Choices for income from an amount of money, pension, inheritance, gift,savings..

Over the next few installments to this blog we'll consider..

What might be some investment tools and thinking one should consider if..
One needs to survive by taking money from an accumulated cash amount for retirement purposes or independence from working 9-5.

Let us say you have a sum of money like $200,000 and you are about to contemplate the action of giving up your day job without replacing the stream of income one would have from that job.

So, you would firstly look at how long the $200,000 would last if you did simply spend $4000 per month if you had to as a worst case scenario. So, $200,000 divided by payouts of $4000 = 50 months. 50 months divided by 12 months per year = 4.17 years.

The strategy then is to find a tool that will in the best of all worlds allow the $200,000 to be left alone, but at the same time will pay you a return every month of $3000 to $4000. Is this possible to attain?

In order to find out, we must explore tools that can do so or at least come as close to the goal as possible while also reflecting your "willingness to take on certain risks".

The tools you must look at to replace "earned income" while attempting to preserve the original capital are - for the most part- as follows*:

GICs (guaranteed investment certificates), Bonds and bond like products, Annuities, Dividend Stock / preferred shares, REITs (Real Estate Income Trusts) and Mutual Funds that provide a monthly distribution from Dividend producing stock and REITs some of which may use the Tax friendly methods of ROC (return of capital).

So today let us just touch on GIC thinking.

GIC: It used to be, that these bank products would save your principal and pay out minute amounts of interest in accordance with the latest bank rates of interest available. And back in the 1970-80 years, the interest rate was very high.You would in effect lend you money to the bank and they would guarantee to pay you back in a certain amount of time with a payment of interest, which would be taxed at your highest tax rate as income.

Nowadays, you have some GICs that are very interesting as they link their returns to the stock market. But that is only effective if the market is going up. Generally speaking GICs must be left alone by the client.

The risk on a GIC is that while you may have a very nice interest rate payout at the maturity or completion of that specific GIC contract, if you then renew or purchase a new contract, there is no guarantee that the high interest rate will be given to you.

These days, the interest rates being paid out hardly cover your actual cost of living. Every dollar you have at maturity is worth less than when you began. Therefore, what you could buy with your money before, now costs a lot more due to rising gas prices and higher prices at the grocery store.

So generally you would have to have a lot of money tied up in GICs of varying time spans (duration) to ensure you get income on a regular basis while keeping the value or purchasing power of the $200,000 intact.

Bonds
bonds are very much like GICs in that they pay interest at the end of a set date. You can get some at higher payout rates than GICs and still protect your principal or capital. Yet like GICs, they would be tied for periods or time and also the risk is to protect purchasing power of your money when inflation or the cost of living is the same or higher than the interest rate paid to you.

There are various kinds of bonds which are an entire study in themselves. Some will give privileges like being able to convert from a bond into a stock at a given price and value. Also some bonds can be taken back from you . That is, they are "callable" or can be "called". The bond market is so huge that it dwarfs the stock market.

To achieve your goals with bond, you would create what is referred to as a bond ladder. This is when you buy a number of bonds to come due next week, then some for next month and then others for next year and then some for further stretches of time at higher interest rates, so that as you go on in time, you always have bonds with their payouts of interest coming due. A good bond broker would set this up for you at a cost. The big question is could $200,000 principal provide regular income and for how long before your needs exceed the set payouts. This would require a certain amount of administration on a regular basis, which again would have a cost.
Consult your advisor on who would be best to provide a bond ladder for you and what it would provide in income.

Next entry we'll consider preferred shares, stock REITs and Mutual Funds with monthly payouts and the two ways of applying ROC (return of capital).

This Blog Purpose for Investment as a "Tool to Attain Specifc Result" in your life.

Investments are largely seen by many as a method of gain or loss almost as in gambling. The popularity of this point of view, I believe, is due to movies and books which popularize the stories of those who have put small amounts of money into "a play" and had the good fortune to sell when this position has taken off to stellar heights.

But there is another more practical way of seeing investment, less as a gamble and more as a tool. So in this blog, I avoid the gamble approach and stick to the practical, since with tools, one can attain a more consistent and reliable outcome.

So in future entries, I will continue presenting different tools which can be used for specific situations in life that most us have or will encounter.

The Secret to Wealth and Success -we never learned in school.

One of the things I did not learn in school is how to get rich. Another is how to become wealthy.

(There is a difference in simply being 'rich' and then becoming 'wealthy'.)

The answers are simple and it will take one stone to knock this one out there.

You create a company.

First you have an idea.

How many times so far in this life have you stopped for a moment and thought... "Wow! I think I have an idea that would make a lot of money!"

This has happened to me a number of times.

Has it happened to you?

The difference between you and someone who becomes rich is - belief in oneself.

Temerity.

Conviction - conviction that if you put a little money behind the idea and tell a few friends it will work.

Yes- it could fail, but what are the odds compared to the odds of buying a 6/49 ticket?

The odds are far better that you will get rich from your "followed-up-on" idea, putting some effort into it and some chatter.

"Oh.. but someone will steal my idea!" , you say.

Well maybe, but probably not. In fact, the odds are very good that someone with money will see you have an idea and the energy to follow through on it and will buy a small share and help you bankroll it.

So imagine you go and register the company for $30 down at the the Palais de Justice in Montreal - or in the rest of Canada I suppose you could do the same at the city Court House -check with a lawyer.

Now you can save any and all receipts from gas, to bus tickets, to pencils, computers , cell phones, business meals, one room in your house plus the cost of maintining that room and reduce your taxes as a result and keep more of your money. They key is to show that you are intent on making a profit in a few years. This is not supposed to be a tax dodge. The tax saving is an inducement to help you make more money and eventually employ people who will pay taxes!

The tax laws in Canada are framed by Tax Lawyers who represent clients who own businesses and make gazillions of dollars and pay tax Lawyers to use the tax code to the best of their ability to reduce their exposure to paying taxes.

So once you exceed $100,000 in gross earnings (a kind of line in the sand) in your registered company, it is definitely time to look at 'upping the ante' and becoming Incorporated to further protecting yourself from Liability.....more expenses and big deductions and perhaps as your millions of gross earnings expand, you shift your operating shares of the company into a 'holding company'. That's when the fun really begins. Then you get into family trusts and protecting more of the money.Then you do an 'Estate Freeze' and save or defer loads more in taxes and keep more for yourself. Further, you buy Universal Life Insurance to protect your family from capital gains taxes on your company if you happen to die. But then if you don't die you can always give the policy over to a bank later in life and borrow against it for retirement income-tax fee and in exchange, the bank gets paid from the policy and the benefit when you die. Not a bad deal!

These concepts and words I bandy about so freely really do exist, but you have own a company and the company must be earning some serious change for you to benefit.

Now before you go and say, "Oh, I could never so that!", just think about it a bit.

It all starts from an idea.

Then you surround yourself with the right people - not those who 'nay-say' and cause doubt saying they are just helping you to not hurt yourself, there-bye helping you to defeat the idea before it gets off the ground. No! Surround yourself with business advisors and Lawyers and people who will help you get the idea flying with the right planning! That's their job! You just make it fly with your magic and enthusiasm, belief and vision!

Surround yourself with the right people. You hire Lawyers. Ask friends if they can refer you to an advisor who won't charge on the first meeting.

So many of our kids are struggling to become doctors and Lawyers. There is nothing wrong with owning a plumbing business. Some of Canada's wealthiest people own these kinds of businesses and they hire our Lawyer son's and daughters.

You don't need to become a service professional like lawyer, you just need to be ables to hire and employ them. I know people who surround themselves with various specialized Lawyers - Tax Lawyers, Litigators, Civil Lawyers, Mortgage Lawyers, Copy Rights Lawyers and more.

You just need the idea and the guts to follow your dream, and hire those who would save you taxes and help you create business strategies. You have fun with making the dream become real. Just do it!

In school I wish I had heard this message rather than "learn to get a good job". A good job is fine, but ...

DRIP Dividend Investing Without Paying Commissions

Investing these days is composed of many variations and different risk/return types along with derivatives- in the case of the 'options' market.

And these variations have become a distraction from a core element of investment, an element which while powerful and elegant is also easy for all to use for some very secure returns -even in declining markets.

The method I propose here is safe, fun and easy.

HOW

• Begin by buying one share of your selected (dividend producing) company. I use BMO, but you can use which ever bank you prefer -even the one you use to house your cash or select a company that issues dividends. You can google these if you don't know any. (Select dividend paying companies.) Why one share only? Because you must be a shareholder before you can enter the plan and one share is all that is needed to be purchased at full price.

If you don't have a brokerage account through which to buy the share, then either go to your bank to set a securities account up or go online and select an on-line brokerage with the cheapest brokerage fees and the best explanations and beginners platform you can find. You can google these as well. I use Questrade. The cost per transaction is cheaper than what one will pay on a bank sponsored account. It used to be $25 per trade versus $4.00-$6.00 with Questrade. You can also check out Etrade.

If you would rather have a human guide, an 'independent advisor' (not part of a big company selling a platform of set products) who has, as part of his/her service, a step by step plan to teach you how to do this. I do this for those who need, but there is a modest cost for my time. However this is something easily done on one's own.

Make sure your advisor can deal with you via e-mail and is willing to be 'fee-based' and will not try to sell you all kinds of products -unless you determine at some later time that you need them.

Also check to see that he/she can visit from time to time to help you out. However using an 'advisor' is not the point to this entry. He or She is simply a user friendly guide to help you have a fun and interesting entry to this world of 'investment'.

So what is a DRIP?

DRIP means Dividend Reinvestment Program.

"What's so exciting about this? It sounds kind of boring. Think I'll go back to Facebook now..."

WAIT! YOU CAN MAKE A LOT OF MONEY CHEAPLY WITHOUT MUCH EFFORT AND EXPENSE AND IT IS 'GOOD' FOR YOU AND CHILDREN!

DIVIDENDS PAY FAR MORE THAN ANY BANK ACCOUNT!

OK, if you are now bored, go back to Facebook.

Here's how to set it up.

First, buy 1 share of your selected dividend paying company to become a shareholder.

• Now, since it just may be the last time you are going to use the broker and you are not buying in bulk/volume as in a 'board lot' of 100 shares, expect to pay a high administration fee of say $75 to $100 for this one time transaction type. But it is worth it. You have to start somewhere.

• Then look up the Dividend producing company on line and give a call to the investor relations department. If you google them, you'll also be able to send that department an email.

• Ask for the application and guidelines for their 'Dividend Reinvestment Program'.

If you are on-line, they should be able to send you a pdf attachment to print up , fill in, sign and send back. Or using snail mail, they'll send it to you.

• Once you are accepted, they will send you a statement showing your 1 share, enabling you to send back a check to purchase more of their shares. -If you happen to have change accumulating on your bureau, take it to the bank, deposit it to you account and then write a check for the same amount and send it in.

I know- the share price might be $35, while you have sent in only $20. This is ok. They usually allow fractions of shares to be purchased. Check their guide line brochure first or even ask by e-mail if fraction shares are purchased. BMO and RBC and other banks do offer this. The administrator of the plan for BMO is called Computershare.

In a few weeks you'll receive another statement showing your own first share plus the fraction you just purchased. And you will be asked if you would like to buy some more. WITHOUT HAVING USED A BROKER OR ANYONE ASKING FOR FEES.

How do you think the 'wealthy' become wealthy and stay that way?

THEY REFUSE TO PAY ENORMOUS FEES!

The idea is to keep buying with amounts that you can afford.

The shares you now own will PAY YOU dividends two time per year. You want to have these dividends reinvested, rather than going to your bank account -(for now), buying you more shares on auto pilot even as you sleep.

AUTO PILOT -AUTOMATIC DISCOUNT IN PRICE!

OH yes! Before I forget! Because the price you pay is usually the best of the last 5 trading days, you usually pay a price per share, that can be as much as 5% below the current market. This is another trait of the wealthy - always buy at a discount!

TO YOUR CHILDREN! SEEDS TO WEALTH or INDEPENDENCE

Imagine! You could even buy a share and transfer it to your grandchild and then have them enrolled or their parents enrolled so that they can now put a slice of all birthday money and gift money into the plan. Dividends pay far more than any bank account! And are taxed much lower!

Children who have these plans as a small hobby, begin to see that, almost without trying, they have a garden of shares growing for them whether they plant more money or not!

These children, as they grow up come to realize the value of investing earlier than other children. It has become part of their being or culture. They have become used to it the same way I became used to collecting hockey and baseball cards or stamps. But this hobby pays more frequently! Later as one grows with it, so too does wealth.

What is wealth?

Simply defined, 'wealth' is .."every dollar you keep, over and above what you need to pay out."

If every one of those kind of dollars keeps paying you, you get get rich. For those dollars to pay you, you must use the most effective harness or system. But you need to know some other systems besides savings accounts or Canada Savings Bonds which don't pay much and are taxed higher.

You see, dividend stocks, pay a reward- like interest, - but called "a dividend" twice a year, back into themselves buying more shares for you or straight into your bank account without buying more shares. If you have the dividends going to your bank account you can then spend them, but your investment grows slower. The object here is to have them reinvest continually expanding their pay-out power until later when you will really need the payments.

And one day if you own enough of them, the dividends will pay more a salary or pension so that you do not "have" to work to live, enabling you to choose whatever you want to do with your- 'life time'.

This is true 'wealth'. It is not 'rich', but this empowerment, the ability to not "have to work" is where children of wealthy people start in their lives. They are not looking for jobs to simply pay bills. Their bills are already paid for by passive income like dividends.

Most of us -perhaps you and me- started out having to 'get a job' and work for someone else until we could retire later in life. 'Retirement' is the 'middle class and lower class VERSION of independence'.

Some might even say it is modern day slavery! But that would be rather cynical view point would it not?

What were you taught to 'think' in school - 'how to get a job and be employed' or 'how to become one of the independent wealth owners in society'.

There is nothing wrong with what we were taught, but there are other ways. What do you think is taught in the Private Schools.

HOW MUCH 'LIFE TIME' DO YOU OWN?

Imagine being able to select a job not based upon salary or payment, but rather on pure enjoyment of the 'LIFE TIME', you (choose) to spend doing it.

After all, do you know how long you are going to live?

So LIFE TIME is a precious commodity. It is far more valuable than money.

It is your first and most important currency -which we are trained to trade away for minimum wage and then at higher premiums depending upon the 'job' we train for.

If you were already earning dividends or 'passive income', to pay your bills, you might choose an occupation that is more creative and rewarding to your inner self-worth and creative being. You would be free to 'invest your time' in learning to perfect your creative processes -write books, volunteer, or yes- even 'work' for someone else, ...but only so long as it was an enjoyable way of living your life

Being paid enough by dividends or passive income from stock/shares to pay bills, if your 'work/occupation' is not enjoyable and causes you to grow weary- then quit!

Since you are already independent of the salary and pension packet you earn, since you already have enough dividends coming in, paying your bank account so you always have enough to pay all your bills -or most of them anyway you are free!

A DRIP program is not just a wonderfully simple and safe way of investing. It is in 'practice', the first step to acquiring 'Wealth Mind' or 'Independence'. It is like learning to walk. There are all kinds of ways to invest money to gain return, but this should be the first one taught in school. It is the missing link.

For me 'independence' is the ability to be free to decide what I would like to do with my 'literal life time' (however much we are gifted with) -'for me first'- without being obligated to go punch a clock. But then one is also free to 'choose' to do that if that is what one enjoys. The key is to have the choice.

I know -easier said than done, but it is do-able. For those who are already half way through their life, one has to create a bridge to that goal - a plan. But those who do have the potential to become independent before retiring at 65 or 70. Being independent does not mean being inactive with one's life.

We are taught from a very early age how to set up our system of dependence on having employment. What we really need to be taught in addition, from an early age, is how to be independent at an early age or even develop our own business in something we enjoy, so we can employ those who choose not to be independent.

Were you directed to consider this choice in your school?

Aspects of RRSP/RRIF

Keep in mind that when you put money into the Registered Retirement "Savings Plan", while you in effect decrease your earnings now to save tax and get a refund in your present days, you will have to pay the taxes in your retirement for a long time at ever increasing rates.

That is the deal. You save now and you pay later in the RRIF or Registered Retirement "Income Fund".

The key word is INCOME. What happens when you have INCOME? You pay TAXES.

The moment you convert your RRSP to a R.R.INCOME FUND, you must by law, take out as income a 'Minimum' of the savings money every year, whether you need it or not and pay tax on it. The minimum goes up every year once you start. Remember this

So in retirement you have the pension from work -if you were lucky enough to have one, and perhaps it pays you $400- $700 per month.

Then you have Old Age Security from the Fed at perhaps another $400-$600 per month and if you live in Quebec, you get the Quebec Pension Plan at another $500-700 per month.

So, $700 + $600 +$700= $20,000 per year not including any other savings you have inside an investment that is not REGISTERED. This will be taxed at a marginal tax rate of approx 35% or more.

Let us say you are age 71 and you now have converted the RRSP to RRIF.

You must take out from the RRIF a minimum of 7.38%.

Let's assume you have managed to save in this plan $200,000.

Then $200,000 x 7.38%= $14,760.

This amount must be taken out whether you like it or not and you must add it to the other income of $20,000 and pay tax on the increased amount.

There are other factors to be considered which I'll write about later. But the key question to you is,...

" Do you understand what is going to happen later if you use the RRSP as a savings device now?"

Good resource articles are in the Financial Post by Jonathan Chevreau (Wealthy Boomer).

He has two articles: Are You Saving Too Much? (Lower Targets) and the second is The RRIF Rebels. The articles are in the Financial Post Saturday Jan 29 2011 and can also be accessed at financialpost.com.

The minimums are :

age 65 = 4.17%

age 70 = 5 %

age 71 = 7.38%

age 72 =7.48%

age 73 = 7.59%

all the way up to age 99 = 20%

And just think, inside the RRIF, your invested money keeps growing even though you have only taken out the minimum.

Maybe we should consider how much should really go into the RRSP and how much should be saved outside it ...

say in a in the Tax Free Savings plan where you have $5000 you can save for year 2009, another $5000 for year 2010 and another $5000 for 2011 where even if you take any out, you pay NO TAX! That's right if you have not started for 2009 or 2010, it can all be added up in 2011 to $15,000, if you have that much to put in. You can put in less, but $15,000 is the maximum until next year if the Fed decides we can do it again.

Not only that, if you took any out, you can replace it at no extra cost.

Golden Rules on your WILL

Remember that every 5 years or so, you should sit with your investment advisor or legal advisor to review the will. Even if you and/or your spouse have not changed anything, the legal, tax and investment rules and laws are always in a state of flux which will have effect either positive or negative on your last wishes.

Also, whether you travel frequently of not, you should always have one of your children or parents or trusted friends 'in the loop' and know where you keep your will(s), so that if anything happens to you, at least (that) someone will know where to look.

Drowning in Paper

As a financial advisor, I ask my clients who are in 'couples-relationships' to share the tasks involved with bill payments, investment strategies, monitoring, organizing and collecting the paper related to those tasks (statements, reports and emails).

The reason is simple. Should one die, the one left with the assets is also left with bill payments and organizing of the paper. And inevitably they are caught short and have no clue where anything is or how things work.

This week I went out to lunch with a wonderful senior couple who are also my clients.

We chatted about several things, but one of the items that came up was how Mrs. H is becoming more involved with investment, cash flow, net worth and how to organize statements and paper as it comes in from the financial companies as she sees now, the need to take some responsibility for this element of the household in retirement.

I am now dealing with her as I would a 'new' (investment) client since I have dealt with Mr. H primarily for 'investment' in the past. She has been a client for just as long, but never has she had to concern herself with Taxation, Accountants, Investment Statements or household bill payment records since that was traditionally 'his territory'. Times and situations naturally do change.

The amount of paper coming in from mutual fund companies at year end is significant .

Further, she is coming to terms with the inflow of statements on bill payments as well. Yes I know about on-line banking, however, the statements from the household cost factors still come in. Mr.H. had always dealt with these in files and filing cabinets. This is not wrong, but there is a tendency for receipts and statements to get lost in files over time.

I recommended something that seems to work for many of my clients who are in business.

For your investment statements, written investment communications, investment e-mails etc, have a 3inch binder and 3-holed punch. Anytime you get a statement or any investment paper, get it out of the envelope as quickly as possible -the same day as you receive it, 3-hole punch it and then put on top of the last paper in the binder the binder. In this way, you have an ongoing story and can quickly look back to see what values you had before compared to now and can keep all the investment related stuff together.

If you deal with an investment advisor who is with a dealer or single 'captive' dealer company, then use the quarterly reports (for mutual funds) or monthly reports (for stock) as your check list to understand the 'geography' of your investments, since your advisor may use many different fund companies for various specialized investment types.

As for household receipts, have a 2 inch binder that has 12 plastic folders for each month and collect the monthly bank machine slips, or any other tax related receipts and put them into this month's plastic 3 ring transparent envelope. At year end - pass it to the accountant and let him or her deal with it.

A book keeper or accountant is a great tool to have. But getting him or her the right paper data will be a big help. At least you don't have to blame yourself for the tax messes and it is time well saved for going for nice long walks, yoga, Tai Chi and staying in shape. In short, more quality time can be spent with your 'significant-other' while eliminating topics of conflict.