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October 24, 2019 | Dr. Garth

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.

Time to abandon the rebel forces of the Alberta Secessionist & Expeditionary Army before the RCMP hammers down the blog’s nice oak door. The last two days prompted Bandit to go out and buy one of those little armoured police dog vests. He wanted a helmet too, but there’s a limit…

Alberta’s long-term future in Canada may be more secure than Mr. Trudeau’s, so everybody should probably take a red pill and chill. In the meantime, let’s turn to some First World problems posed by people who show no inclination to mug a Quebecker.

“Short time reader (~6 months), love the dog pictures, and my favorite posts are definitely your doctor is in, particularly when you skewer someone for not following the advice you give weekly, “ writes Vancouver Millennial (what else?), another of those rich kids everyone hates.

My wife and I live in Vancouver aged 34 and 33. We have stable jobs; I make 130k and she makes 85k (w/pension). We have ~600k in assets split 70/15/15 between a variety of ETFs, fixed income and cash. About half is in non-reg accounts. We save 60k/yr that goes into TFSA/RRSP, but a lot of that is because our rent is a reasonable 1200/mo.

Now: My wife is now pregnant and that rent friendly apartment is not child friendly. Buying isn’t really on the table for reasons listed on this blog ad-nauseum, but I’m struggling to determine what a ‘reasonable’ rental we can afford based on how much we should try and save with maternity leave and future costs on the horizon (child care, additional children, a much wanted canine friend…).

For context, we can find 1000 sqft 2 bed apartments in East Vancouver in the 2-2.5k range, versus nice detached homes in Vancouver West that are 2000 sqft for 3-3.5k.

Assuming our current non-essential expenses shift to the newborn, is renting an entire house and saving 33k/yr vs. renting a 2 bed and saving 45k/yr a bad idea? We have no visions of retiring in our early 40s (mid to late 50s would be great), but want to set ourselves up to be financially independent and ready if housing prices ever crash out here.”

First, your baby won’t give a hoot where you live. The kid won’t demand a separate bedroom or a backyard for a while, so there’s no rush. Having said that, you make a lot of money, have saved a ton and can certainly afford to upgrade.

How much rent should you pay? One yardstick, often used by landlords to determine if a tenant has the wherewithal to lease, is the Rule of Forty. That simply means your annual household income should be 40 times the monthly rent. Or, conversely, divide income by that amount to arrive at the max rental rate. For example, a family grossing $100,000 could finance a $2,500 monthly.

In your case the rent ceiling chimes in at $5,300 – enough to rent a honking nice house, even in delusional Vancouver. But, of course, that would eat into your fat savings rate – and already you face a lifestyle shock with all of the kid-related expenses about to fly into your lives. So three grand a month (or close) sounds like a reasonable compromise. Please remember, however, to avoid the classic Baby Mistakes – (a) running out and buying a lot of insurance born of guilt, obligation and adulating or (b) falling prey to one of the RESP Vultures festering like a fungus outside the maternity ward doors.

Now, to the opposite end of the age continuum, because Samuel has a question about looking after his grandma. Lucky for her, he sounds like a good boy.

“I’m a long time reader of your educational blog and this is the first time I’ve reached out for your expert opinion. I couldn’t imagine not starting my day off without a cup of coffee and a fresh post from the wise Garth Turner. I hope this is enough of a suck up?”

It is. You may continue.

“I’m a young male in my mid 30s, and I have the responsibility of being my widowed 87 year old grandmother’s POA and executor of her will. She has multiple RIFF and non-reg accounts that sustain her current and foreseeable lifestyle that is changing daily as Alzheimer’s has set in. She has a ton of GICs that are staggered to come to term every year and recently she had 80k of GICs that have come to term and I was surprised to find her TFSA has 50k of room. I intend to fill the TFSA but am second guessing what to fill the TFSA with. IMO my grandmothers generation had the approach of parking money somewhere that as long as it didn’t lose it was a win and it has done her well.

“As her mental health has deteriorated rather quickly, locking into a multi-year anything seems like a bad idea. Obviously, I have a different investment approach at 30 than that of my 87-year-old grandmother. I want to do the best thing for her so she can be comfortable going forward. Do I take a 60-40 balanced approach? Do I stuff it in short term GIC’s just as the TNL@TB led my grandmother to believe was in her best interest?”

The first concern is her care as she sinks into the fog of Alzheimer’s. This is a vicious malady with no cure, a steady spiral downwards and a known outcome. Her needs will grow more intense, and many victims end up requiring 24/7 attention in a secure place. Sadly most public facilities are ill-equipped or staffed to adequately handle that. So, Sam, your highest obligation is to use her money to ensure she receives the greatest, most appropriate and loving assistance. That can cost eight grand or more a month in many cities. For that level of expense, her assets likely need to perform far better than in a GIC.

TNL@TB is wrong. Your grandmother doesn’t need to preserve her capital for the years ahead, but to use it now for immediate needs. By investing it for her in a prudent, diversified and balanced portfolio you can extend the life of this capital and possibly allow her to also leave a legacy. Work with an advisor to consolidate the RRIFs and the non-registered accounts, to fold in the GICs as they mature, and create an ETF-based stream of income for her needs. Stuff the TFSA, of course. Review her will. Document all of your actions as her POA. Speak with her accountant to ensure past tax returns have been filed. Start reviewing your complex duties as an executor.

Then hold her hand and tell her not to worry.

Remember, Sam. There but for the grace of God and a few decades, go you. Pray you have as worthy a guardian.

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October 24th, 2019

Posted In: The Greater Fool

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