The heading on this white board should read;
'Your expenses will vary in retirement so you need a rising and growing cash flow.'
We are constantly being seduced by financial institutions to give them our money in exchange for some product they are selling. This sign is not new but it has appeared in the past and I'm sure is still affecting those people that fell for it. All the big banks sell these products, so buyer beware. Let's pop the hood and explore further.
$500 a month X 15 years = 500 X 180mo = $90,000
What happened to the other 10K?
Sucked up in fees just for the privilege of buying this product from the nice lady at the bank. Market linked GICs are mercilessly flogged by the bank as soon as they hear you like to invest yourself. They couldn't wait to pitch me this when I told them my house was paid off and that I was a DIY investor.
They didn't like the fact I mentioned that I don't leave money at the bank but only look at it as a place to get money.
Don't fall for this, it's a trap.
You are not protected and your money is not participating in growth. This is financial porn at it's finest.
If you invested 100K in just a 60/40 Balanced Portfolio and earned 7% which has been the average return of the last 15 years you would have;
100K X 15 @ 7% = $275,903.15
Why would you hand over that 100K to the bank? when you can generate that kind of return in a fairly low risk portfolio.
You are going to receive a lot less money and they guarantee it. It's all wrapped up in the sales propaganda of having a fixed income.
You don't want fixed income you want a growing income in retirement. This helps you stay ahead of inflation and if your expenses go up so does your income over time. You have to find ways to achieve that. This is not an investment that does that, the math is pretty simple. Invest the money and do not buy a market linked GIC from the bank. You can do so much better.
Don't fall for anything the bank is selling. Chances are they are the ones getting rich off of your money.
If that 100K is burning a hole in your pocket another option for you is to buy 100K worth of the bank's stock. Whatever bank you deal with just buy their stock.
All you have to do is go online and open up a non-registered account with a discount broker. Every bank has a discount brokerage trading arm they use to appeal to DIY investors. If you don't know how to do this get someone to help you or ask the bank to help you open one (if they will).
Once you open the account, you fund it with the 100K. Purchase bank shares equivalent to your $100K.
Every quarter they will send you dividends into the account that are taxed a lot more favourably than the income from a GIC. The other positive behind buying the bank's common stock is the growth it provides. That 100K will continue to grow every year for 15 years.
It's up to you, but you have more than one choice. On the one hand you can hand over 100K and give all control of your money to the bank OR invest in a balanced portfolio OR just buy bank stock.
Let's look at an example of buying BNS which is where I hold all my investments. I use Scotia iTrade as my discount online broker.
The stock closed at $75.98 on Friday 15 June 2018. Using my 100K it would allow me to purchase 1,316 shares of the common stock. The stock is currently yielding 4.42%.
The calculation works out to 1,316/$82 per 100 share coupon rate = $1,079 every quarter.
Which breaks down to $359.70 monthly.
Yes that is less than the $500 a month the bank is giving you back BUT you have the following advantages;
- total control over your money
- spending or letting your dividends grow
- participating in the growth of your money
- a more tax efficient investment
- yield + growth = a better return on your investment
- zero cost on your invested dollars
- you are way ahead by NOT giving the bank 10K in fees
- it's your money, the bank is just giving it back to you over time
I think it's pretty clear what the best options are. I'm not suggesting that you dump 100K in any one stock, it's just an example to highlight just how much growth you give up when investing at the bank.
If you would have invested 10K in Royal Bank in 1999 today you would have 210K according to a recent article from Motley Fool Canada.
If you would have invested 10K in Royal Bank in 1999 today you would have 210K according to a recent article from Motley Fool Canada.
Do you own any market linked GICs?
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Using your BNS and assume the div grows at 2% per yr (as the stock price) and they increase their withdrawal by 5% per year, the $100k will last 20yrs. They would still own about 640 shares worth about $125k.
ReplyDeleteIt really is amazing the other choices out there instead of a dead end market linked GIC. Thanks for some more great math. Why wouldn't anyone want to do this? Appreciate it!
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