Home' Trinidad and Tobago Guardian : May 11th 2014 Contents Client Situation:
Ruth a 50-year-old single
professional earns about
$25,000 per month. She
contributes $1,000 to an
employer pension plan.
She also invests US$600
monthly to a hard cur-
rency investment valued
US$25,000 and has the potential to earn about
10 per cent per annum over the next 10 years.
She hopes that this foreign currency investment
will buttress her retirement income.
She has a T&T share portfolio worth close
to $1 million, most of which was acquired
from an inheritance and from an interest-only
(8.0 per cent) $365,000 loan, to which she
pays $2,433 per month. This portfolio generates
about $35,000 per year in dividends and has
the potential of good capital gains. Apart from
her home valued at $1,300,000, she owns an
art collection worth about $300,000.
Ruth wants to know whether she should
liquidate part of her stock portfolio and pay
off her mortgage or stay invested and continue
servicing her debts monthly. She also wants
to know whether she is adequately set up for
her later years.
Ruth has three main goals:
1. Secure her retirement
2. Eliminate debt
3. Create wealth
As Ruth progresses in age, her ability to
recover from an investment loss will decline.
She, therefore, has to strike the right balance
between the opposing forces of growth and
safety of capital in keeping with her stage in
life. The following table and chart illustrates
how her current portfolio is distributed across
the different asset classes and, by extension,
the varying degrees of risk. The net asset
values used in the diagram reflect her true
worth after we account for the related debts.
Portfolio of assets
What we discover is that Ruth s portfolio
is made up of higher-risk assets, probably
because her focus was on aggressive growth.
The following is a brief assessment her assets
and possible strategies with each one.
Stocks & debts
Ruth has $1,000,000 in T&T stocks. What
we do not know is the number of companies
she owns. The more companies she has invest-
ed in, the more diversified her portfolio would
be and the lower her overall risk. On the other
hand if she has fewer companies this risk
increases. Ruth is also just 10 years from retire-
ment and should focus on consolidating and
preserving her wealth by scaling down her
In respect of returns she currently earns
annual dividends of $35,000 or 3.5 per cent
on her $1,000,000 portfolio. This is not guar-
anteed, as is the case with her share prices.
When we match this uncertain return with
her fixed cost of funds on the 8.0 per cent
debt used to acquire these shares, there is a
possibility that her interest payments could
exceed her gains.
Her intention to sell off some shares to clear
debts is not a bad idea however the first debt
to address is the higher 8.0 per cent investment
loan and then the 6.75 per cent mortgage. Her
present mortgage balance should be about
$538,000 based on the information provided.
She can move to eliminate all debts using
this strategy but she will have no shares left.
If she chooses this option she can rebuild her
portfolio in keeping with her current life cycle
stage and risk profile by investing her monthly
debt payments of $6,933 ($2,433 + $4,500).
These regular amounts will be invested at dif-
ferent prices, which will average down the
cost per share and allowing room for growth.
Her $1,000 contribution to an employer
pension helps her to reduce her taxes by $250
(25 per cent). Some employer plans allow for
voluntary contributions which she could con-
sider as this will buttress her retirement income
and, at the same time, maximise her tax breaks.
Inland revenue allows favorable tax treatment
for these contributions (inclusive of 70 per
cent of NIS payments) up to a limit of $30,000
annually, so she may have room for an addi-
tional $15,000 if she has no other registered
annuities. Over the next 10 years the total tax
benefit will be $75,000 (25% X $30,000 X 10
Ruth did not tell us the nature of her foreign
investments but based on the return expec-
tation of 10 per cent annually we could assume
that it is some type of stock-based instrument.
She is currently contributing US$600 to
this investment every month. If this payment
comes from a US currency source then this
is not too bad, however if she is purchasing
foreign exchange to invest she may be starting
off at a loss.
Further if this investment is a mutual fund
with a front-end load (commissions and costs
paid up front) it means that her investment
has to recover before generating positive
returns. In the near future if there are no exit
or surrender charges and she has made a good
return she can scale down risk by cashing in
and investing in an income property.
Property & retirement income
Real estate is an excellent option to preserve
and grow retirement wealth. Further rental
incomes move in tandem with inflation; unlike
pensions that are fixed for life.
As Ruth still has some time ahead of her
and a good income she could leverage these
to acquire a second property that could be
rented out and pay the mortgage. She can
even consider modifying part of her home if
possible to generate additional rent.
Like stocks, this investment is also spec-
ulative and depends on the market demand
for the pieces that she has. She needs to con-
sider how easy it is to convert this to cash
should the need arises.
(Details were modified to protect client s iden-
Nicholas Dean (Cer-Fa) is a financial coach
and mentor who is the managing director
of the Financial Coaching Centre. He can
be contacted at:
SBG16 FINANCIAL ROAD MAP
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MAY 11 • 2014
Real estate is an excellent
option to preserve and grow
retirement wealth. Further
rental incomes move in
tandem with inflation; unlike
pensions that are fixed for life.
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