Home' Trinidad and Tobago Guardian : April 12th 2015 Contents Client situation
At age 49, Walter
accepted early retire-
ment from his compa-
ny. At the end of next
month, he will be
receiving a pension
lump sum of $230,000
and a monthly income
of $3,500. He doesn t need the income right
now because he is still employed on contract.
Also his wife Marion has a good job. Their
eldest son, Justin, is 21 and works part time,
while Miguel, 16, and still in school. The couple
owns a second house (two-bedroom), which
is currently rented out at $2,500 per month.
The only debts they owe are a mortgage on
their primary residence and two bank loans.
Walter is contemplating using his pension
to increase his annuity contributions and the
lump sum to invest in the stock market. They
do not have a lot of cash otherwise and want
to make the best decision with the pension
Nick's Assessment & Advice
Many times, an unexpected windfall can be
an opportunity to advance a family s financial
plans. Sadly, however, the absence of specific
goals and objectives can result in a misdirection
of funds to inappropriate investments.
Walter s intention to channel this new money
into his annuity and the stock market is more
of an instrument-centric approach rather than
the wiser goal-centric approach. A financial
instrument is only a means to an end and not
an end in and of itself.
While Walter s idea is not bad and may yield
some benefits this may not necessarily be the
best use of his funds.
Our task is to identify three variables for
Walter: goals, resources and instruments and
then connect them in the most efficient way.
Table 1 illustrates these three areas specific
Economics tells us that our wants are unlim-
ited and our resources are finite. This means
we need to distribute our scarce resources
firstly to what is most important and then to
what is least.
Walter is no exception and he has to choose
carefully how to direct his limited resources.
When investing many people focus solely on
growth completely ignoring the two other
important variables of any investment, which
are risks and accessibility. A good rule of
thumb is to match one s long-term goals with
one s long-term investments and the short-
term goals with likewise short-term invest-
We were told that Walter does not have a
lot of cash saved up separate and apart from
the pension lump sum he is expecting. This
can put Walter in an undesirable situation
should an emergency arise. If the unthinkable
should happen, he may be forced to borrow
or convert a long-term, illiquid asset to attend
to a major set back.
Adequate liquidity is essential for any good
financial plan and as a guide Walter should
set aside at least three months income from
his lump sum dedicated solely to dealing with
emergencies. Once this money is separated,
Walter can then consider pursuing his other
longer-term growth and income objectives.
(return on investment & risk)
No one wants to lose their hard-earned cash
especially in their golden years. The ideal sit-
uation would be to have the best returns with
the least amount of risk. In fact, it would be
wonderful to get a guaranteed return with
absolutely no risk. Is there such an investment?
Yes there is but it requires an adjustment in
one s perspective.
When making an investment decision or
evaluating two different instruments one can
bring them to a common measure of percent-
ages or rates of returns for a better comparison.
On the one hand, Walter is pursuing the
prospect of growth through the stock market,
which offers returns that are neither secure
On the other hand, he is carrying three
debts, which have interest rates that are more
than likely guaranteed and fixed.
Further, the rates of returns on most financial
assets often fall short of the interest rates
charged on debts.
Walter should consider the possibility of
becoming debt free and reap the benefits of
saving on interest cost and freeing up cash
flow which could potentially be used to create
more assets for retirement or for his children s
Whilst today $230,000 is hardly enough to
acquire a new income property, it can be used
to enhance an existing real estate investment.
Walter s need for retirement income could be
amply satisfied by rental income and he may
even be better off concentrating his efforts
and resources in this area than on any other
He could consider modifying the current
property to create more rentable space, which
may produce a better return on capital
employed than making an outright purchase
of a new property. If possible, he may want
to consider this option before clearing debt,
as the benefit gained may be greater than the
interest cost savings foregone on repaid loans.
In fact, depending on the price tag of these
possible improvements or any other property
initiative, it may be justifiable to use new debt
where the payments are met in the first
instance by his pension and then subsequently
by the projected rent.
He should, as far as possible, try to keep
his primary residence free and clear of any
new debt but instead leverage (borrow against)
the investment property.
When all debts are repaid the entire rent
becomes a free cash flow that would augment
his retirement income.
Stock market & annuity
The stock market has traditionally yielded
superior returns to most other financial assets.
In fact other financial instruments such as
some mutual funds and annuities take advan-
tage of this benefit.
The investor s time horizon and expectations
however need to be extended to overcome the
short-term variability of prices and the some-
times lack of real time market information.
Considering Walter s age, he may not want
to dedicate a huge part of his lump sum to
stock based investments.
A better strategy would be to make monthly
or periodic investments to benefit from price
fluctuations; buying more when share or unit
prices are depressed. If there is an opportunity
for an initial public offering (IPO)---a new share
entering the market---then a lump sum invest-
ment can be considered.
Stock-based registered annuities that have
maturities of greater than five years in the
future could be a good blend of Walter s plan
to take advantage of tax breaks and growth
potential. He should, however, scale down his
risk exposure nearer to his targeted maturity
(Cases are developed from a combination of
scenarios received from our readers)
Send us your question and be one of the
three individuals selected this month to receive
a free confidential financial consultation.
If you have any questions or need advice
on today's subject please e-mail me
at: firstname.lastname@example.org or web at:
APRIL 12 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
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