Welcome to the Million Dollar Journey March 2010 Net Worth Update.

Another month, fortunately another net worth gain.  Usually when it comes to personal finance, there are two main lines of thought.  The first, and perhaps the most common, is to spend less than you earn.  This train of thought leads to frugality and separating your needs and wants. 

The second line of thought, which is basically the same as the first but with a different perspective, is to earn more than you spend.  This way of thinking puts frugality in the background and focuses on increasing your income.

For me, I like to use a hybrid consisting of both strategies.  That is, live simply with a focus on increasing your means and I believe my net worth reflects that.  Month over month, a significant portion of our gains are due to savings.  It just goes to show that building wealth isn’t just about investing, it’s also about looking for ways to increase your cashflow and subsequent savings. 

Lets talk a bit about the numbers below.  You’ll see a large gain in the TFSA, most of this is due to a $2,000 contribution this past month.  This contribution came from tax loss selling a portion of my non-registered portfolio in late 2009.  As well, instead of letting the accounts sit in cash, I decided to use a portion of the money to purchase short term bonds.  The vehicle of choice was Claymore’s short term corporate bond ETF (CBO) which has an annual distribution of around 4.6% based on recent prices and a respectible MER of 0.25%.

On to the numbers:

Assets: $ 510,180 (+1.42%)

• Cash: $4,500 (+0.00%)
• Savings: $35,500.00 (+12.70%)
• Registered/Retirement Investment Accounts (RRSP): $76,700.00 (+0.52%)
• Tax Free Savings Accounts (TFSA):  $9,980 (+24.75%)
• Defined Benefit Pension: $28,450.00 (+0.53%)
• Non-Registered Investment Accounts: $14,300.00 (-5.92%)
• Smith Manoeuvre Investment Account: $56,000.00 (+3.70%)
• Principal Residence: $283,250 (+0.00%) (purchase price adjusted for inflation)
• Vehicles: $1,500 (2 vehicles) (-25.00%)

Liabilities: $77,300.00 (-1.90%)

• Tax Liability: $3,000 (-0.00%)
• Principal Residence Mortgage (readvanceable): $20,500.00 (-7.24%)
• HELOC balance: $53,800 (+0.19%)

Total Net Worth: ~$432,880.00(+2.03%)

• Started 2010 with Net Worth: $399,600.00
• Year to Date Gain/Loss: +8.33%

Some quick notes and explanations to net worth questions I get often:

The Cash

The $4,500 cash are held in chequing accounts to meet the minimum balance so that we pay no fees (accounting for regular bill payments). Yes, we do hold no fee accounts also, but I find value in having an account with a full service bank as the relationship with a banker can prove useful.

Savings

Our savings accounts are held with PC Financial and ING Direct. We usually hold a fair bit of cash in case “something” comes up. The “something” can be anything that requires cash such as an investment opportunity that requires quick cash or maybe an emergency car/home repair.  We also need cash to cover any future tax liabilities.

Real Estate

Our real estate holdings consist of a primary residence plus a rental property. The value of the principal residence remains valued at the purchase price (+inflation) despite significant appreciation in the local real estate market.

Pension

The pension amount listed above is the value of my wife’s defined benefit pension.  I basically take the semi annual statement and add the contribution amounts on a monthly basis.

Stock Broker Accounts

Another common question is which discount broker do I use?   We actually have accounts with multiple institutions.  I’m hoping to reduce the number of accounts that we hold in the near future.  Here is a review of some of the more popular online stock brokers.

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After a post last week about how annuities work, there were a lot of questions in the comments and via email from readers (and Kathryn).  Below is a list of common questions and answers about annuities.  If you have any additional questions, please add them to the comments.

What are the advantages of annuities?

You will pay far less taxes with a non-registered annuity compared to GICs.

The monthly distributions are guaranteed. No mutual fund or ETF can say that.

What are the disadvantages of annuities?

You lose control of your money. Once you buy an annuity you can not change your mind and get your money back.

What is a good age to purchase an annuity??

Generally in your 60’s. However, there are always unique cases such as in my example for the RDSPs (previous posting). One might also buy an annuity for a large sum of money that needs to be distributed over fixed period of time in a tax efficient way. An example of this might be an large inheritance that needs to be spread over 10 years for fear of the children spending the money too fast.

Can you purchase an annuity for someone else? Say you are 50 and have terminal cancer. Your mother is in her early 70s and you worry about her after you’re gone. Can you purchase an annuity for her using your money?

Yes, also see question/answer above.

Is it possible to set them up inside a TFSA to avoid tax?

Yes, but since the limit for TFSA is currently very small, this would not be practical.

How much are annuity rates/payouts?

The rates change daily because they are based on interest rate and different competitive forces in the market. Like mortgage rates at different banks, one day differs from the next.

Can we buy them through a fee for service financial advisor?

Yes, if you like paying extra fees! The insurance company pays a commission to the advisor directly so he will get paid twice if you pay a fee also. In fact, an interesting trend is for fee only advisors to recommend annuities while at the same time saying commission advisors make too much money! There is a book written by a firm that offers second opinion (for a fee) and talks about buying an annuity as party of retirement planning.

What happens when you die?

This depends on the type of annuity that you buy. See my posting on how annuities work for details.

What happens if you sign up and then die soon after?

Some companies offer a return of principal minus distribution upon early death as defined in their policy.

How is my annuity income determined?

• Current interest rates
• Amount of money you desposit
• Your age and sex
• Number of years for which you want the company to guarantee your income payments

How do I get one? Who do I call? Who sells them? What do I need to bring to the appointment?

Licensed insurance agents only (like me!). Bring your cheque book :-)

If someone had cancer or past history of heart problems can they get more money from an annuity payout?

Yes, this must be underwritten by the insurance company. Example 65 year male $100,000 annuity would get $680/month (single life annuity). With health problems this would go up to $965/month or 42% more. This would be another reason to have life insurance (permanent) in place before health problems to explore an annuity.

Brian Poncelet who is an insurance specialist and independent certified financial planner (CFP) working in the financial services industry since 1994. Along with insurance, Brian Poncelet focuses on mortgage and retirement planning.

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