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February 5, 2018 | Shelter in Place

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.

Mr. Market giveth. He taketh away. Robo-advisors crashed. Stock picking cowboys suddenly wish they weren’t. Meanwhile the Bitcoiners need Depends and Toronto realtors are too terrified to release monthly stats. Just another scary day out there in reality.

Fortunately, we have this blog. Safe as your momma’s bosom. Full of puppies, man buns and gender-sensitive people. And free advice, worth every damn cent you paid to come here. So let’s forget the storm out there for a moment or two, and address the tempests within some blog dog hearts.

Here’s Kelly, who wants to talk HELOCs.

“You discuss the downside of moving your mortgage over to this typically misused strategy – and I completely get it.  I have a number of friends who have done this and only ever make the interest payment.  Scary stuff for sure.  My question is: using your numbers you referred to in your recent blog, a $400K mortgage results in a $1900 monthly payment.  In moving this to a HELOC which includes a higher interest rate, if you made those same $1900 monthly payments rather than just paying the interest, is there an upside?  I’m assuming you would pay much less in interest compared to the traditional mortgage structure. Is that so?”

You betcha, Kelly. It is. Mortgages are amortized, so the debt repayment’s spread over the entire am period – typically 25 years – with interest charged in a sneaky, front-end-loaded way. In the early years payments are almost all interest. In the later years, they’re mostly principal. This means the banks get their profitable sauce up front thanks to ‘blended’ payments.

Home equity LOCs are not amortized and have ‘simple’ interest. So if monthly payments are greater than the accrued interest, the extra goes straight off the outstanding loan balance. Thus, a disciplined, reasonable, debt-hating person could retire a HELOC far faster than a traditional mortgage. Do you know any?

“My partner and I are the very infamous moisters you refer to,” say Julie and Dave. “We’ve stayed away from the housing market (in Vancouver) thus far and rent. As such we have quite a bit of savings… $625,000 combined. We both just turned 31, no help from our parents, but are responsible adults who have been working for the past 10 years. Our secret is that we are professionals still living like students. Our combined income is now up around $200k. It may seem like a lot on paper but doesn’t feel like much in this city….

“My question is whether we should we be maxing out our RRSPs? I’m hesitant to contribute the full 18% as I’ve heard from my accountant friend that a lot of people actually have higher incomes once they retire and end up having to pay more taxes. Our TFSAs are maxed. We both have unregistered investments accounts (yes they’re separate accounts :/ ). Roughly $180k in RRSPs and $180k in non-Registered combined. We also have $110k sitting HISA, if and when the housing market declines. What is your take on this should we be maxing out our RRSPs?”

Yes. Simple logic: RRSPs are no longer for retirement, but tax-shifting. This is the gig economy. People barely turned 30 will likely be changing jobs, shifting employers, taking time off for babies, career training or personal sanity. If you put 18% of your income into these vehicles now, at your income level, the tax savings will be substantial and the money swells tax-free. Then melt down some of it during a mat leave, sabbatical or a layoff, withdrawing at a far-lower tax rate, effectively reducing your lifetime costs.

You’re right about higher taxes later. People with million-dollars RRSPs converting to RRIFs often end up being pissed-off 72-year-olds, forced into a higher marginal tax rate by the extra income. This is why RRSPs should be viewed as a tax-shifting tool, while the TFSAs become the primary retirement vehicle. You can each have a million-buck tax-free account, and still collect the wrinklie pogey! Revenge.

“I am hoping you can help or point me in the right direction,” says Caleb, 34, in Calgary, “I left my health care position with all the “amazing benefits and pension” that goes along with it because it was killing me (mentally and physically). I have 9.7 years of pensionable service which leaves me with this according to a letter I just received: Pension commuted value: $160,477.36, Excess contributions: $10,724.15

“It says that the total value of my benefit entitlement exceeds the maximum tax sheltered transfer value. Considering I had no choice in how much I contributed that is certainly something I never expected. The letter from my pension plan indicates I have 2 choices: take monthly payments of $1221.94 when I retire, or transfer $131,968.98 to a LIRA, receive a lump sum payment of 28,508 plus the excess contribution amount stated.

“Help. What do I do? Of note in case you are wondering as of 2017 I had 42,712 in RRSP room.”

And you wonder why people despise government workers, Caleb? Sheesh. Ten years of being paid, and you walk away with another $170,000. Well, the answer is a non-brainer: take the commuted value, not the future monthly payment. After all, you have three decades until retirement, enough time for this money (properly invested) to grow to be well over $1 million.

In fact, almost always take the cash instead of the monthly payment. (a) This become money controlled by you, not some unknown pension administrator. Control is good. (b) There’s a reasonable chance you can grow it faster than the plan, which has more regulatory constraints and is run by guys devoid of personalities (accountants). (c) Three decades is a long time and your plan’s benefits could be reduced by a future Albertan government trying to get over the NDP’s legacy. (d) If you croak the money becomes the property of your family, instead of being lost. (e) You control your own tax situation by withdrawing money as you need it, as opposed to a monthly pension cheque taxed at source.

Take the money and run, Caleb. But we still hate you.

Now, about the stock market? All you need to know is here.

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February 5th, 2018

Posted In: The Greater Fool

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