Simplify Your Financial Life

Fall 1999 CSANews Issue 33  |  Posted date : Mar 03, 2007.Back to list

To enjoy a happier and more enjoyable financial life in retirement, it seems that an old adage needs to be followed: Less is more! As we get older, we should review our financial assets to simplify our holdings into a more manageable and easier to understand portfolio. There is real power in simplicity.

Most investors will have diversified portfolios of eight to 10 stocks, bonds, GICs, mortgages, real estate, life insurance and mutual funds. At least, that is what we thought.

A CSA member in Kingston, aged 71, sent us a portfolio of 44 mutual funds which produced a tidy 11 per cent return on investment in the midst of the greatest bull market of the 20th century. Every time she complained to her financial institution about her poor returns, they moved four or five funds in and out. As the average mutual fund has about 50 stocks and bonds, she owned more than 2000 investments.

A new advisor acted to simplify her life into FOUR funds – a blue-chip Canadian fund, a blue-chip U.S. fund, a blue-chip Western European fund and a Science and Technology fund. All four funds were in a guaranteed segregated fund format. Needless to say, her returns have improved, as have her feelings of safety and security. Owning more than four or five funds does nothing to reduce risk or improve returns.

But, here is another perspective. A CSA member in Victoria, an 81-year-old widower, had invested his entire portfolio into a $600,000 GIC with his bank, thinking that this would be his safest and least complicated option. However, after-tax, his cash flow from the 'investment' was less than $19,000 a year. Fearing that he would have to use up his capital to maintain his standard of living, he consulted with an independent financial advisor who did the following:

He placed the entire $600,000 into a simple annuity that yielded a $93,000 cash flow to the gentleman – guaranteed, of course. The annuity had no residual value on the death of individual, so the advisor recommended that if the client wanted a tax-free estate equivalent to what he started with, he should consider a $600,000 life insurance policy which would yield $600,000 tax-free to his beneficiaries. The insurance would be expensive, but worth it - and he could now afford it. The cost was $54,000 a year, but he would still have a net cash flow of $39,000 ($93,000 minus $54,000), which would be a 100 per cent improvement over what the bank had offered. This was only slightly more complex, but a lot better for the member.

Simplify your financial life and take the fear out of retirement and estate planning. A good advisor should be able to demonstrate that 'less is more.'