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May 17, 2016 | Choices

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.

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Do you have financial regrets? Other than reading this blog, of course? Are there fundamental things you’d change about how you’ve handled money, if you could go back in time? Should you have married the geeky guy who went on to become a millionaire (geeky) dentist? Or bought that 1970, 7-litre Hemi-Cuda when it was new? Or avoided your first wife? Or not dumped your bank stock in the winter of 2009? Or actually learned something about investing before you turned 45?

Most people regret a lot. A survey last week in the States found three-quarters of people moan about past money decisions. The greatest shortcoming is what you might imagine – not saving for retirement early enough. So, Yanks are like Canucks. More live paycheque-to-paycheque, have the bulk of their net worth in non-financial assets, don’t have juicy pensions and are massively unprepared for the WTF moment when they turn 60.

The biggest enemies we have are emotion and ignorance. At least one of those is fixable.

Not a day of mine passes without hearing from some poor schlep whose parents are basket cases. It’s astonishing how many Canadians (at last count, more than half) believe that CPP and OAS pay enough to scrape by on in retirement. They don’t. Get over it. The average public monthly pension cheque is just over $600, while the old age supplement pays $563. That’s $14,000 a year, so even a couple collecting both would have a retirement income of less than thirty grand. If you live in a cabin outside Tatamagouche and really like foraging and insects, that might be okay. Otherwise, it sucks.

The crap really hits the retirement fan when you start needing some help – which most people do at some point. Thus, it’s important not just to save (and consume your money over time) but to invest (so the investments help pay ongoing expenses). This means most people are off the mark getting more conservative as they age, locking away their meagre amounts in GICs, bonds or high-interest bank accounts instead of having that money working for them. Always remember what the greatest risk is. Uh-huh. Running out of money, not losing it.

Well, it may be too late for mom & pop. But not for you. Remember these few rules.

  • The first place to put money is in a TFSA. Fill it to the limit before investing anywhere else. These are turning into serious little financial weapons, with a couple now eligible to stash almost $100,000 between them. Why the TFSA first, instead of a retirement plan or non-registered account? Simple. All of the income generated thusly in retirement is not reportable. It won’t boot you into a higher tax bracket nor erode a dime of your public pogey pension money. Nothing else will yield this result.
  • TFSAs, I should add, are not for saving, but investing. Put a hundred a week in there for three decades at an average of 6% and you will retire with $407,000 (or which $308,000 is growth). This should yield about $25,000 a year in income – so added to your government cheques, it means cash flow of about forty grand – and no tax.
  • Take CPP at age 60. No exceptions.
  • RRSPs are good for lots of things, but retirement saving isn’t one of them unless you’re (a) self-employed with no pension or (b) planning on being poor after you stop working. For most others, when these change into RRIFs (age 71) they’ll convert into a cash stream, and can kick you into that higher bracket – a potential bomb, especially if politicians like T2 keep hiking taxes. So, TFSAs first, non-registered accounts second – which can give you capital gains and dividend income at a seriously reduced tax rate.
  • However, those RRSPs are good for tax-shifting. Contribute when working so you can cash it in when laid-off. Or on maternity leave. Or going back to school (withdrawals can be tax-free then). They also work for income-splitting with a less-taxed spouse, with the higher-earner taking the deduction and the other person getting the money. Plus you can use one to shelter part of a severance package. Or leverage up a down payment through the Home Buyer’s Plan (money put in there for just 60 days nets a refund cheque). And by using a ‘contribution in kind’ you don’t need cash to contribute. For selling yourself assets you already own the government will send you money.
  • Never watch BNN. Ever. Or HGTV. Or, God help us, W.
  • Remember how stuff is taxed. Interest on GICs, bonds or savings accounts, along with rental income is all lumped on top of earned (or pension) income and taxed at your marginal rate. Ouch. Dividend income (such as from preferreds) allows you to claim the dividend tax credit, while capital gains (from ETFs that rise in value, for example) get a 50% tax break. Interest paid on a residential mortgage comes from after-tax dollars. Interest on money borrowed to earn money is a 100% write-off. Mutual fund fees are not deductible. Advisor fees are.
  • Also bear in mind that gains made on residential real estate are untaxed if it’s your principal residence. Housing values are at record levels. Even CREA says they’ve ‘topped-out.’ If you ever wanted to feel like a genius about something, this is it. Sell, downsize or rent, then invest and diversify.
  • Stay married. Kick your kids out. Don’t buy universal life. Lease your car. Never buy penny stocks. Be balanced. Diversified. And liquid.

Regret what you can’t change. Fix the rest. Send me a selfie.

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May 17th, 2016

Posted In: The Greater Fool

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