He was a fireman for the full thirty. She still works, but aches to retire. Both are mid-fifties and when she hangs up the clipboard as manager at a small courier company, they’ll be living on his pension of $3,800 a month.
“Not enough,” Irene says. “I wanna travel.” But that’s not going to happen, unless they give up their entire financial plan – which involves owning two side-by-side houses. The one they live in is worth seven hundred. The one they rent out (for peanuts) is worth five. And the sum total of all RSPs, TFSAs and cash stuffed in the orange guy’s shorts is less than $50,000.
At age 56, they have a net worth of $1.2 million. That’s good. But 96% of it is in one asset – real estate – which in their city (Victoria) is dropping like a stone. “It’s so scary now,” says Irene, ”that I have no idea if we can even sell these places, let alone for what the assessment says they’re worth.”
And she’s right. A 50% decline in that market over the next five years is entirely possible. But anything close to that will underscore how risky a strategy it was to put all of your eggs in one basket. Victoria first, of course, then Vancouver and Toronto. Slowly but steadily, reality will settle in. I mean, have you looked at what $1.2 million buys in 416 lately?
Last year I said the era of the house is ending. Absurd overvaluations will end. They have to. We’re outta money. And one big reason for that is, like the retired fireman and his flame, we’ve sunk almost everything into bricks.
Remember, less than 1% of Canadians have a million dollars outside of their homes. But about 50% of all the people living in Vancouver have $1 million in their homes – at least for now. The latest news shows this is not likely to last for long.
The national economy grew at zero in the last period, and is about to go negative. And you know the US is comatose. But that’s not what homeowners with the bulk of their net worth in drywall should worry about. More chilling is the fact most people are slowly, inexorably, relentlessly and willingly running out of money.
Two-thirds of people over the age of 55, who should be in their fat years, are in debt, says CIBC. According to a new survey from Big Orange, half of the population can’t save even $25 a week. About 47% of people say their financial plan involves cutting back on the amount of food they eat. Forty per cent have insufficient income to pay monthly bills. And in recent years, retirement plan contributions have fallen off a cliff.
At the same time households owe $1.5 trillion, and interest rates are near the lowest point ever. What happens when they start to normalize? The point of the bank survey released this week was to show how delusional people have become. When asked if they’ll be debt free by the age of 55, most people say, yeah, sure. Of course, it won’t happen. It’s a statistical impossibility – unless we start shunning houses.
Has his already begun?
I’d say so in Victoria, the Okanagan and swaths of Ontario outside the GTA. Maybe the latest numbers from CHMC tell part of the story. Since F’s latest mortgage rule changes in March, home loan refinancing has dropped about 40%. The number of people buying mortgage insurance plopped after the announcement, and has not recovered.
Why should it?
As I’ve said here a few times, house prices rose because of more debt, not more income. And now that the economy has developed ED, most people will be lucky to hold on to the income they’ve got. That big plan of making money off rising house values no matter what size mortgage you took is looking suspect. When half the population can’t save twenty-five bucks a week, and two thirds of people ready to retire are in debt, who the hell’s going to buy your house for twice what you paid?
There’s no economic argument for existing home prices in most major cities. The emperor is naked.
If you think this is a poor time to sell, and don’t, you have no idea what’s coming.
Before I turned into a drama queen on Friday and huffed off on my Harley, I affirmed why I host this disgusting site: to help people. It’s why I provide a running commentary on the one asset class with the most influence and danger, real estate. Why I offer guidance on investing and tax avoidance. And why those who come here to mope, bitch and foment revolution can rotate.
My worldview is simple. No systemic financial collapse. No bank failures in Canada. No 80% drop for the stock market. No food riots. No depression or hyperinflation. No bankrupt America.
But neither will there be robust economic growth, a sizzling economy, mucho jobs, fatter house prices or cheap rates forever. What’s coming will be what you see, only less. This will shock more people than you realize. Especially delusionals who think 50 feet of water and a parking spot is worth $550,000.
In the period ahead, when wages are flat, jobs few and Boomers disintegrate, you need a plan. Owning a house isn’t one. Nor is having a pile of gold, or your fortune in GICs. I preach a diversified and balanced portfolio for good reason. Because it works. It saved asses in 2008, it smoothed out the S&P meltdown three weeks ago and it spit out 15% last year.
For anyone who cares, I’ll spell this out better in a future post.
But investing is hard. It takes a set. Tax avoidance it easy. So let’s start simple. Today I have a tip on how to put money into an RRSP, and how to take it out. This is done in the full knowledge that TFSAs are actually better than RRSPs, and that’s where your first fifteen grand should go (but not into savings).
The worst way to make an RSP contribution is the way everyone does – in the last two weeks of February, just to beat the March 1st deadline, claim the deduction on last year’s taxes, and collect a refund in April. Of course this means for an entire year you have overpaid on your taxes, sending more money to Ottawa than the knobs deserve. You’re also putting money into a tax shelter where it can grow faster months later than you should have, and thereby foregoing months of growth.
There’s a better way. Get a tax refund on every single paycheque instead of waiting an entire year. This increases your cash flow, reduces withholding taxes and makes your spouse think you got a raise, which should be a reason the special underwear comes out of the drawer.
It’s easy. Set up a monthly contribution to your RRSP through the bank or your financial guy. Then go to www.cra.gc.ca, click on the first tab on the top left (‘Forms and Publications’) and request T1213, ‘Request to reduce deductions at source.’
Fill it out and send it to your local tax office. They’ll approve it, forward it to your boss, and then the person who figures out your source deductions will reduce them. Suddenly your take-home pay is augmented, and your retirement plan is growing faster. Why would you not do this?
Now, there have been some questions on this blog about how you get money out of an RRSP or a RRIF without paying tax. As you know, all a registered retirement plan does is kick the tax can down the road – it defers the hit instead of avoiding it, as a TFSA accomplishes. For this reason, it makes poor sense to invest in assets that yield lowly-taxed capital gains or dividends inside an RRSP, since it all comes out eventually and is taxed higher, as income. At least 99% of folks do not understand this, and keep equity mutual funds in their RRSPs and GICs outside. Pity.
Anyway, it is possible to transfer wealth from a registered plan into a non-registered one with the use of leverage – the fancy name for a loan. Just borrow some money on a line of credit with interest-only payments and then invest it in a nice, stable balanced portfolio of ETFs, bonds, preferreds, REITs etc. Then take whatever money you need to pay the monthly interest on the loan from your RRSP.
When you do your annual tax return, the money received from the retirement plan is added to your taxable income. But the loan payments (since they’re all interest) are deducted from that income. With a little figuring, you should be able to balance them out, for zero net tax. So what you’ve done is finance a non-registered portfolio with your RRSP money, and it’s cost you nothing to do so. Wealth is, in effect, flowing from one to the other.
Of course, this involves two scary things: (a) borrowing and (b) investing. So if you’d just like to get old and pay more tax, then go for it.
Or, you can lament the way things are and find a blog to take a dump on. Hey, here’s one.