Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, May 7, 1990 TAG: 9005050011
SECTION: BUSINESS PAGE: B-5 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Medium
A: Canadian G.I.C.s differ markedly from what is called a G.I.C. in the United States. The domestic version is a Guaranteed Insurance Contract issued by private insurance companies to back various investments.
Jeffrey Roberts, local manager for Branch Cabell, said Canadian Guaranteed Investment Certificates are issued by the government of Canada.
They are guaranteed by the full faith and credit of the Canadian government, so they are more comparable to U.S. Treasury issues than they are to American bank CDs.
There is no credit risk in this investment, Roberts said. The Canadian G.I.C.s are a very secure place to put your money.
The 15 percent Canadian tax should represent no problem either. Roberts said you would get credit for the Canadian payment on your federal income tax form.
Roberts said interest rates are higher in Canada than in the United States. At the moment, interest rates are inverted in Canada so that short-term investments earn a better rate than long-term. The 25-year bill is earning 11 1/2 percent while the three-month is returning 13 1/2 percent. He suggested you check various maturities before rolling over your investment.
The primary risk you face is currency exchange. The Canadian dollar is equal to about 85 U.S. cents, but the exchange rate fluctuates a little every day. The exchange rate in effect when you terminate this investment will govern how many U.S. dollars you receive.
Barring some serious currency situation, which would be highly unusual between the U.S. and Canada, you are earning a safe and high return in Canada.
Make your money work
Q: I have just retired and am buying a new house. I will realize about $45,000 from the sale of my present home. I am due to receive about $40,000 lump sum retirement benefits, but will only receive one-half of it this year and the rest in 1991.
The cost of the new house will be $75,000. With the $45,000 from the sale of my house and the $20,000 lump sum benefit, I will be $10,000 short of what is needed to purchase the new house. How should I make up the difference?
I have approximately $40,000 in an IRA. Should I use part of this? I have about 160 U.S. Savings Bonds, which I purchased for $50 each ranging in age from 6 1/2 years to 3 months. Though I do not know the value of these, should I consider cashing them and using this money? Or should I get a mortgage for the $10,000 difference and pay it off when I receive the remaining $20,000 lump sum benefit in 1991?
A: Are you making yourself house poor in retirement?
You don't mention the amount of your retirement income or whether you have other assets besides those you list.
If you have no other investments and put most of your assets into the house, you will go into retirement with a cushion of something over $58,000. The bonds aren't worth much more than your $8,000 investment because they pay market rates only after they have been held five years.
A house is an investment, of course, but it is illiquid. You cannot tap into the money fast if you really need it. You would have to sell the whole house in an emergency to recover just a portion of its value.
Many mortgage companies deal in loans of $30,000 or more. You could, however, get a mortgage through a bank.
Lynn Willoughby, a Dominion Bank branch manager, calculated that a 15-year mortgage at a recent rate of 10\ percent would carry a monthly payment of only $109.
Can you sit down with someone, such as your banker, and figure out what you can afford to pay each month out of your retirement income for a mortgage?
You should also calculate what you could earn by investing your IRA, pension payment and bond money in a portfolio of income and growth investments. This money would help you through emergencies and hedge against inflation.
If you have other assets - or if you would feel safer in a paid-up house than with money investments - get rid of the bonds. Most of them are newer than five years old, so they are earning only 4.3 to 5.5 percent. Because you are already retired, you should make that money work harder on your behalf instead of waiting for them to mature.
by CNB