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Nobody wants to do nothin'
Just waitin' to get a finger in the pie
Waitin' for a call from a big quiz show
Or hopin' and a-waitin' for some rich uncle to die."
— Hank Williams Sr.
If I inherited a fortune from my rich Uncle Ben
I wouldn't think twice, I'd know where to begin
I'd take it down to the bank and watch 'em look at me strange
When I walk up to the window and say give me some change
Make it nickels, nickels and dimes
“Nickels and Dimes”
— Red Dirt Rangers
TORONTO (GlobeinvestorGOLD)—"Here's the scenario. My imaginary rich uncle dies suddenly at the age of 90 from gunshot wounds suffered after being caught in flagrante delicto by a jealous husband. When his will is read, I am pleasantly surprised to learn that he has left me $200,000. (I'm surprised, because my uncle always told me that he spent most of his money on wine, women, fast cars and slow horses—and the rest he wasted). What would we do," I asked my wife," with a $200,000 inheritance?"
She immediately launched into a wish-list of stuff, starting with a month in a private villa on Lago Maggiore in northern Italy, a new kitchen counter top, a plasma TV, some serious redecorating, landscaping, and a…
"Hold on a second, not so fast," I said. "I didn't mean how would we blow a $200,000 legacy. That would be entirely too easy. I meant, how would you invest that kind of windfall?" Of course, her idea of investing is to "invest" in decorating the house, so she gave me one of those "what is wrong with you" sorts of looks.
For me, it seems like a no-brainer. First, I'd pay off the remainder of my mortgage. With several years still to run on a mortgage at 5.375 per cent, paying off the principal would give me essentially a risk-free pre-tax return of just over 10 per cent. It isn't easy to find a risk-free investment yielding 10 per cent in the market. Ditto for my car loan (it's not one of those zero-per-cent ones). Paying off my mortgage and car would make a nice increase in the monthly cash-flow from my employment income, which would in turn allow me to increase my monthly Registered Retirement Income Plan contributions. If I had any other debts, I'd pay them off too.
The next investment I'd make would be to max out my RRSP. While I do make monthly contributions to my RRSP, I confess I have never yet managed to use up all of my contribution room. After income taxes, mortgage payments, real estate taxes, car payments, GST, PST, orthodontics, the kid's college fund, and the myriad other essential payments that we have to make just to get by in this overtaxed country, like many Canadians I just don't have enough money left over to use up all of my RRSP room. Over the years, it has accumulated. I always find it odd that our politicians are still arguing over the merits of making RRSP contribution limits higher, when they should be looking at cutting taxes so that people could use up the limits they already have.
It is worth noting that Canadians now have about $285-billion in unused RRSP contribution room, or about $9,500 for every man, woman and child. Take away children and those who are already retired or without RRSPs, and the average Canadian's unused RRSP room is likely in the low-to-mid five figures. Frankly, I'd be surprised if the prospect of that $285-billion suddenly becoming tax-deferred didn't give federal finance ministers the whim-whams, which might help explain why tax relief for Canadians is coming on a more or less geological timescale.
I'd use up all my contribution room and get a nice fat tax refund. I might even have to refile previous years' returns. With the cash that I put into my RRSP, I'd buy my usual assortment of low-risk income producing instruments:
I'd try to buy bonds of terms that filled in the gaps in my holdings, putting some more rungs on the maturity ladder, if you will.
I'd take another chunk of my inheritance, say 10 per cent, and put it in my non-registered brokerage account. I'd use it for sportier investments, like those Dec 04 $360 gold calls I wrote about back when gold was $340. Or to buy some tech stocks. (Or not, probably, in my case, but you still might like to).
I might also look into buying an income-producing piece of real estate, like a house near a university (not U of T, where nearby houses are out of my snack bracket, but, say Windsor or Waterloo or Trent) that I could rent out to students for enough to carry the mortgage.
There're plenty of other things you might look at investing in, beyond the usual stocks, bonds and mutual funds, and the bland yet satisfyingly boring things that I suggest. I don't mean gemstones or pork bellies, either, but rather things like long-term disability insurance, term life insurance—the kinds of things you never think you'll ever need when you are young and can still buy them cheaply. OK, so those are boring, too. Or, you could start your own business; go back to school for that Master's degree or Doctorate; see the world; buy a big rig and become a long-haul trucker; move to Belize and become non-resident for tax purposes; try out for the PGA Tour—the mind boggles as the possibilities proliferate.
After all of that, I still might have a goodly chunk of that mythical $200,000 legacy left over. My wife, a wise woman in many ways, even if she is addicted to the home-decorating channel, had some sage advice.
"Don't invest it all," she said. "Life is meant to be lived. Your imaginary Uncle didn't leave you that money for you to just salt it away somewhere, clip coupons and dividends and never spend it. He wanted to give you some enjoyment. As Miguel de Cervantes wrote in Don Quixote, 'There is a strange charm in the thoughts of a good legacy, or the hopes of an estate, which wondrously removes, or at least alleviates, the sorrow that men would otherwise feel for the death of friends.' The whole reason for him leaving you a legacy in the first place is for you to do something fun with some of the money, so that you will remember your uncle fondly. And there is such a thing as too much prudence—you could get run over by a bus tomorrow."
Hmm. Well, I guess maybe I could use some new computer equipment—these new games nowadays are RAM-pigs, aren't they?—maybe replace my four CRT monitors with flat-panel displays (it gets awfully warm in my office), even set up a Wi-Fi network in the house. One of those big plasma TV's would be awfully nice in our rec room. Sure, a month in Italy's lake district next summer would be way cool. And maybe I could get another Spinone—you can't have too many dogs, I always say. I could probably even cover some of this stuff with the tax refund from maxing out my RRSP. And one other thing: I'd probably give some of my windfall to charity (I'm partial to the Alzheimer's Society, myself)—that feels pretty good, too.
So, bottom line, if your rich uncle gets struck by lightning and remembers you in his will, pay down your mortgage, pay off your debts, make a mitzvah, and then put the remainder to work. And remember to live a little. Your uncle would have wanted it that way.
Harry Koza is Senior Analyst in Canadian markets for Thomson Financial/IFR. At various times in his career, Mr. Koza has been a prospector, metallurgist, project manager, engineer, as well as an institutional bond salesman for 15 years. His current area of expertise is in high-yield distressed securities and corporate bonds in general.