How to Make Your Money Work for You by Bill Storie
No, we don’t give financial or investment advice, but we do help to make you aware of how your money, or maybe the lack thereof, can affect your life and lifestyle.
If you are now retired the chances are that you don’t have a regular salary as you once had when working. You rely on pensions income or maybe some rental income if you have another property beyond the house you live in. But hopefully you do have some income being generated from your savings or investment portfolio.
Given that your pension income will be fixed month over month then your investments need to be working for you – maybe working better than they currently are.
“Ah but” you say. “While I am not happy with my investment income I am very scared of taking more risk to produce a higher return.” That makes sense.
So, let’s take a fresh look at how you are investing at the moment and see if there is another way to manage your money.
Let’s say you have $100,000 in liquid assets – assets which could be sold quickly and cashed in (liquidated). I know that may seem high for some of you but let me explain the concept then apply it to what funds you do have.
Let’s say that the $100,000 generates $5,000 a year (5% return – which is probably high in today’s low-interest rate climate), but let’s stick with $5,000. Relatively speaking $5,000 is not a huge sum and most likely will not make or break your retirement lifestyle, even if in the worst case, if you didn’t have it. In other words, let’s assume that your pension income is sufficient to give you adequate cash flow for everyday expenses. You may not be living the high life, but hopefully you’re comfortable. Certainly, if you must have the $5,000 – not a penny less to get by then you probably didn’t do your retirement planning too well, years ago !
Now let’s factor in your age and an estimate of longevity. Not a great subject I admit but if you only have to look after yourself financially – in other words you are on your own and while you have family, you have decided to not leave any inheritance to them (they have done well and don’t seek any part of your hard-earned money). So, an argument could be made to loosen the purse strings on the $100,000.
If you took an extra $5,000 every year out of the principal amount ($100,000) then you could do that for 20 years ($100,000 divided by $5,000 per year). If you live beyond 20 years, then your “loss” would only be the $5,000 annual income because you can’t take the principal with you and you have no-one to leave it to (per above).
Of course, as each year goes by the principal ($100,000) is reducing hence the income generated is correspondingly reducing – but if the $5,000 per annum were to be say $4,000 per annum it wouldn’t disrupt your lifestyle.
So, now let’s think about your starting point – the $100,000.
Let me be clear – the 5% return today is on the high side, but it is the concept I’m referring to, not the absolute numbers.
So, let’s take half the principal ($50,000) and take higher risk. And let’s say we get 7% return or $3,500 per annum. Add that to the remaining $50,000 at the current 5% ($2,500). The result is you have increased your annual cash flow by $1,000 ($3,500 + $2,500 = $6,000) which is a 20% increase. ($1,000 divided by the initial $5,000 = 20% gain).
You still have your $100,000. You have taken more risk, but you can handle it, and you have increased your overall annual return. And if you now choose to withdraw some funds each year from principal you will still be ahead of the game overall because you will take the funds from the $50,000 at 5%, not the $50,000 at 7%.
So, as I said above, these returns are on the high side but hopefully you get the picture. Use your own principal and your current rate of return and then look around for better yielding investments but move cautiously and don’t dive into a higher yielding portfolio because it feels good. Think long-term. Think common sense. Most of all though – think !!!
Please Note: Obviously, I am not a certified financial planner; please review all investment decisions with an expert.
By Bill Storie