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1992-01-23
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WEALTH MANAGEMENT SYSTEM
Investing made simple
by WILLIAM W. ODLUM
Suite 105, 35 Ormskirk Avenue
Toronto, Ontario, M6S 1A8
This Document Copyright (c) 1992 WILLIAM W. ODLUM
Wealth Management System Software copyright (c) 1992 WILLIAM W. ODLUM
All rights reserved.
Non-registered users are granted a limited license to use the above mentioned
software and document on a trial basis. Use, except for this limited purpose,
requires registration.
Use of non-registered copies by any person, business or agency is strictly
prohibited.
No user may modify either the document or software in any way whatsoever.
Note: The United States of America have an equivalent plan to the Canadian
Registered Retirement Plan and it is called an IRA or Individual Retirement
Account.
All points made for holding an R.R.S.P. are valid for the I.R.A.
To register and receive the complete package send $49.95 to:
William W.Odlum
Suite 105, 35 Ormskirk Avenue
Toronto, Ontario
M6S 1A8
THE CHALLENGE
Income Earning Years.
When you start to earn your own money depends on how far you went through
the educational system.
However, at between 20 to 25 years of age you started working and will continue
to do so until age 55 to 65 years.
As a result of changes due to technology and automation a lot of people will be
forced out of their jobs, through no fault of their own, as early as 55 years of age.
Just look around you and see the changes made in manufacturing and methods
of doing business in the last 12 years due to the introduction of the personal
computer.
This pace of change is going to continue and you have to be prepared for it and
accept the fact that it may mean you will not be able to continue to work until the
traditional age of 65. No matter how willing you are to work or how much you need
income from a job.
You have between 30 to 45 years of income earning years in which to build a
retirement income.
Non-Earning Years.
With advances in medical science and better health care the average life span
in North America is now 88 years for women and 85 years for men.
It is often said that older people do not need as much income to live as when
they were younger - this is not true - they are forced by financial circumstances to
live on less.
Their tastes, needs and desires may change but they still need the same amount
of income as when they were working to continue the same lifestyle now that they
have more freedom and leisure time.
Unfortunately many, due to a poor income, find themselves imprisoned within
four walls staring at T.V and their greatest thrill is going to the grocery store once
a week !
You are looking at 15 to 30 years during which you will not be earning an income,
only spending whatever income you have acquired through savings and pensions.
The Bottom Line.
The first half of your adult life is engaged in earning money and spending it, while
in the second half you will not be able to earn, only spend money.
Since you will wish to continue the same standard of living when no longer able
to work, your income will have to continue at the same level.
Most people believe they are taking care of their non working years by
contributing to company pension plans. With Government old age pension,
Canada pension etc. they will be able to live in style.
Unless they are among these who work for the various levels of Government who
have an indexed pension plan, which will keep up with the increases in inflation,
they will be in for a rude awakening when they get a fixed pension at 65 years of
age that will not be indexed and the purchasing power of their fixed income
decreases year by year, leaving them to drift deeper and deeper into poverty.
Those who are forced out of work before age 65, when the above mentioned
pensions start, will be out of luck as they will have no income and have to either
take odd jobs or mindless minimum wage jobs just to live.
THE WAY OUT.
Yes there is a way out of this depressing situation as outlined above. Read on.
Most people do save for their retirement and put their savings into save no-risk
investments such as bonds, guaranteed certificates, treasury bills, insurance,
pension plans etc., feeling that they are taking care of their retirement years and
will have the income to do all the things that they did not have time for during
their working life.
Imagine their shock to find that they only have enough to live on. Why did this
happen ? Simple, they loaned their money and received interest on it, which did
not keep up with inflation.
Their so-called no risk investment turned out to have carry the greatest risk of all
- not increasing in real value.
How different it would have been had they put their savings into owning something
that would increase in value at a greater rate than inflation.
One lesson I learned was:
BE AN OWNER, NOT A LENDER
Take an example of two people 25 years old, who decided on different types of
investment. Mr. Lender decides to make a safe, no risk form of investment and
buys bonds, certificates, treasury bills etc. all of which give him a guaranteed
rate of return, and safety of capital.
Mr. Owner on the other hand decides to put his savings into ownership with no
guaranteed rate of return, but knows that with inflation the value of his investment
will grow and he will share in the profits, which will also continue to grow over the
years.
Mr. Lender invests $1,200.00 each year for 25 years at 10% return each year with
the annual interest re-invested. The result:
$1,200.00 each year at 10% compounded annually for 25 years = $129,818.10.
Mr. Owner invests $1,200.00 each year for 25 years at 20% return each year with
the annual dividends and capital growth re-invested. The result:
$1,200.00 each year at 20% compounded annually for 25 years = $679,652.76.
What a difference !. But it goes even further. Suppose they decide to retire at this
point (age 50) and now want to live on their Capital.
Mr. Lender leaves his Capital in the same loan type investments at 10% and at
the end of each year takes out 13% of the Capital as income to live on.
Starting Capital = $129,818.10. The result:
Withdrawal of income over 25 years = $299,850.00. Capital balance = $60,621.78.
Mr. Owner leaves his Capital in the same equity type investments at 20% and at
the end of each year takes out 13% of the Capital as income to live on.
Starting Capital = $679,652.76. The result:
Withdrawal income over 25 years = $5,588,359.80. Capital balance = $3,688,769.57
Mr Lender from the first year has been reducing his Capital and his annual
income. At 75 years of age and taking inflation into account, he is living in poverty.
Mr. Lender on the other hand is adding to his Capital and increasing his income.
At 75 years of age he is certainly not living in poverty.
You cannot believe it !!. Well try it out on the Savings and Income Calculators
and you will see for yourself the results year by year and test them out.
Establishing Your Wants or Needs.
Let us try to figure out how much money in savings you will need to be able to live
the good life and be dependent on no one, either children or governments.
Ignoring inflation for the moment, supposing that your present annual working
income is $30,000 this year and you want to just maintain your present standard of
living when you decide to stop working or are not longer needed in the workforce.
You will need 10 times annual income of $30,000.00 which is $300,000.00 in
savings.
How did I arrive at that figure and why ?
Assume that you get a 10% return on your Capital/Savings, to have an annual
income of $30,000.00 would require $300,000 in Capital to allow you to continue
to use the annual income of $30,000.00 every year for the rest of your life without
having to touch the Capital.
However, since we do not live in a perfect world with zero inflation we must factor
the decreasing purchasing power of the dollar into the equation.
That is where the Savings Calculator comes into the picture. If we take the
average rate of inflation to be 5% per year over the time period that you expect
to continue to work, we can easily find out how much Capital is required.
As an example: Mr. Planner is 30 years of age right now and earning $30,000 per
year. He wants to stop working at 55 years of age but does not want to take a cut
in his present standard of living.
Into the Savings Calculator we enter:
Starting Amount
Invested or Lump Sum_______________________ $30,000.00
Annual Amount of
Savings Invested___________________________ $0.00
Interest/Growth (%)__________________________ .00%
Term in Years______________________________ 25
Adjusted for Inflation Rate (%)_________________ 5.00%
To keep pace with inflation he needs $101,590.65 per year 25 years from now just
to maintain his present purchasing power!
10 years earnings X $101,590.65 = $1,015,906.00
that's right ! 1 million dollars in Capital in 25 years at 10% interest, just to
maintain his present standard of living based on an income of $30,000.00 this year.
It gets even worse because if he takes out 10% per year while inflation is still
running at 5% per year his purchasing power is declining year by year.
Don't despair !. I will now show you not alone how to keep pace with inflation but
to beat the damn thing.
Savings Required.
Having established that Mr. Planner requires a Capital amount of $1,015,906.00
on quitting work at 55 years of age, we will work out how much he must save
annually for the next 25 years to achieve this Capital amount.
Into to the Savings Calculator we enter:
Starting Amount
Invested or Lump Sum________________________ $1,380.00
Annual Amount of
Savings Invested____________________________ $1,380.00
Interest/Growth Rate (%)______________________ 20.00%
Term in Years_______________________________ 25
Adjusted for Inflation (%)______________________ 5.00%
He started with a savings rate of $1,380.00 the first year and increased his
savings by 5% each year to keep pace with inflation. While increasing the amount
in dollars he has to save each year, he really is only putting in the same
purchasing power as the first year, as his earned income is increasing at the
same rate of inflation.
By getting a compounded growth/interest rate of 20% each year, at the end of 25
years he has a total Capital of $1,015,789.00 from a total amount invested of
$65,863.40.
Mr. Planner is right on target. He can take out 10% of this to spend the first year
($101,578.90) which has the same purchasing power as his present $30,000.00
earned income.
It is even better than that as you will see. If he continues to get a compounded
20% growth rate on his investment he can safely spend 15% of his Capital each
year and both his income and Capital will grow at a 5% rate of inflation.
Let's try it on the Income Calculator:
Current Value of your
Investments on Retirement____________________ $1,015,789.00
Interest/Growth Rate (%)______________________ 20.00%
Annual Income Withdrawn
as a (%) of Current Value______________________ 15.00%
Term in Years_______________________________ 30
Mr. Planner has withdrawn income of $152,368.36 at the end of the first year and
his withdrawal income is increasing by 5% a year while his Capital is also
growing by 5% so he is staying within the average inflation rate of 5%.
After 30 years of living well, at 85 years of age, he will have withdrawn as income
a total of $10,123,178.00 and still have Capital of $4,390,182.00.
Unbelievable but true, the facts do not lie. Check them out for yourself.
Check out the growth rates of the amount of income withdrawn or current value by
dividing any one year by the next year figures.
At this point you are probably saying you cannot afford to save $1,380.00 each
year to take care of your financial future. You cannot afford to ignore the facts.
You are going to live a long time and it depends on whether you are willing to
defer some present spending in order to live well all of your life instead of living
the last half of your adult life in genteel poverty.
As you can see when Mr. Planner quit work at 55 years of age, he had 50% more
to spend each year than the amount we established as the equivalent of his
income from his job.
This is because instead of getting 10% growth/interest rate on his Capital as we
worked out earlier he was able to get a return of 20% and is able to take out as
withdrawal income 15% of Capital.
Your wants or needs may be more or less than Mr. Planner. I urge you to establish
them right now using the above entries as a guide.
You may have a longer earning period and a shorter retirement period, try all
combinations to establish a reasonable savings plan to finance your non-earning
years.
You may already have savings or an inheritance to start off with a lump sum the
first year.
How to Save.
Most people have great difficulty in starting a savings program and sticking with
it. Some because they do not see the necessity for doing so as they feel the
future will somehow take care of itself without having to give it any thought or effort.
Others because they are on a treadmill and are influenced by countless ads
telling them that they deserve whatever product the advertiser is pushing,
demand instant gratification and must have it all now.
For instance, changing furniture and appliances or broadloom every 3 or 4 years,
not because of wear or tear but because the new ones have a different shape,
colour, style or more buttons etc. But the functional level remains the same.
Transportation is one area alone that will produce the savings to provide a
splendid retirement income. Today it costs $20,000 - $25,000 for a car with all the
bells and whistles, capable of travelling at 180 km/hr, from start to 100 km/hr in
zilch seconds with 4 wheel drive to take you across swamps and mountains.
What a Joke!. The top speed limit is 100 km per hour and most of us spend all of
our time in dense rush hour traffic and rarely get beyond 50 km/hr. A more
modest car at $10,000 - $12,000 will do the same job of providing good,
comfortable transportation.
Since a car is a rusting, depreciating possession, it has to be replaced every 5
years. So the savings are at least $2,000 each year without counting the savings
in financing charges etc.
I can hear the objections. My car is a statement of my status, my manhood, lets
the world know how important I am and where I am going.
Bunk ! This particular ego trip is going to cost you a life of luxury in later years.
Another way to save is by renting equipment for leisure time activities rather
than buying immediately.
People get really enthusiastic about a new sport. Take skiing for instance. They
go and buy all the clothing, boots, equipment etc., only to find after 2 - 3 sessions
on the icy slopes that it is not for them, and all the equipment goes into the
basement.
Then on to the next fad, wind surfing, golf, tennis, snow-machines, boats etc.
When one is contemplating such purchases, they should ask themselves if it
does something better or easier or gives more long term pleasure than what they
already have. In this way, they find they do not need to make the expenditure and
can put this money into savings.
One of the best and easiest ways of saving is to pay yourself first. Most people
sit down at the end of the month and write cheques to cover the monthly bills, the
mortgage or rent, car payments, credit cards etc. and when they are finished,
look at the little remaining, figure it is not worth saving and spend it.
This is wrong. The first cheque you write should be to yourself, by that I mean into
your savings plan. Then you pay the other bills, if your money does not stretch to
pay all of them, let them wait until next month and try to reduce some expenses in
the meantime.
So get in the habit of writing that first cheque to yourself, after all you worked hard
for it, then you can have fun spending the rest of your month's income knowing
you have taken care of number one.
Another way is through forced savings. Such as mortgage payments or a monthly
payment plan for shares in a mutual fund, or a bond at your bank or trust
company. You must meet these payments every month and in doing so are
building up equity.
TO BE A LENDER OR AN OWNER.
Let's look at lending first.
People looking for safety of capital and a known rate of return put the money, that
they have worked hard for and saved, into institutions such as banks, insurance,
trust companies etc., who offer saving accounts, bonds, treasury bills, guaranteed
investment certificates etc.
They know that they will be able to redeem them at full value and will receive
anywhere from 6% to 10% per year interest. The interest rate will vary from time to
time due to money market conditions.
They have taken no risk with their capital and feel safe and secure.
What happens to this capital they have loaned? It does not sit idle. The
institutions now lend it out at a higher rate of return which varies from 12% to 16%,
to businesses that are expanding or bringing new products to market.
These business are not going to borrow this money unless they are going to
make profit by doing so and are looking for a return of 20% to 25%
Indirectly their savings have gone to finance business or commerce which they
considered as too risky an investment.
Now let's look at ownership.
I see financial institutions taking in hard won savings and lending it out at a far
higher rate than they are paying for this money. Sure they have operating
expenses, but they are still making a great profit margin.
I want to participate in those much larger returns and buy ownership in those
institutions and end up with a far greater return from growth and dividends than
lending that same money to them. If it's safe enough to lend them my money, it's
surely safe to own a part of them.
Then I look further and see the business that borrowed at high rates and in turn
made a profit in doing so and I want to own part of them.
I am not being greedy, I just want to get the best yield I can from my savings.
If the institutions feel it is safe to lend to these businesses, then it must be safe
for me to own part of them and participate in their even greater growth and
dividends.
I believe ownership is the only way to put one's savings to work and achieve the
maximum results.
Yes, some businesses do fail through poor management, not keeping up with the
latest innovations in their industry, or their product is replaced by a better one.
So how is one to choose the growth companies and avoid the ones that are
stagnating.?
I will now show you how.
WHERE AND HOW TO INVEST.
Since this is an unregistered copy, I am not going to give you the second
part of this document until you register.
I can tell you that the simple Investment strategies I will share with you have
worked for me. They enabled me to accumulate enough money in 25 years to
retire.
I came to Canada at 24 years of age and I am now 59. I retired at 50 years of
age and have enjoyed myself since and have not missed the stress, pressure
and nonsense of the work world! Ho Ho Ho !.
So many investors I have spoken to seem doomed to repeat all the mistakes
of the beginning investor by trying to reinvent the wheel, as they will not pay
for sound advice upon which they can continue to build.
They use free advice from friends, acquaintances and newspaper columnists
with no proven track record. In doing so they end up wasting their money on
commissions and lost growth by investing in the wrong areas at the wrong time.
Take Real Estate as an example. When the boom in prices started there was a
great deal of money to be made but then everyone got on the bandwagon and
instead of a home providing shelter it became a profit centre with annual gains
greater than the homeowners take home pay.
When the cost of owning a home required 50% to 60% of the home buyers
annual salary it was obvious that people could not and would not pay these
prices and they crashed back to the traditional level of the cost of shelter
which is 25% to 30% of salary.
I have lived through all the fads. Gold from $200.00 to $800.00 an ounce and back,
Silver from $5.00 to $50.00 and back. Oil $18.00 a barrel to $56.00 and back,
Nickle ,Cotton, Strip Plaza's, Office buildings, Land, Retailing, Manufacturing,
Junk Bonds the list goes on and on. However while enormous sums of money
were lost by gullible investors, it did not disappear. Some shrewd investors
ended up with it all.
As you probably know. the Dow Jones Industrial Average increased in the year
1991 by over 20%. Since this is an average, some stocks did not show any gain
while others did far better than 20%. Did you participate in these gains?.
Enough said. The choice is yours, do you want to retire early and live in luxury.
