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May 5, 2016 | Bad Thinking

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Whether you plan on it or not, you’ll age. Wages will be a memory. But your debts will live on. If you fail to plan, you’ll fail. As oft said here, the biggest risk we all face is running out of money. Life is long. Focus on that.

Here are two recent developments to showcase this.

First, let’s revisit a woman I wrote about a few months ago, now in her eighties, whose life turned twice. First with the death (liver cancer) of her husband twenty years ago, and later with the 2009 financial crisis. When he passed away, he left a house worth $300,000 and one Canada Savings Bond with a face value of $60,000. Keeping the house was no option, since property tax alone equalled her OAS, leaving only $425 a month in CPP.

So, she sold. Wise. And the $350,000 that remained, prudently invested for long-term growth in the 6% range, would provide enough income to pay her rent, put food on the table and live a respectable life. No substitute for losing a husband who was still working, but enough.

I helped her set up that balanced investment portfolio, asking an advisor friend to maintain it, ensuring the principal was kept relatively intact and her bank account received a steady amount each month. It worked for years. Then came the credit crisis. She watched CNN, and freaked.

In the winter of 2009 she pulled her investments – which were down a little over 20% (temporarily, as it turned out, as she was told would happen) – putting the remainder in a bank savings account. “Now it’s safe,” she said. So she started to live out of that. Of course, with no growth and almost no interest, the well eventually went dry. Then she got by on overdraft and Visa. “I never thought I would live this long,” she said. “So that’s the basic problem.”

Last month her daughter, herself financially stressed after her husband lost his job in the energy business, convinced mom to go bankrupt. She got power of attorney, arranged things through a credit agency, and was able to erase $72,000 in debt. But the toll’s been immense. “Never,” mom said, “did I think I would end up like this. How did it happen?” I hear she hasn’t left the apartment in weeks. Shamed.

Now here’s John. A traveller on a similar road.

“Hello Garth. I am 70 years old and my wife is a few years younger. We have been retired for 6 years with a modest pension and government benefits. Unfortunately we still have a mortgage of 195K and the house would sell for approximately 400K in today’s market.

“Our mortgage is up for renewal next spring and are already thinking of what we should do for some extra funds. We still have a mortgage, minimal savings, no investments and not enough income. We would like to have some extra cash to help our kids and some travel. Is this best done by increasing our mortgage amount or going for an HELOC ?”

Recent stats show more people are retiring with a mortgage than ever before in our nation’s history (a bank survey found 60% of retirees have debt). It’s easy to see how this will turn from a curiosity into a crisis, given current real estate prices and the epic mortgages people are committing to for the next 25 years. John and his wife have a mortgage and two hundred grand in equity, yet not enough income to get by. So what’s their proposed solution? Sign. More debt.

The best course of action is to bail out of the house, invest the money and get an extra thousand bucks a month income from the account – which should preserve the principal for any storms that lie ahead. They’d be freed from property taxes, maintenance and insurance while collecting tax-free proceeds. Half the cash should go into TFSAs, and the rest in a balanced non-registered account. A HELOC is a thoroughly bad idea, since it would give only 65% of their equity, cost at least 4% and be a demand loan they could never pay if called.

The last option? A reverse mortgage – good for getting about half their equity out, but at a huge cost. While the money is tax-free and need not be repaid until they sell or croak, it’s still a mortgage. Interest charges accrue instead of being paid, so every year the debt grows larger. Worse, the rates are insane. HomeEquity Bank’s five-year reverse mortgage rate, for example, is currently 5.59%. Imagine how fast that builds up.

Two small examples of how the wrong kind of thinking will quickly make a bad situation worse. Misunderstanding risk is fatal. You needn’t be afraid of market volatility, but rather fear lasting longer than your money does That almost always comes from trying to avoid risk. Eschew debt, and plan to be rid of it before you even think about turning fifty. Invest, don’t save. Don’t consider residential real estate to be a retirement plan, since it will end up costing, not paying. Give lots of attention to taxes, knowing that interest and rent are nailed fully while capital gains and dividends get a massive break. Never put cash in your TFSA, as this is a crime against nature.

Most importantly, talk to your parents about their money. If they give you grief, send ‘em here.

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May 5th, 2016

Posted In: The Greater Fool

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