A Strategy For Retired Seniors Confused By The New Realities

Hedley Dimock As a retired senior pushing 90 years old, I am perhaps the eldest Canadian MoneySaver writer—and am more confused about my investing future than at any time during its 58-year career. Never has the stock market been more volatile with globalization impacting the market almost every day (with China out in front). The focus is shifting to alternative energy and climate control as well as “cloud” computing, artificial intelligence, biodata and who owns the intellectual properties to control these developments is too much. When our new government plans to spend billions of dollars on new projects creating a crippling debt, I have become highly motivated to write this article.

The question for us seniors is: “What should we do to protect our financial plan for retirement and its hard-earned lifestyle?” The media is overloaded with experts telling us all kinds of contradictory things but as usual they supply no results of their wealth-creation success. While past results are not a clear prediction for the future, we’d all rather go with Warren Buffett than my stock-broker neighbor who went bankrupt. A brief summary of my wealth creation therefore seems in order. At age 50 we were worth a million on a taxable income of less than fifty thousand dollars. I did not lose any money during the 2007-9 recession: two stocks raised dividends and two lowered them. And I have beaten the Toronto Stock Exchange every year for the past five or more years, usually by a couple of percent.

The strategy I am describing here is focused on wealth creation and preservation as have all of my MoneySaver articles over the past two decades. It is not concerned with going along with the crowd, buying up the flavour of the month, picking the next big winners or being restricted to totally safe fixed income investments. Here the focus is sticking with what we know and earning more than the average return that increases each year exceeding that of inflation. What we know still makes sense for financing our retirement and present lifestyle and likely providing a bit of a nest egg for the emergency situations of old age.

Investment Balance

According to a survey I saw early this year, most Canadians are holding about 60% of their wealth in cash or its equivalent. That seems a bit high and I would have guessed maybe it would be that much in their house or condo. In any case it could be an indicator of the concern and confusion around what to do with your money given all the new realities mentioned. Either is a poor place to start in balancing your investments as neither will produce the monthly income you need to maintain your retired lifestyle. Increasing taxes on your house/condo, and new costs for hydro, garbage, and water could make you house-rich and income-poor in ten years. If this sounds like you then it is time to start building up an investment portfolio of stocks and bonds or consider downsizing to reduce the cost of your accommodation and provide the money from the sale of the house/condo to start the stock/bond portfolio.

The balance of the equity and fixed income in the portfolio is a matter of opinion and as one size does not fit all we will discuss it further under Safety and Wealth Creation. The important point here is to assess its weaknesses and strengths. I think this is the least worst plan you can put together to manage your remaining retirement years.

Investment Safety

The safest investments that provide almost complete safety and get a small amount of interest are laddered Guaranteed Investment Certificates. If you have $25,000 to invest, you could buy $5,000 worth for each of the next five years. Thus each future year you buy one new certificate for five years. They are guaranteed by the Canadian Deposit Insurance Corporation up to $100,000 in each account. In my experience, the interest rate has usually been enough to cover inflation, and the laddering helps to even out the highs and lows over the five years.

As you can see, the more of your total wealth that you hold in these G.I.C. investments, the safer you are, but as your total capital remains the same and the less able you are to keep up with compounding inflation, your purchasing power can dwindle by 40% of its value in 15 years. The percent of your wealth to hold in this fixed income is your first big compromise with this strategy, and determines your lifestyle. A reasonable place to start thinking is half fixed income and half equity for wealth creation.

Wealth Creation

This strategy starts off by selecting reasonably safe stocks that typically beat the Toronto Stock Exchange. They are blue chip stocks: large, well-known companies, listed with the top 500 Canadian stocks on the exchange. They also pay a moderate dividend of about 3.5% to 4.5% that is eligible for reduced tax treatment. Most important of all, they have a track record of increasing their dividend every (or almost every) year. The average dividend increase has been 10% for the past five years and 9% for the past 10 years. This has meant the dividend has doubled in the past eight years and this has driven the stock’s value up enough to beat the TSX and usually by a couple of percent. This factor is called “the magic of compound interest” and is a key component upon which this strategy is built. During my 58 years of investing it has easily handled the inflation of our lifestyle (including the double digit inflation of the previous Trudeau government) and created a large nest egg for our retirement.

While this strategy has been very successful in the past, how is that helping us deal with these new realities that are confounding us right now? Well, we are using what we know again and hiring professional managers to do that at no extra cost for us. I am talking about the blue-chip companies we have invested in which are unlikely to invent or create the new applications that we can’t imagine (pigs that can fly?) but after these things are created our companies will buy up enough of them at a good price to keep paying and increasing our dividends each year.

For example take Bell Canada, a dull stock for widows and orphans that was the first I bought and now owned for 58 years. When purchased it was virtually a government-controlled monopoly making and operating land line dial-up telephones for millions of Canadians. The move to push-button phones, battery-operated portable phones, cell phones and answering machines was only partly done by Bell but their professional managers did what was needed to stay in the game and pay my dividends and increase them regularly at an 8% average for the past ten years. Even as a TSX exchange-traded fund has gone down -5.5% for the year to mid-March 2016, Bell is up 14.7% in value with a 5% dividend increase. Now Bell owns things like the CTV television channel. Management has done a good job for us.

The other thing we ask ourselves, using what we know, is: does this company not only have the management competence to stay in the game but also the product or program required to keep ahead if times get tough? Are Enercare clients likely to stop paying to rent their water heater? Of course, the energy to run the heater will likely come from a renewable source and the heater itself may be reinvented as a small insert on the hot water pipe but yes, they will still pay their rent on time.

Investment Allocation And Diversity

The holdings of our retirement financial plan need to provide safety and a modestly increasing income to deal with inflation and the 50-50 likelihood of significant medical and institutional costs of old age. And we don’t want all of our eggs to be in one basket. We need to allocate our holdings to have some diversity in type of holding such as stocks, bonds, G.I.C.s, income trusts, real estate, etc., and focus of product such as banks, utilities, electronics, real estate, precious metals, etc. As the global economy is now impacting Canada considerably and the U.S. is buying over half of our exports, we need to consider diversification of our Canadian stocks.

Again we stick with what we know, balancing the type and focus of our holdings that avoid mutual funds preferring stocks and exchange traded funds. We avoid the popular junk bonds of the 2008 recession and choose guaranteed bonds and G.I.C.s. instead. Our product focus is a bit restricted as we stick with banks, utilities, real estate and telecom equities that will beat the TSX. The need to buy global stocks is an advertising ploy as they have done poorly in the past.1 Almost every one of our blue-chip stocks is doing some or most of its business internationally.

The Bank of Nova Scotia has international exposure, TD Bank has more banks in the U.S. than Canada, and over half of Manulife’s business is global. Why would we pay extra to the investment industry to invest in their products and try to deal with fees, exchange rates, foreign language rules, politics, taxation, and accounting methods? Worst of all, we would also lose our Canadian tax cuts on the foreign dividends by not converting them and running them through our Canadian company.

Wealth Preservation

We have covered the major considerations for creating safe and hopefully increasing wealth for the rest of our retirement and now it is part of our strategy to look at keeping as much as allowed by reducing our taxes. The first suggestion that you are probably not going to like is either do your own tax returns or go over your taxes with your consultant for two or three years starting now. This will maximize the need to divide, differentiate and defer your taxes, saving up to 50% on your taxes.²

The real return of our investments includes our expenses in managing them, such as bank and brokerage fees, tax return costs, mutual fund built-in management costs. Inflation can easily whisk away another 2.5%-3.5%. Not knowing the tax rates or how to defer taxes can easily reduce your real return. If you are a senior who does not know how much can be made in Canadian dividends tax-free or at what income capital gains are taxed less than dividends or how single survivors can still split their incomes, you would benefit by reading my tax article. Checking the pros and cons of your RRSP/RIF with the newer Tax Free Saving Accounts could also save you taxes and money as during the 2008 recession I heard a lot of discontent about the mandatory withdrawals of RIFs taxed at top rates and no reductions for dividends or capital gains and their losses.

Summary

“The future ain’t what it used to be” (Yogi Berra) and is especially confusing, complex and upsetting for retired seniors.
Sitting on our wealth in cash or low-paying investments is self-defeating—maybe you need to stop procrastinating and move forward now.
A good way to move forward is to “go with what we know”, accept the new realities and invest half our wealth in solid productive Canadian stocks.
We know of blue-chip Canadian stocks that have been very successfully for decades that pay moderate dividends, 3.5% to 4.5% and raise these dividends every year now averaging 6% to 8%.
These companies do a great deal of business all over the world and can best manage our globalization needs.
Our concerns for safe investments are guaranteed by the government with laddered G.I.C.s.
Our strategy includes a way to balance and diversify our investments using Canadian stocks.
You could try to become involved enough in the taxation of your wealth to maximize the use of dividing, differentiating, and deferring information to reduce your income taxes by perhaps 50%.

Comments and questions welcome.

Hedley Dimock, Guelph, ON. MA, Ed.D , Author. hdimock@teksavvy.comn

^1.A third quarter BMO newsletter of 2015 reported that emerging market averages compared to the S and P 500 lost 14% over the past year and over 12% in the past five years, and -.5% in ten years. International stocks lost compared to the S and P 500 for every period from one year to 30 years.

^2.See my article “Reducing Income Tax by 50%”, MoneySaver, June, 2013.