Chapter Three of Preserving Wealth

Chapter 3: Protecting and Preserving your Wealth

“Well, David, I have to say one thing—you sure have become a good cook. This has been one of the best breakfasts we’ve had all summer.”

David’s face was rife with suspicion as he glanced over at Alice. “It’s only our second Saturday breakfast, dear, and I think I know why you’re buttering me up. You just want me to take over cooking detail during the week too. Nice try, but no deal.”

“If you think this is impressive, wait until you see what I’ve got in store for you when you come over to our place next weekend,” Mark bragged.

“Aunt Lorraine, can you do the cooking next week?” Sally pleaded. “Mark has never made any­thing even remotely edible, and you know how much we all love your crepes.”

Aunt Lorraine got up from the table and said, “David, thank you for breakfast. As for the rest of you, I think you’ll be surprised when you see Mark in action next Saturday. These days women want a man who can take care of himself, so I’ve been teaching him how to find his way around a kitchen.”

After Aunt Lorraine left, I asked everyone whether they had followed any of Uncle Wayne’s advice during the past week by starting to pay off their debts.

“I have,” Sally answered. “I paid off all my credit cards, and I’m going to pay the total every month now instead of just the minimum, so I won’t be charged any interest.”

“Atta girl, Sal. You’ve learned something already,” Mark said.

“Mark, I don’t much care for the condescending tone in your voice,” she countered, “and you had better quit referring to women my age as ‘girls.’ It would appear that the politically correct parade has passed you by. No wonder you can’t get a date!”

“I, for one, don’t want to hear about Mark’s social life,” Alice said. “Getting back to Jack’s ques­tion, our mortgage is coming up for renewal in about two months, so we’re going to do what makes the most financial sense. We’ll apply our double-up payments and the anniversary payment now and then pay off the balance at renewal time.”

“I’ve never had a mortgage,” Sally said, “so you just lost me, Alice. What are double-up and anniversary payments?”

“Well,” she answered, “there are lots of different kinds of mortgages, but I did some checking, and ours lets us pay an amount equivalent to the monthly mortgage payment, in addition to our reg­ular payment, each month. That’s the double-up feature. The extra payment is applied directly against the principal, which is the amount that was borrowed in the first place.”

“And that would mean the interest component on the remaining mortgage payments would be less,” Sally reasoned, “because you’ve made a deeper dent in the principal.”


“Do all mortgages have this double-up feature?” Sally asked.

“No, they don’t,” Alice replied. “You have to check the terms and conditions of each particular mortgage.”

“Wait a minute,” Mark interrupted, “I thought extra payments like that were only allowed on the anniversary date of the mortgage … you know, when the day rolls around every year that you first signed the papers.”

“Well, that might have been true for your mort­gage, but not ours,” Alice explained. “Ours was a closed mortgage, and besides the double-up feature, ours allows a one-time 10% at any time during the year, and it’s applied directly against the principal. By the way, the reason we aren’t paying off the entire mortgage now is that we wouldn’t save a dime. In fact, the penalty pay­ments for an early pay-off would be more than the interest we’ll be paying over the next two months until we’re up for renewal.”

I smiled at Alice with respect and set out to explain the mortgage situation for Sandra and me.

“First, we took advantage of the terms of our mortgage by making an anniversary payment, much like yours, Alice. Then we arranged to pay off the remainder of our mortgage, with a penalty, at the end of this month. Come to think of it, it’s a good thing we’d put our cash in a high interest savings account, because Sandra was able to get at the money in a matter of two days.”

“Daddy, Daddy, boat, Uncle Wayne,” Connor was pointing toward the dock as we saw Uncle Wayne bounce over in his Boston Whaler.

As bright as our kids are, they weren’t ready for a discussion about investment strategy, so once again Connor and Paige were put in the care of Scott and Jan so that the adults could concentrate on the business at hand.

Uncle Wayne came in the door, grabbed a coffee, and immediately started talking.


“I hope you’ve perfected your golf swings, because the annual Honey Harbour Tournament is next Saturday, and I have entered all of us.

“Meanwhile, here’s my plan for today’s session. First, we’ll talk about the types of investments that can help each of you achieve your financial objec­tives. Then we’ll focus on protecting your inheri­tance, and, finally, we’ll look at tax and retirement planning.”

“I have to admit that I’m really getting a kick out of these sessions,” Alice grinned. “I’m actually more interested in this stuff than David, and I’ve been doing a fair bit of research.

“You wanted us to think about priorities for the three main objectives we could achieve with our inheritance, which are:

  1. Do you need the cash now to pay off debts or for purchases? (liquidity)
  2. Do you need to set up an income plan from the inheritance to fund your current expenses and lifestyle?
  3. Is the inheritance earmarked to provide for your future retirement income?

“Of course, priorities depend largely on age and situation. As you all know, David and I are both in our early fifties. Soon we’ll be paying off the small mortgage we still have on our house with David’s inheritance. We’ve established an emer­gency fund equal to three months’ expenses, and we’ve also decided to set aside enough to cover university for the kids.

“David plans to continue working in the equip­ment leasing business, where he gets both a salary and a bonus. I’ve been teaching since Scott and Jan started high school.

Still, we don’t need the inheritance to provide an income for us at this point. Our main goal is growth, because we’re looking to retire in about five to ten years if possible. Those are the facts, Uncle Wayne. How do you think we should invest our money?”

“Let’s hear from the others before we get into individual plans,” he answered. “What’s up with you, Sally?”

“Well, I have no immediate need for cash for a large purchase, but I’ll probably want to buy a house someday. I’m just not sure when. My job situation depends a lot on cutbacks and the federal deficit. I’d always thought I’d stay in Ottawa and work for the government until I retired, but I’m only thirty-five, so that’s at least another twenty-five to thirty years away. I guess these days most people can’t count on being with one employer for their entire work­ing lives. Anyway, that’s about as far ahead as I’ve been able to look.”

Sandra followed Sally and told everyone that she would continue to work part-time as a teacher until both Connor and Paige were in school all day. We were comfortable with our earned income, so we didn’t need the income our inheritance could produce for living expenses. Since we’re both forty, we were hoping to retire in twenty years, or twenty-five at most.

Mark said his software business in Kitchener was doing well, and he was looking to retire in the next year or two, as he is sixty-three. He also mentioned that his divorce was almost final, and he was thinking of buying a smaller house. His two sons were away at univer­sity completing their master’s degrees, and he neither expected nor particularly wanted them to move back home on a full-time basis.

Alice had listened politely but was clearly get­ting impatient. “So, Uncle Wayne, you know our situations. What should we invest in?”

“For starters,” replied Uncle Wayne, “let’s look at the three investment classes— cash, bonds, and equities/stocks—and review what you’d be getting into with each.”

“I’d like to take a stab at this,” declared Mark. “In the first two categories, cash and bonds, you’re basically lending money to another party, but with stocks, you’re buying shares, or owner­ship, in a company. Over the long term, stocks have outperformed the other types of invest­ments.”

“Details!” demanded Sally. “More details, please.”

“Sure. In the category of cash, you’ve got sav­ings and chequing accounts, and Treasury Bills (T-Bills). “T-Bills are sold every Tuesday by the Government of Canada, for terms from thirty days up to a year. They’re sold at a discount, which means they’re sold at less than their face value, but at the maturity date, you get the full face value; therefore, the deeper the discount, the better return you’ll get. I also found out that the reason the government issues T-Bills is that it provides them with a way to raise cash.”

“Maybe I was wrong about you, Mark. Maybe you do know something after all,” Alice said with a grin from ear to ear. “Now tell us about bonds.”

“I’ll take that as a compliment, I think,” said Mark. “When you buy bonds, you’re really making a loan, either to a level of government, which could be federal, provincial, or municipal, or to a company. They, in turn, promise to pay you a set interest rate for a certain period of time, and when that time’s up, they pay back your loan.”

“Wait a minute, hotshot,” Alice said. “What about GICs? Are they considered cash or bonds?” She was a sly one.

Uncle Wayne jumped in to save Mark. “I would include GICs in the bond category, because they have some of the same characteristics as bonds.”

“That’s what I was about to say,” Mark declared, although he looked as though he didn’t expect us to believe him. “Anyway, GIC stands for Guaranteed Investment Certificate, and, essentially, it’s a loan you give to a bank or trust company. The usual term for a GIC is one to five years, although it can be longer. For example, you loan the bank $1,000, and the bank will pay you a set interest rate for a specific period of time and then pay back your $1,000. A lot of people like GICs because they’re guaranteed for up to $100,000 per institu­tion per person by the Canada Deposit Insurance Corporation (CDIC), provided that the term of the GIC doesn’t exceed five years.”

“So, what’s the difference between a bond and a GIC?” asked Sally.

“There are two main differences: the guarantee factor and the liquidity. You usually can’t cash in a GIC before the end of the set term. A bond has more liquidity; you can sell it on the open market anytime you want. However, the value of the bond is not guaranteed. If you sell it before the maturity date, you could end up losing money, or if you’re lucky, making money.”

“You’ll have to run that by me again,” Sally complained. “You’re starting to lose me.”

“No problem, cousin. What’s probably confus­ing you is my use of the word ‘value.’ You see, a bond’s value is not the price you paid for it but something that is determined by the current inter­est rates. For example, if you bought a $1,000 bond that paid an interest rate, also called a coupon rate, of 3% per year, you would receive $30 a year in interest, and if you held onto the bond until its maturity date, you’d get back your $1,000. But if you needed cash in a hurry and sold your bond before the maturity date, the value of the bond would be determined by current inter­est rates at the time of the sale.

“For example, if interest rates had risen to 5% since the time you bought the bond, no one is going to pay you the full $1,000, because your bond only pays 3% interest, and the buyer could get 5% by investing somewhere else. So to sell your bond, you have to drop the price so that the buyer gets the equivalent of a 5% return on the invest­ment.”

“So, bonds are more liquid than GICs,” Sally summarized, “but if you sell them before maturity, the value will vary according to current interest rates.”

“That explains a lot,” Alice said. “I’d read you could post a capital gain or loss with bonds, and now I know how.”

“When you buy stocks,” Mark continued, “you’re not lending money to the company; you’re actually buying ownership in a company. Your investment increases when the value of the com­pany increases; unfortunately, it also works the opposite way. If the value of the company decreas­es, so does your investment. Some companies also pay their investors a portion of the company prof­its each year in the form of dividends. Dividends are nice, but your biggest gain comes when the value of the company goes up, because that push­es up the value of your stocks.”

“I’ll say it again,” interrupted Alice. “I’m impressed, and I don’t impress easily.”

“Tell me about it,” mused David.

The rest of us laughed, but Sally had dollar signs in her eyes. “Are stocks guaranteed?”

“No way!” Mark answered.

“Well then, why would anyone buy them?”

Uncle Wayne took over. “It’s true that the stock market goes up and down, but over the long term, the trend has been up, just like the economy. I can show this to you in black and white. I took the lib­erty of asking Aunt Lorraine what year each of you were born so that I could chart the growth of the Toronto Stock Exchange Index in a way that isn’t skewed toward my point of view. Look at this,” he said as he pulled out a sheet of paper.

Mark (1955) TSE was 536.50

David (1968) TSE was 1062.88

Alice (1970) TSE was 947.54

Jack/Sandra (1978) TSE was 1309.99

Sally (1983) TSE was 2552.35

“The Toronto Stock Exchange at the end of 2019 was at a whopping 17,063.43, so even with all the turbulence in the time since Mark was born, the stock market has increased dramatically. Gosh, think of everything that has happened in the last sixty-three years: the Korean War, the Cuban missile crisis, Vietnam, the separatist movement in Quebec, the advent of the information society and the global economy, not to mention the oil crisis of 1973, the market crash of ’87, the fall of Communism, the Gulf Wars, Bre-X, Nortel, the Dot Com boom-bust in 2000–2001, the Great Recession in 2008–2009, 9/11 …”

“Enough with the history,” Sandra said affec­tionately. “Let’s get back to the economy. What I think you’re saying is that at any one point in time, there’s enough upheaval going on that you could feel skittish about risking an investment in stocks. However, the bottom line is that the market has always gone up over the long term.”

“I’m still not crazy about the risk factor,” Sally said. “Stocks may have gone up over time, but how have cash and bond investments done in comparison?”

“I thought someone might ask that,” Uncle Wayne replied, “so I came prepared. The informa­tion for this chart came from the 2018 Morningstar Andex Chart, and it shows the average performance of each over various time periods.”

Last Ten Years

Asset Compounded
Annual Return
T-bills (91 days) 0.9% 4.1%
5 Year GICs 1.8% 3.6%
US Large Stocks 13.0% 17.0%
World Stocks 6.4% 20.1%
Canadian Stocks 4.2% 16.5%
Long Bonds 6.7% 9.6%
Balanced Portfolio 7.5% 10.0%
CPI (Inflation) 1.5%  

Last Twenty Years

Asset Compounded
Annual Return
T-bills (91 days) 2.3% 4.1%
5 Year GICs 2.7% 3.6%
US Large Stocks 5.9% 17.0%
World Stocks 4.3% 20.1%
Canadian Stocks 6.6% 16.5%
Long Bonds 6.8% 9.6%
Balanced Portfolio 6.4% 10.0%
CPI (Inflation) 1.9%  

Since 1950

Asset Compounded
Annual Return
T-bills (91 days) 5.2 % 4.1%
5 Year GICs 6.2% 3.6%
US Large Stocks 11.7% 17.0%
Canadian Stocks 9.8% 16.5%
Long Bonds 7.4% 9.6%
Balanced Portfolio 9.5% 10.0%
CPI (Inflation) 3.6%  

“What the heck does the risk percentage mean?” I asked as I studied my copy.

“Good question,” said our uncle, turning toward me. “Look at the last twenty years; the average return for Canadian stocks was 6.6%. The risk figure is 16.5 percentage points, which means that the returns in any one year could have been as high as 26.3%, or as low as -9.9%. The fluctuation figure tells us the extent of the range for returns on stocks.”

“I’m still not clear on this,” I admitted.

“Try thinking of it in terms of your golf score, Jack. On average, you shoot about 110 for eighteen holes, but your range is probably anywhere from about 102 to 118.”

“Hey, what about the time I shot 95?” I protest­ed.

“That’s a good point,” Uncle Wayne agreed. “Sometimes a result will be well outside of the range, but as you know from your golf game, that happens very rarely.”

“I see,” Sally said. “The fluctuation is the stan­dard deviation, which means that the result will be within the range two times out of three. However, there is always a possibility that a result will be outside the boundaries of the range, like what happened in 2008.”

We all stared at Sally.

“No big deal,” she shrugged. “Stats 101.”

“So,” I commented, “if the results will be within the range of fluctuation two out of three times, then investing in the stocks of good com­panies would be the best investment over the long term. However, since the result could be outside the range one out of three times, and that means higher or lower, you have to be emotionally and financial­ly prepared to handle the risk factor.”

“I understand this,” Sally said, “but I don’t want the headaches of worrying about ups and downs. I’m going to sink all of my money into bonds and GICs, and I’ll be fine.”

“Not so fast, Sally,” said Uncle Wayne. “You haven’t considered the other risk factors related to investment planning, namely inflation, taxes, and the very real worry that you might outlive your supply of money.”

Again, Uncle Wayne shuffled through his papers to fish out another chart for us.

“Let’s say that in 2019, you invested $100,000 for a twenty-year period in a GIC with an average return of 3.5% before taxes:

2019    $100,000 (investment)

2038    $198,979 (3.5% return, no taxes)

“But you do have to pay taxes, so let’s assume your tax rate is 40%. That would mean your after­ tax growth is 2.1%, so let’s add that factor to the list.

2019    $100,000 (investment)

2038    $198,797 (3.5% return, no taxes)

2038    $151,536 (2.1% return, after tax)

“Your investment doesn’t look so healthy anymore, and we’re not even finished. We must count inflation as another factor, so let’s use a long-term inflation average of 2% and add that to our list.

2019     $100,000 (investment)

2038     $198,797 (3.5% return, no taxes)

2038     $151,536 (2.1% return, after tax)

2038     $101,979 (0.1% return, after tax, after inflation of 2%)

“What looked like a good investment before taxes and inflation now appears to be pretty darn poor. Your $100,000 has only grown to $101,979 in today’s dollars after twenty long years.”

“Are you saying I should invest everything in stocks?” Sally asked.

“I don’t think that would be within your comfort zone, Sally,” he answered. “Could you stand see­ing your entire portfolio down by 50% in any one year, like 2008, if you invested only in US stocks?”

“Hardly,” she replied. “I think I’d flip right out.”

“Then perhaps the answer, for all of you, is something called ‘asset allocation.’ Essentially it means not putting all your eggs in one basket.

“Several studies have shown that the most important factor in determin­ing the success of investments is asset allocation. I won’t bore you with all the findings, but the high­lights are:

  1. the allocation between stocks, bonds, and cash can account for up to 85% to 95% of the difference in returns between various portfolios; and
  2. different asset allocations represent differ­ent risk levels but may end up providing the same level of returns. The key is to fig­ure out which mix will bring the returns you want while offering the lowest possible risk.”


As we tried to absorb this information, Uncle Wayne looked at us thoughtfully and continued.

“The money you’ve received has come by way of your parents’ hard work and sound planning. I believe it should not be gambled with, and you should try to protect the capital as much as possi­ble. However, since you’ll want to provide for your own retirement as well as leave some money behind for your children, you’re going to need some growth too.

“My best advice is to develop a globally diversified portfolio that invests both in bonds and stocks/equities, based on your risk level and specific goals.”

“What kind of mix do you recommend?” asked Alice.

“Before we get into that, Alice, let’s review what I mean by risk,” Uncle Wayne continued as he sat up straight in his chair. “There are basically two main types of risk: capital preservation risk and inflation risk.

“Capital preservation risk is the risk that your capital is not there when you need it. Let’s say you were going to buy a new boat in a year, and the cost was $25,000. To make sure you had the $25,000 in a year, you would have to invest in conservative investments, such as a high-interest savings account, so you’d have the $25,000. If you invested in equities/stocks, in a year, you could have more than $25,000 or a lot less.

“Inflation risk is basically making sure that your money grows over time as items get more expensive each year. Even inflation of 2% over twenty years, as in the prior example, can lead to costs increasing dramatically.

“Even if you’re close to retirement, you still need some growth in your portfolio because peo­ple today are living longer, and the longer you live, the greater the chance is that inflation will beat you. I’m sure you all want to live a long time, but you don’t want to outlive your supply of money, so your financial plans should be based on a project­ed life span to your mid-nineties. That means Sally needs her money for the next sixty years, and Mark for another forty-two!”

Mark looked surprised and took a sip of his drink. “Wow, that is a long time. I wonder if I’ll still be water skiing then!”

Sally started to laugh and said, “You can barely water ski now! You only go once a year after a few brown pops!”

Uncle Wayne coughed to get our attention and continued. “So you all will need growth or equities in your portfolio to keep up with inflation. A globally diversified portfolio is made up of both bonds and stocks/equities from countries around the world, and the breakdown is determined by both your goals and your risk, or sleep at night, factor.”

“What specifically do you mean by goals and sleep at night factor?” asked Sally.

“Let me try to answer that,” Alice went on. “For short-term goals, say when you will need the money in less than five years, you’ll want to use conservative or defensive investments like short term-bonds, GICs, or high-interest savings accounts, so that the money is there when you need it.

“Longer term goals can be more difficult to plan for. For example, if you can attain your retirement income goals based on only investing in GICs and/or bonds, then the risk of your portfolio will be low, and it will not fluctuate much. Since your money growth is more consistent, you’re better able to sleep at night, because you really don’t need to worry too much about your portfolio declining in value.

“However, for many people, us included, to achieve our retirement income goals, we need higher returns than what bonds or GICs can provide … so we must invest in stocks. This is where the sleep-at-night factor comes in. The greater the allocation to stocks or equities, the greater the fluctuation—daily, monthly, and annually—of the portfolio returns and portfolio. This fluctuation of returns is called your risk level, or sleep at night factor. If you can’t sleep at night because your portfolio value changes too much, you may need more capital preservation type of investments in your portfolio; however, if you do this, you may not generate the returns required to achieve your goals. So how did I do, Uncle Wayne?”

“Awesome, Alice, I couldn’t have said it any better!”

“So, how do you actually develop a diversified portfolio?” asked Sally. “I understand the basics between bonds and equities, and clearly, I haven’t been doing as much research and reading as Alice. How do we put it all together?”

“From my experience,” Uncle Wayne continued, “there are six key factors to developing a globally diversified portfolio, and they are:

  1. strategic asset allocation
  2. tactical asset allocation
  3. specific Investments and/or money managers
  4. risk management
  5. fees
  6. taxes


“Whole books have been written about this subject; however, I will attempt to simplify this. Strategic asset allocation is basically what we have reviewed, and it’s your long-term allocation between bonds and equities. This also includes how much you would invest in Canada, the US, and internationally for both bonds and stocks.”

Alice commented. “Is one of the reasons that we should invest outside of Canada because different country’s economies and companies do well at different times, so by investing outside of Canada, we can reduce our risk?”

“Yup, that’s it,” Uncle Wayne said with a smile.

“So then tactical asset allocation,” Sally added,” would be shorter term allocation changes based on market conditions?”

“Correct,” continued Uncle Wayne. “It could be a decision to increase your allocation slightly to Canadian equities or increase an allocation to international bonds.”

“I’ve been doing some reading,” I mentioned. “So, for the actual investments, we could pick the stocks or bonds ourselves or use mutual funds, exchange-traded funds (ETFs), index funds, and/or use a managed money approach using a professional portfolio manager. I’ve been wondering, though. What are ETFs and index funds exactly?”

“Well,” Uncle Wayne continued, “ETFs are similar to mutual funds in that they can be a basket of securities, such as stocks and bonds; however, they’re traded directly on a stock exchange, which means they’re bought and sold like stock. Many track the performance of a specific stock market index and/or asset class. These are often referred to as index funds. For example, at the most basic level, you can buy an ETF or index fund that follows the performance of the Toronto Stock Exchange (TSX), so you would get exposure to all the companies in the TSX. Today, some ETFs are wrapped in a mutual fund as well. It can get very confusing, and as a result it can be difficult and/or time consuming to select and monitor your own investments over time, but we’ll talk about that in a minute.

“Let’s finish the last three factors first. I had mentioned risk management, and these are techniques that professional money managers use to reduce the risk of a portfolio. An example would be to use a currency hedge to protect returns. When you invest outside of Canada, your investment is valued normally in the home country’s currency. To protect your investment from dramatic swings in the currency of another country versus the Canadian dollar, professional money managers can use a hedging strategy.”

“Is this used because our portfolio is valued in Canadian Dollars, and investments outside of Canada are converted back to Canadian Dollars?” asked Mark.   

“Bingo!” Uncle Wayne continued. “After risk management, another factor is fees. These would be the fees you would pay your financial advisor for their advice, and the fees for the investments themselves. Like all things in life, you must get value for the fees you pay. You could invest yourself and save on the fees, or you could hire a professional. It really depends on what you’re looking for and your own money management expertise.

“The last key factor is taxation. You’ll want your investments to be held in a tax-effective manner, and you also want to organize your investments in a way to reduce the amount of taxes you have to pay.”

“This is a lot of stuff to know,” said Mark. “I’m glad we have you to help us!”

“While I can provide a good general overview, you either must hire an advisor yourself or really do a lot of reading and research. Jack asked about what type of investments to select. I recommend the use of a globally diversified portfolio, and I’d suggest using a professional money manager using a portfolio approach. The specific investments could be individual stocks and bonds, mutual funds, ETFs, index funds, or a combination of them all.” As he spoke, he handed out a piece of paper.

“The type of portfolio allocations will be specific to each of you based on your goal requirements, time frames, and risk level. I looked at the basic portfolios from Morningstar, which is what my CFP®, or CERTIFIED FINANCIAL PLANNER®, professional uses when updating my financial plan, and these are the base portfolio’s projected returns and risk levels.”

Portfolio Type                   Defensive       Growth          Projected Returns      Risk

Conservative                     80 %               20%                3.60%                           4.27%

Moderate Conservative   60%                40%                4.23%                           5.42%  

Moderate                           40%                60%                4.90%                           7.34%

Moderate Aggressive      25%                75%                5.35%                           9.01%

Aggressive                        10%                90%                5.82%                       10.70%

Source: Morningstar November 2019 

Defensive=income investments, Growth=stock/equity investments.

“So,” Sally said as she took a drink and paused, “let me see if I understand this. If we look at the moderate portfolio, the 40% defensive means that the allocation would be 40% income type of investments like bonds, and the 60% growth means that it has 60 % equity investments, with a long-term projected return of 4.90%.  Also, the risk level of 7.34 % would be the range of returns. Is that correct, Uncle Wayne?”

“Absolutely!” Uncle Wayne said with pride. “What your financial advisor should do is review your plan based on your risk level, and if you can’t achieve your goals, one option would be to increase the potential returns, and that might mean moving from the moderate portfolio to the moderate aggressive portfolio for some of your investments.”

Sally asked another question. “Why are the returns for the portfolios less than the returns you showed us over the past number of years?”

Uncle Wayne took a slip of his drink and then replied. “The main reason is that they look at the current market conditions and make a forecast going forward. This is updated every year or so to keep current. The secondary reason is that if you use projections that are too high, it makes your plan unrealistic.”

“That makes sense, Uncle Wayne,” continued Mark. “I’m looking at retiring. Does this change my investment strategy at all?” He got up and grabbed another drink.


“The key thing is that once you retire, you’ll want to create a strategy to replace the monthly paycheque you’ve been receiving for the past thirty to forty years with the assets you’ve accumulated over your lifetime. The basics still apply; however, there is a slight change in approach. Do you remember when you were younger and we used to go to Blueberry Hill, climb up the rock cliff, pick the blueberries, and then climb down? Later, you took your own kids.”

“Absolutely, but why to you mentioned that?”

“When you took your own kids, did you let them go ahead of you on the way up to the top of the rock cliff?” 

“Yes, we did.”

“And then on the way down, were they allowed to go alone?” asked Uncle Wayne.

“No, we used to hold their little hands when climbing down,” Mark continued.

“Why was that?” asked Uncle Wayne

“Well, on the way up, if they slipped or fell, they’d just fall down a bit, and we were there to pick them up and start again. On the way down, if they slipped or fell, they could tumble to the bottom and really get hurt,” Mark explained.

“This sort of explains the difference between saving for retirement and retiring with the need to generate an income and cash-flow stream from the assets you have accumulated and inherited. The way up the rock cliff is like saving for retirement. If you make a small mistake or slip, you can recover and continue your journey to the top. However, once you reach the top and start the descent, it’s like being retired. If you make a mistake, you have less time to recover. You could tumble to the bottom and get hurt badly.

“Just like when you held your kids’ hands on the way down the rock cliff to protect them, an experienced retirement income advisor can help retirees navigate their income and cash-flow requirements.”

“That’s a great analogy, Uncle Wayne. I can see how it’s important to make sure you have a great plan as you transition to retirement, but what are some of the key risks to retirement income planning that are different than saving for retirement?” Mark asked.      


“Good question, Mark. A key risk is that you really don’t know how long you must plan for, which is called longevity risk. People are living longer today and don’t want to out-live their investments.” Uncle Wayne explained.

“I was reading some stats the other day, and for a couple today who at age sixty-five, there’s a 50% chance one will live to ninety, and a 25% chance that one will live to ninety-five,” I added.

“Wow,” Sally said. “Mark, if you ever get a new girlfriend, you’ll have to plan for another thirty-three years!”

“Good luck with that,” Alice commented with a smirk on her face.

“Let’s get back on track. We’ve already reviewed inflation risk and taxation risk over time, so another key risk we must review is something called, the sequence of return risk,” Uncle Wayne said. 

“What in the world does that mean?” Sandra asked. 

“I’ve been doing some reading, and I believe it means that in retirement or just prior to retirement, if you have poor investment returns, it can dramatically reduce your long-term income,” Mark suggested.

Uncle Wayne continued. “You are correct, but I want to add to that. When saving for retirement, if you average 4.90% with a moderate portfolio over ten years, we know that you don’t actually have a return of 4.90% every single year. You could have years when you get higher than 4.90% and years when the returns could be negative. When saving for retirement, you can take advantage of down years by adding more money to your savings. The challenge is that once you stop working and you’re taking money out of your investments every year, if you have bad early years in retirement, it can reduce your investment account balance, and you don’t have time to make it up. As a result, your retirement income can be determined by luck, which can be either good or bad, depending on when you start withdrawals.”

“Ouch,” commented Alice. “So that means two people could have the exact same investments and retire seven to eight years apart and have completely different experiences and retirement incomes. Are there any other risks we need to review?”

“Yes, there are few. One is cognitive risk, which means as people age, they may not be able to make financial and health decisions for themselves. We’ll review powers of attorney in a later session. Another risk that I worry about for myself is a health risk, which refers to staying healthy as I get older, and the real worry that one day I may have to move into a retirement home and then perhaps a long-term care facility,” Uncle Wayne suggested.  

“You still look pretty healthy to us,” Sally added. “I bet you can still water ski better than Mark!”  

“I’m sure he can,” Mark added. “You’ve been retired for a while. How much income do we actually need in retirement, Uncle Wayne?” 


Uncle Wayne got up, walked to the counter, and poured another glass of orange juice. “I like to break it down into day-to-day expenses, which are your normal daily living expenses and what I call ‘do what you want when you want’ spending, which is really your fun money. This could be travel, bird watching, writing a novel, and perhaps your bucket list items. For this spending, I’d suggest you plan to do that in your first ten to fifteen years of retirement when you’re healthy.

“Other costs to consider would be replacement costs for things such as a new roof, furnace, or car. Also, you have contingencies that may occur, such as helping grandkids with their education, or health care expenses, such as funds for a retirement home or a long-term care facility, or extra help at home if required.”

“That’s a lot of stuff to think of,” Mark commented. “Where do we start?” 

“I’d suggest the starting point is to determine how much you want to spend each year, so look at your current expenses and then deduct what expenses you may no longer have once you stop working. Next, determine your sources of guaranteed income, such as Old Age Security, Canada Pension Plan, and company pension plans like Sally has. The difference between your guaranteed sources of income and what you want to spend is how much income or cash flow you’ll require from your own investments. Once you find this out, you can see if conservative investments such as GICs or bonds will provide you the income you require for the rest of your lives. If not, you’ll have to look at other options.” Uncle Wayne sorted through his papers and gave each of us a sheet. “I had thought that you might ask this question, Mark, as you’ve hinted at retiring over the last several months, so I printed this out yesterday for you to review.”

“The Wayner is always thinking ahead,” I added.


“There are five main options to achieve the cash flow you desire from your own assets:

  1. income only investing
  2. income-focused investing.
  3. guaranteed income: life income annuity/guaranteed income products
  4. total return investing: a diversified portfolio
  5. combination of the above


“Let’s start with income-only investing first,” Uncle Wayne continued. “With this option, you would only invest in bonds or GICs, and the income they provide is what you use for spending. This is often the starting point in creating a retirement income and cash-flow plan. The challenge with this approach is that with the current low-yield environment, the income earned may not be enough to fund your cash flow needs annually. Over time, the asset growth may not allow you to keep up with inflation, as your cash flow needs increase.”

“So,” Alice asked, “low yield means low interest rates, and with the current interest rates so low, it could be difficult to create the income from the money you invest? We couldn’t really increase our income each year in retirement, sort of like when we received a raise while working?”

“You got it, Alice.”

“What about the second option? How is income focused investing different from interest-only investing?” Alice continued.

“With income-focused investing,” Uncle Wayne said, “not only would you invest in income-oriented investments such as GICs and bonds, but you’d also invest in dividend paying stocks, either directly or within mutual funds, and live off the income they provide.

“As with the income-only investing, the challenge with this approach is that with the current low yield and interest rates, as Alice mentioned, the income and dividends earned may not be enough to fund your income and cash flow needs. Over time, the asset growth may not allow you to keep up with inflation as your cash flow needs increase.”

“That makes sense to me,” David commented. “Next on the list is annuities. I’ve heard about them, but how exactly do annuities work?” 

“Well,” Uncle Wayne started, “a life annuity isn’t really an investment but a tool to create income. It’s like purchasing your own pension. With this option, you would purchase an annuity from a life insurance company and then receive a guaranteed income for life or for joint life with your spouse or partner. Annuities can be purchased with registered investments (RRSPs and RRIFs), and the income is fully taxable each year. Annuities purchased with non-registered funds may have a tax advantage.

“A key advantage of annuities is that they eliminate the risk of outliving your savings and market risks, which are transferred to the life insurance company.”

Sandra commented, “I take it to mean that with life annuities, as long as you’re alive, you’ll get paid, so that takes care of outliving your savings.”

“And when you say market risk, Uncle Wayne, I assume you’re referring to when the markets have terrible years, like 2008,” said Alice. “What happens to your capital when you purchase an annuity?”

“Both of you are correct, Alice. As long as you’re alive, you’ll receive your income, and market risk is exactly what happened in 2008. An advantage to annuities is that once purchased, no more decisions are made. However, the trade-off is that for the lifetime guaranteed income, you no longer have access to your capital. Some life insurance companies do offer cash back annuities, which means that at death, if payments you received haven’t equalled the original purchase price of the annuity, the difference goes to your estate.”

“So, if you don’t have a pension like me, Jack could buy an annuity and sort of replicate a pension for lifetime income?” asked Sandra.

“Absolutely,” grinned Uncle Wayne. “Some people don’t like the thought of using their capital to purchase an annuity, so another option for guaranteed income is guaranteed income products offered by life insurance companies through their segregated funds, which are pooled investments like mutual funds. These products provide a lifetime guarantee of income regardless of how the underlying investments perform within the segregated fund contract. 

“Most often the guaranteed income will be less than what an annuity would provide; however, you do have full access to your capital at any time at the current market value. If you do redeem your money, you no longer have the income guarantees. These products are flexible enough that if your needs change, you can get your money back. I have friends who retired prior to the 2008/2009 financial crash, and they found these types of income products to be very helpful in providing guaranteed income for part of their income and cash-flow strategy.[1]

“Sounds complicated,” I added, “but I can see that having some guaranteed income in retirement on top of Canada Pension Plan and Old Age Security would help with the sleep at night factor.”

Mark added, “I’ve been talking to some of my friends who have already retired, and to a person they’ve said that those who have more guaranteed income worry less about their own investment portfolios. So how does the next option work, investing using a globally diversified portfolio?”

“This approach is like what you would do prior to retirement,” Uncle Wayne explained. “You’d invest in a globally diversified portfolio that will generate income, dividends, and capital gains, so that you don’t totally rely on only one source of income. The inclusion of capital gains allows you the potential of keeping up with inflation over time. This is called a total return portfolio.

“To create a monthly income, like your paycheque when working, you withdraw the cash flow you require. The withdrawal amount can be changed to adjust for an increase or decrease in your retirement expenses. For example, during the Great Recession (December 2007 to June 2009), I reduced my ‘do what I want, when I want’ spending that year until the markets rebounded the following years. With a total return portfolio, many retirees may end up with an asset allocation in the range of between 40% to 60% growth investments and 60% to 40% defensive investments. 

“Often with this strategy, a ‘bucket’ approach is used, where the first two to three years of spending is placed in the ‘income bucket’ and allocated to very conservative investments, such as a high-interest savings account or short-term bonds, and the cash flow is redeemed from this location first. The balance is allocated to the longer-term portfolio, the diversified portfolio bucket.” At the end of each year, the income bucket is filled up from the diversified portfolio bucket if the market growth has been positive.”

“I think this would help with sequence of return risk. Is that correct, Uncle Wayne?” asked Alice.

“Absolutely,” Uncle Wayne answered. 

“This all sounds very complicated,” Mark commented. “How do you review the various tax strategies?”

“First of all, you need a great accountant and CFP, and there are some great financial planning software packages that good financial planners can use to model the different options.”

Uncle Wayne then added, “Many retirees like me will develop a plan where they may utilize a combination of the above options to create their lifelong income and cash-flow plan. For example, retirees may decide to cover some of their essential expenses with an annuity or a guaranteed income product and then invest the balance in a total return portfolio, perhaps using a bucketing approach.

“A key part of this approach is the coordination from a timing, sequencing, and tax standpoint, as retirees may have numerous income sources, such as:

  • Old Age Security and Canada Pension Plan
    • company pension plans RRSPs, RRIFs, locked in RRSPstax-free savings accounts (TFSAs)annuities and guaranteed income products; and
    • non-registered investment accounts 


“So, there’s a great need to develop an optimal de-accumulation strategy, and this is where a great financial planner can help.”  

“Awesome stuff, Wayner, as Jack would say,” commented Mark. “This helps to explain the analogy of the difference between climbing up Blueberry Hill and climbing down. I can see that once you retire, decisions become more difficult and important.”

“I don’t think I can remember all this, Uncle Wayne,” Sandra said, sounding a bit perplexed. “I can see why we need a good accountant and financial planner for the times when we can’t get hold of you.”

“You bet. Remember, I am away most of the win­ter. In one of our later sessions, we’ll talk about building your own team of financial advisors,” he replied. “But as long as you have a handle on the general principles we’re discussing, you’ll be more comfortable later with the decisions you’ll have to make.”

“Oh! I just remembered something else,” exclaimed Sally.

There was more than one audible groan.

“C’mon, you guys,” she said, “this could be important. My insurance pal mentioned some­thing called segregated funds, and you mentioned them briefly. What are they, Uncle Wayne?”

“Segregated funds are similar to mutual funds, except they’re regulated by the Insurance Act. They offer three unique features. First, they usual­ly guarantee 75% to 100% of your original invest­ment for a certain period of time, usually ten years, or upon death. In addition, you can name a benefi­ciary for your segregated funds, so they don’t become part of your estate, which means you’ll save money on any estate costs, such as probate. And yes, Sally, we will go over the total estate costs in a later session. A bonus for people like Mark, who owns a business, is that segregated funds may be considered creditor-proof. This means that if Mark gets sued or goes bankrupt, his creditors may not have access to his investments in segregated funds. Segregated funds can also be utilized within an RRSP to provide creditor protection.

“I just thought of a joke,” Sally said as she started to laugh. “What is the difference between bonds and men? Eventually, bonds mature! Get it?”

“Ha ha, Sally. So how do our RRSPs and TFSAs fit into the picture?” asked David.

“You’re going to have to bribe me for the answer to that one,” laughed Uncle Wayne. “I’m starving. Jack, do you think you could do some Cajun hot dogs and get your thirsty old uncle another pop?”

They call my hot dogs Cajun because I tend to burn them. Sally took care of the drinks while I fired up the barbecue and went over the morning’s key points in my mind:

When allocating your investments requirements, you should answer the following questions:

  • Do you need the cash now to pay off debts or for purchases? (liquidity)
  • Do you need to set up an income plan from the inheritance to fund your current expenses and lifestyle?
  • Is the inheritance earmarked to provide for your future retirement income?


The three main types of investments are cash, bonds, and stocks.

  • The risk factors associated with investments include taxes and inflation over the long term, in addition to volatility in the short term.
  • Over the long term, stocks offer the best potential for growth to beat inflation.
  • Asset allocation plays a major role in deter­mining the return on investment.


The six key factors in developing a globally diversified portfolio are:

  • strategic asset allocation
  • tactical asset allocation
  • specific investments and/or money managers
  • risk management
  • fees
  • taxes


Retirees must create a de-accumulation strategy from the assets they have acquired over their lifetime, from a timing, tax, and sequencing standpoint, as they may have numerous sources of cash-flow, such as:

  • Old Age Security and Canada Pension Plan
  • company pension plans,
  • RRSPs, RRIFs, locked in RRSPs,
  • tax free savings accounts (TFSAs)
  • annuities and guaranteed income products,
  • non-registered investment accounts.


When you make the transition to retirement, you must make sure you have a customized retirement income strategy and cash-flow plan set up, as you have less time to make up for mistakes. The basic strategies to create an income and cash-flow strategy are:

  • income only investing
  • income-focused investing
  • life income annuity/guaranteed income products
  • total return investing—diversified portfolio.
  • combination of the above


Segregated funds can be a good alternative for people who are nervous about the lack of guarantees when it comes to mutual funds, or for people who require certain creditor protection.

    For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®.

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    This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.

    Insurance products are services provided through Assante Estate and Insurance Services Inc.

    [1] These products are designed to protect retiree’s income and cash flow from financial market declines, like during the COVID-19 Pandemic.

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