be taxed at top rate on a substantial portion of that year's income, on death.

And the residue of my tax-deferred retirement accounts (I had to begin to liquidate them, beginning at age 70, at a specified minimum amount annually, which precentage increases annually till age 90) will all be added into income in the year of death.

However - there'd be brokerage fees to sell, then when I re-buy. And the amount paid in tax would no longer be available to invest.

However ... in this year, one investment that I'd wondered about selling, as I'd owned it for a number of years, was involved in a reorganization, such that it would be deemed a sale, so I'll be taxable on that capital gain this year.

Another company was sold, so my shares are (forcibly) luiquidated.

And a third company, whose shares I bought earlier this year, was involved in two reorganizationas (one related to the first one that I mentioned) so there'll be capital gain involved with that one, as well.

All in one year.


So - I guess that I'd better start finding money, looking toward writing a cheque of substantial size to the Canada Revenue Agency at the end of next April.

Wish me luck!

One advantage, though, of buying stocks whose value rises and not selling them for a sustantial period, is that I don't become tax-liable on the increase until I sell (or get sold involuntarily) (or die) so I achieve tax deferral, which achieves one of the major purposes of a tax-deferred investment account, but without the restrictions.

ole joyful

Hope this helps.

    Bookmark   October 12, 2006 at 4:01PM
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About three years ago I was paying just over 10% of my income as income tax, last year, though I enjoyed a slight (temporary) increase in income, I paid about 8.75% of it in tax, largely due to a substantial increase in charitable gifts.

Or - so I thought.

I just received a message from the Income Tax people, which stated that a reassessment of my last year's income produced an extra refund of around $250. - which will reduce that percentage of total income that I paid in income tax even further.

I like them apples!

Have a lovely weekend, everyone.

ole joyful

    Bookmark   November 30, 2006 at 1:26PM
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Perhaps you recall the current price of the bank stock that I referred to in the original post on this thread as having bought 40 years ago for less than $4.25 per share. In case you didn't, it was around $80.00, last fall.

The price has risen substantially in recent months: it passed $100.00 per share, a few weeks ago.

That means that it has doubled about 4-2/3 times during that 40-year period.

Are you familiar with the Rule of 72?

It says that if you divide the rate of interest/growth that you obtain into 72, the result shows how many years that it will require for your money to double.

Double $4.20 to 8.40, 16.80, 33.60, 67.20 and 134.80, means that at $100. currently, it has doubled just over 4.5 times.

Dividing 40 years by 4.5 doubles shows that it took about 8.88 years average per double.

Then dividing 72 by the 8.88, the number of years required per double, shows that the rate of growth of capital was about 8.1%.

That is a number that pleases me, and when I know that when I sell, the tax rate on the growth in capital is low, that pleases me even more.

But - there's more.

During those years, the stock has paid a dividend of about 3%, sometimes at a higher rate, sometimes lower.

Plus - I paid tax at a much lower than usual rate on such dividends, and that rate just dropped even further.

Not only that - I have not been required to report to the income tax people about that increase in value of my asset, and won't until I sell. That gives me the equivalent to a major advantage of the folks who invest in tax-deferred retirement investments. But when they withdraw those funds, every dollar is taxable, and at regular rates ... as the invested dollars were deducted when invested.

No complaints, here.

Some of my holdings have not grown that well, and some pay a lower rate of dividend - or none, for newly-started ones.

Some have lost money - in an investment group that I've attended monthly for several years, we call that the tuition fees for learning how money works.

Good wishes for having an enjoyable time through the rest of winter (summer, if you're in Australia).

ole joyful

    Bookmark   February 17, 2007 at 12:39AM
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I showed earlier that the rate of growth of that bank stock was about 8.1%, over 40 years.

In addition, they've paid about 3% dividend rate, over those years, which brings my rate of gain to just over 11% annual rate, compounded.

I'm not complaining.

To be fair, I've owned stocks that didn't grow that well. Some didn't grow at all.

Some paid a decent dividend rate, some paid less and some, especially young companies that need to reinvest their profits to grow, paid no dividend at all.

The trouble is to know how to choose which small, growing company may grow, and which among dozens/hundreds may languish and die.

Good wishes for a fascinating week, everyone.

ole joyful

    Bookmark   April 15, 2007 at 11:00PM
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