Financial advisors say the damndest things, like realtors. They tell you to keep an emergency fund equal to six months’ spending, for example. Wrong. Get a line of credit. It costs you nothing to set up and every dollar you own can then be working. Besides, when was the last time you had an emergency?
Advisors tell you the first money to save for when you’re wrinkly and your bladder retires, is in an RRSP. Wrong. We covered this ground yesterday – the first thing you top up, and keep full, is that TFSA.
RRSPs are actually a bad retirement idea for anyone under the age of 55. There’s little doubt personal tax rates will be higher in a decade, for starters. You could be paying more in tax when you don’t have a job and cash it in than you saved when working and contributing. Worse, if you earn capital gains and dividends inside an RSP – which are both taxed at the lowest level – that advantage is largely lost when retirement hits and you must take the money as income, and pay more.
Remember, RRSPs are for tax-shifting, not retirement saving. For example, put money in there with a frenzy if you happen to work for a big Canadian newspaper or magazine, because you can pull it out when you’re unemployed. Open a spousal plan if your babe is at home with babies. You can contribute up to your own limit, write it off your taxable income, then collapse the plan and use it for her yoga classes after three years. That’s called income splitting.
Or open a spousal plan and whack your cash in a few years before you start a family. It can all be taken out, often with no tax, to finance a mat leave. Do the same with a sabbatical in future years, or a trip back to school, or when you throw away your career as a surgeon to become an animal rescue activist. These are the everyday things that an RRSP’s good for. Retirement? Not so much.
Advisors tell you that real estate forms the cornerstone of personal financial planning. Wrong. They say paying off mortgage debt is the holy grail. Wrong again. We dealt with the mortgage question some days ago, showing it makes no sense to pay off a below-prime borrowing which is actually lower than the inflation rate. Why repair the bank’s mistake? And when you can earn 7% or better with a nice, white-bread bland balanced portfolio, why shovel more equity into your house?
This goes to the part of the Canadian Securities Course (boot camp for advisors) about a house. Tell your clients to buy one, it says. The logic is that real assets will keep pace with inflation and turn real estate into a storehouse of value. Like pet rocks or Kias. Of course it didn’t work in America, Britain, France, Spain or Kelowna. The world’s now experiencing asset deflation at the same time as price inflation, which means families see house equity falling while monthly living costs rise. Soon (October) they can add higher interest charges to the mix.
Real estate, especially the kind bought with 5% or 10% down, turns into a wealth trap unless values endlessly rise – and such a thing’s impossible, even in Vancouver. In fact, this week the latest Demograhia report reminded us that real estate in the Mouldy City is “severely unaffordable” and Van is the second most-awful place on the planet in which to own a house, even after the latest market plop. It’s why so many people there are hooped, with empty TFSAs, withered little investment accounts, bloated mortgages and strange people living in the basement.
Of course, all of Canada is turning into an oddity. While all 20 major US markets are considered affordable, Toronto and Calgary are sliding. Nine years ago this country was among the six most desirable in which to buy property, but has now suffered the greatest deterioration.
“Canada’s deteriorating housing affordability was led by large house price increases relative to incomes in Toronto (50%), Montreal (65%) and Vancouver (80%) since 2004. As housing affordability has deteriorated (globally), there has been a tendency on the part of housing industry and financial market analysts to ‘cheer on’ abnormally high house price increases as if housing were a commodity, like gold. Housing is much different. It is a basic necessity and adequate, comfortable housing is necessary for a decent standard of living.”
Exactly. You’d think most advisors would know that. After all, you buy what appreciates and rent what depreciates. That’s why smart people lease cars from dealerships dumb enough to offer 0.9% financing, even when the vehicle costs more. It’s why house and condo renters in Toronto, Edmonton or Burnaby enjoy being subsidized every month by the schleps who own them. It’s why you should worship liquidity in a turgid world.
After all, the goal’s not stuff. It’s freedom.