Investors BEWARE - Rate of Return in Canada

There's no way that we can find an investment where the money compounds at 6% annually every single year. Now, you may find investments out there which talk about average 6% rate of return. Now, average 6% rate of return doesn't mean that your money is going to compound annually at 6% per year. But just for this example sake, let's just assume that this individual is getting 6% every single year and it compounds one time per year from age 45 to age 65, and he's putting aside $20,000 per year.

Beware of the rate of return. In this video, we're going to take you through an example of an investment and expand on the rate of returns. And what you see may not be really what you end up with. This video is not to be considered advice, but just to provide clarity when you're looking at building your wealth and focusing on just the rate of return. Sarbal, let's dive in.

Absolutely, Peter. Now, here's the context of the example. So this individual is age 45, and the objective for this individual is to put money aside into some sort of investment so that he can produce passive income when he retires. And I'm just going to assume that for him, the passive income age is age 65. So he's putting aside $20,000 every year from age 45 to age 65, and he found an investment where he gets 6% rate of return every single year from age 45 to age 65. Now, Peter, what's the probability of somebody getting 6% every single year from age.

45 to Age 65.

Guaranteed? I would say it's very slim.

Very slim. Right. So there's no way that we can find an investment where the money compounds at 6% annually every single year. Now, you may find investments out there which talk about average 6% rate of return. Now, average 6% rate of return doesn't mean that your money is going to compound annually at 6% per year. But just for this example sake, let's just assume that this individual is getting 6% every single year and it compounds one time per year from age 45 to age 65, and he's putting aside $20,000 per year. Again, what's happening in this investment is we're getting 6% every single year in the investment and it compounds one time per year. The person is age 45 when he started putting money into this investment, and he's putting $20,000 per year. And the objective is to make sure that he's got passive income at age 65. So if he continues to put the money into the investment at 6%, let's fast forward to age 65. So at age 65, he stops putting money in. He's not putting any more money in. But based on what the investment did, he'll be able to get 33,900 every single year from age 65 all the way till. Let's assume projected mortality being age 90 for him. So he put in $20,000 every year till 65. So the total money that he put into the investment is. Let's see what his total in is.

So the total money that he put into investment is $420,000. The total money that he gets out of the investment when he retires is 33,900 every year from age 65 all the way till age 90. So the total money that he gets out is $881,000. That's a pretty good rate of return. Peter, would you agree?

I do agree with that, yes.

But sometimes what we fail to consider is what happens in the back end. We just get so focused on the rate, we don't look at what the effective or the net rate is going to be in the investment. We do our math based on 6%. Hey, we put money into investment at 6% and we're going to receive 33,000 per year. Great. But here's the real math.

You know, if you are getting 6% per year in investment, you know, someone who's making you 6% in the investment, that someone has to get paid for the job that they're going to do for you. Let's assume the management expense ratio in the investment is 2%. So if you are getting 6% per year and the management expense ratio, this is what the individual is going to get paid who's going to do a good job of getting you that rate of return. So you're not going to make 6% net. You're going to make 4% net, because 2% is going to go towards management expense ratios. Now, you may also have to pay tax on it. And let's assume that you're in 30% tax bracket. So when you're looking at 4% after management expense ratio, well, you're not going to get 4%. You're going to get 2.8%. That's considering some taxes in the equation here. So when you're looking at 6%, it's not really 6%. It comes down to 2.8%. Now, when this is your real rate, then the outcome changes drastically. Instead of you getting 33,900 per year. Now you're getting 23,300 per year as cash flow from investment from age 65 all the way till age 90. But you did your math based on 6%. So when you're putting money into investments, make sure that you do the right math. If you're looking at a rate, it may not get you the income that you need at passive income because there are other factors that have to be considered, which is management expense ratio, taxes and all that to really look at what the effective rate is going to be. So do the math before you put your money into investments. Now, in this example, we talked about 6% per year. So that assumes that the money compounds every year at 6% and the likelihood of that happening is pretty low. These things get impacted by what happened in the stock market. These things may get impacted by future pandemics. So if you're subjecting your future passive income to the risk of loss, you have to be very cognizant of where your money is going to be stored, because your money has to sit somewhere. The tool that we use to implement the process of becoming a banker is called a participating dip in whole life policy. And by warehousing your money for your objectives, which in this case is passive income. So by warehousing your money in a participating dividend bank holder policy for the purpose of making sure that the passive income is there. While the tool has many great advantages versus investments, because as you store money in a participating whole life policy, the probability of you losing that money is zero. Your money in this policy can never be less than what it is at this time. It can only increase. So by warehousing your money in a participating whole life policy, your money won't be subjected to the risk of loss because of stock market manipulation. It won't be subjected to the risk of loss because of future pandemics, your money is going to grow. No matter what happens, your money must sit somewhere. It needs a warehouse. What better warehouse for your money other than the participating Dave and Pink policy? And as your money and wealth goes in this policy from that tool, you can implement the process of becoming your own banker. Now, Peter, if I was to ask you, let's just say you are starting from scratch and you're creating your own investment from scratch, you have an empty slate. What attributes would you assign to that investment? Can you share some examples?

Yeah, examples. I would say I'd like to have control. I'd like to have guaranteed returns, consistent returns, be safe, liquid, tax efficient. Is A massive thing. I think what you showed in that example was free of fees. That would be really nice. Can you see how that impacts the long term? Additional would be private.

There's probably many more that we can look into. Some people use leverage as an option too.

Access to capital Right? So let's just say today you have to create an investment from scratch. And here's some of the attributes that you may want to assign to that investment. So attributes like high rate of return.

Consistent rate of return, conservative or safe, just like how Peter mentioned liquid so that you can have access to capital when opportunities come strike you. If you have access to capital, opportunity is going to come find you guaranteed tax benefit or tax free. No market fluctuation of volatility yields income besides capital gain, credit protection, inflation protection control transferable, easy to manage, no hidden fees or penalties reputable private.

Now think about where your money is sitting and what of these attributes. What of these attributes are attributed to where your money is sitting and what of these attributes are not applicable to where your money is sitting today?

This should be no surprise, or it may be a surprise to most of you. These attributes define a participating, developing whole life policy.

Your money must sit somewhere. So by warehousing your money and participating dividend paying whole life policy, you're creating predictable future growth of your wealth. And from that you can implement the process of becoming a banker. So make sure that you check our video on attributes of participating whole life policies and also the video on the master class hosted by Jason Loh on becoming your own banker. And if you haven't had an opportunity yet to order a copy of this book.