I sometimes get asked, "Tell me something new and different - not the same old."
Today, I'm going to tell you about the TriDelta Maximizer Strategy - a powerful wealth builder in the right situations.
Who is it right for?
1. Someone with meaningful real estate equity (at least $600,000)
2. Someone with no debt or a low percentage of debt to real estate equity
3. Someone who wants to grow their net worth
4. Someone interested in having greater financial liquidity or cash flow
5. Someone interested in leaving a legacy to their family and/or charity
6. Someone who would likely have an estate value of at least $750,000. To find out your likely estate value, use TriDelta's Retirement 100 calculator.
If you fulfill these criteria, you will want to read on.
As a financial planner, I look at somebody's total financial picture to determine the best course of action. This means looking beyond investment assets. For many clients age 55+, real estate makes up a sizable part of their net worth, but in some ways this is "dead" money.
Here's what I mean: If a house is worth $700,000, with no debt, and the house goes up in value to $750,000, the individual has added $50,000 to their net worth.
If, instead, the house is worth $700,000, the individual takes out a $300,000 mortgage, and the house goes up in value to $750,000, the individual has still added $50,000 to their net worth. But now they have $300,000 in cash that can be used for any purpose. Before, that $300,000 was dead money - now it is freed up.
Yes, it is true that this person now has a $300,000 debt, but it will most likely be paid off in full when the house is sold (usually in the next 15 years). If this is a 60 year old with an income of $60,000 a year, they now can enjoy this $300,000 over a 15-year period when many can still travel and be more active. If the money doesn't free up until age 75, there are often fewer opportunities to enjoy the cash.
Now, the next step.
In today's super-low interest rate environment, someone in a 31-per-cent tax bracket can easily lock in an after-tax borrowing cost under 2.5 per cent for a five-year fixed mortgage. The tax-deductibility comes from borrowing and using the loan to generate income.
The income comes in from investing the funds in a conservative, dividend-focused portfolio. This would feature preferred shares and utilities with an average dividend of 4.5 per cent or higher. The effective dividend tax rate is 10 per cent in Ontario for this individual, meaning that the after-tax dividend yield is around 4.05 per cent. This means that just from the dividend yield alone, after tax, there is a 1.55-per-cent net return (before fees).
Now the kicker.
A 60-year-old couple buying a permanent joint last-to-die insurance policy can earn one of the best after-tax rates of return available, especially if it is funded by dead money.
To keep it very simple, you could draw $5,800 a year for 20 years - from the growth on the borrowed pool of $300,000 - after which the policy would be fully paid up. The insurance would pay out $400,000 to the beneficiaries, tax free. If the "last to die" passes away in 25 years, the equivalent pre-tax rate of return is 11 per cent a year [8.6 per cent to year 30] So in this case, the couple puts in a maximum of $116,000 for a guaranteed payout of $400,000 tax free. If the individual has a privately owned corporation, even more tax advantages could be created, further increasing the power of this strategy.
If we assume a 1.55-per-cent net after-tax return on the investment portfolio over the after-tax debt cost, this couple now has created an extra $380,000 of wealth over 25 years by simply adjusting their assets using the TriDelta Maximizer Strategy.
This $380,000 of new wealth was created using the dead money trapped in the house.
How is that for "something new and different"?
Ted Rechtshaffen's Adviser Secrets series:
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He was vice-president of business strategy at a major Canadian brokerage firm and found that the interests of the client were often not aligned with the interests of the adviser or the interests of the company.