HOUSE WINDFALL REQUIRES INVESTMENT PLANNING
Whatever you do, don’t just let the cash sit in a chequing, savings account
A lot of houses change hands at this time of year, and in many cases, the family home is sold for more money than the recipient or recipients have ever handled in their lives. If this is your situation and you now find your bank account suddenly bursting at the seams, what do you do with your new- found wealth? Let’s have a look at some options.
First of all, you don’t want a small fortune just sitting in your chequing or savings account for very long as, normally, these types of accounts pay depositors very little interest, if any. As a starting point, you could inquire with your bank on what they are offering in terms of Guaranteed Investment Certificates ( GICs) or term deposits. Currently rates range between 1.56 per cent for a one- year term, to 1.88 per cent for three years and 2.06 per cent for five years. These returns may not sound like much but they are meaningfully higher than the zero per cent you may be earning if you do nothing.
Given that the Canadian Deposit Insurance Corp. ( CDIC) only insures amounts up to $ 100,000 per depositor per institution, you may wish to spread your term deposit investments around to multiple issuers. This can be done through your own dialing for dollars or you can seek out the assistance of an investment dealer who can shop the market for you and offer a diversified portfolio of GIC issu- ers under one umbrella or one account.
If you are hoping to turn your cash into something that produces income you could look at investments that generate dividends, such as preferred shares and dividend paying common shares, depending on your tolerance for risk and your time horizon. Dividend generating investments have certain tax advantages over interest bearing instruments as the income is taxed at a more favourable rate. Investment advisers and portfolio managers can assist you in this regard, or you might seek out the help of a mutual fund representative who may introduce you to dividend mutual fund options as well.
If “risk” is a four- letter word to you, alternatively, you might want to see what life annuities could pay you in exchange for your treasure trove, or a portion of it. Life annuities have the advantage of paying a level and certain amount of income for the rest of your life, or lives, in the case of two spouses. In fact, since the majority of the annuity income payment is considered a return of capital, very little of the annuity income received is taxable, thereby providing further benefits to the annuitants. The downside of an annuity is the sacrifice of your capital in exchange for this certainty of income so they do not tend to be great estate- planning vehicles.
If you are looking for a mix between higher potential returns on your investments combined with a guarantee that you will get your principal back, in the event of death or maturity ( anywhere from 5- 10 years), you could also consider so- called principal- protected notes which have their returns linked to a basket of equities or an index, or even look at segregated funds, which are mutual funds issued by life insurance companies. However, both of these options have their costs or limitations and you should inform yourself well before committing your capital as you could end up tying up your investment for years in order to fully benefit from these advantages.
If all of this seems rather overwhelming, another approach you could take is to hand over the whole sum to a portfolio manager to manage on a discretionary basis. In this case, your time horizon, your investment objectives, your asset allocation and your tolerance for risk are all carefully discussed and documented in an investment policy statement. Based on clearly stated criteria, the portfolio manager will then manage your nest egg for an all- inclusive investment management fee and report back to you on a regular basis. This removes you from the investment decision process and assigns your portfolio management worries over to specifically licensed managers leaving you more time to concentrate on your bridge game or golf swing or both!