Entries from October 2017 ↓


On Halloween it’s okay to pretend you’re someone else. What a relief that must be to most little beavers whose real lives are pooched. Tell me, how did we get to be so educated, and still be so dumb?

“My sister and new husband, 28 and 31 years years old, are both full time teachers,” says Angelo. “They just bought a townhouse a month ago against my best efforts to educate them. My question is, should they still be putting aside money every month (firstly in their TFSA’s obviously), instead of putting all their extra money towards extra mortgage payments?

“Let’s face it, they are both going to be retiring with a pretty sweet pension, and the chances of it not being there for them are pretty slim.  My argument for putting some savings elsewhere was just so they didn’t have all of their money in one asset, even if it means they didn’t pay off the house as quickly.  Does a couple in their situation really need to be saving for the future outside their pension though? I can’t even seem to convince them to start with one of their TFSA’s to put some money aside.  It’s absurd to them.  What are some reasons I can use to convince them this is something that would be smart to do, even for people in their situation (sweet government pensions)? Feel free to discuss in a future blog post, I’m guessing some others might be in the same boat.”

Yes, Angelo, teachers are among the worst offenders for spending 100% of what they earn, saving nothing, being financially illiterate, and (most heinous of all) acting smug. In reality, many of them grossly underestimate the money they’ll need to live in a long, long retirement (many teachers check out in their 50s) and overestimate pensions. They also forget 100% of their defined benefit pension payments will be taxable.

So while it makes less sense for a career teacher to have a whack of money in an RRSP (at age 71 it could boost you into a higher tax bracket), TFSAs should be totally loaded for bear. The reasons are simple, spelled out here with robotic regularity. Put $5,500 in there every year from age 28 to 65, invested in a balanced account producing 7%, and end up with $949,000, of which $740,000 is compound (tax-free) growth. That will produce $4,700 a month in retirement (preserving the principal) which won’t be counted as income, won’t push sis into a higher tax bracket nor reduce her government pogey.

If they eschew this $100-per-week investment in favour of paying off a 3% loan on a shoddy townhouse, you have my permission to disown them.

Now, let’s do Becky.

“I am 29, married plus 1 child. Discovered your blog sometime in the summer, and have since been obsessed with it.  My husband and I sold our house in suburban GTA back in March (thank god) and moved to rent even though everyone we know thought we are crazy. Of course they think otherwise now. We are well on our way to our first 1 million in savings. Here’s the problem. My parents. They have a nice townhouse and I advised them to sell it ASAP before the stress test comes out and move to rent until the market bottoms. (They didn’t listen to me back in March but now their ears are wide open.) I am second guessing myself though because perhaps the stress test will push many buyers to the townhouse sector as detached will become unattainable for many next year. This could result in TH values going up. I would be devastated to have given them the wrong advice and hurt them financially. The last thing I want is to gain while my parents loose. I wouldn’t even be able to celebrate my success. Can’t live with that. Desperate to hear your thoughts about this.”

Let’s recap. You told the wrinklies to sell last spring when prices were insane. They didn’t. Ignored you. Missed the peak. Lost a wad of potential tax-free capital gains. And now you’d be ‘devastated’ if they sold at the wrong moment, when prices might be squeezed up?

Sheesh. They’ve done a number on your head, haven’t they? When the world runs out of weapons of mass destruction, there will always be parental guilt.

The best advice is to stop giving it to people who already know everything, and focus on your own family. Yes, you did the right thing with your house. But don’t be too anxious to get back into the market – things could take several years to find a bottom. As for the stress test pushing low-end real estate higher, this will probably happen, newbie buyers being as demented as they are. But it won’t last too long. It’s impossible for price levels to stay elevated when credit is being restricted. The parents should sell, rent and shuddup.

So here’s Linda, in Squamish, which is actually better looking than it sounds.

“First a huge thanks for keeping up your witty entertaining daily blog! It has become part of my morning routine for a few years now! I’m 30, own a cute little condo in the heavily inflated Squamish market and today I could more than double my money on this shoe box… I’d be sitting pretty with a total profit of over 300k

“The problem is rent in this town is close to double my mortgage; unless I’d be willing to rent a room in a shared house. Our town has been directly affected by the YVR market. In response to that there is a huge boom in the condo/townhouse construction, it worries me that soon my market will be oversaturated! Could the new mortgage rules make my condo even more desirable? I’m also worried that with the new mortgage rules buying in again will become more of a fairytale. I understand your strategy and love the thought of living off the interest but most banks nowadays can barely guarantee a 2% how and where could I be achieving these 7% returns you talk about?”

First, Linda, don’t fib. You can rent a 3-bedroom townhouse in Squamish with a double garage for $2,200. Condos are less – around $1,700. This is the amount your $300,000 profit would generate if invested to give you a 6.5% return. In other words, you’d live for free. No mortgage payment. No strata fee. No homeowner’s insurance. And you would have doubled your money, tax-free. How many times in your life is that going to happen?

If you sold and invested you’d have a diversified portfolio instead of all your net worth stuffed in one thing. You’d eliminate the inherent market risk with that stress test about to hit – with unknown effects. You would escape interest rate risk since it’s assured your next renewal will be at a higher rate. And you’d realize a major capital gain, instead of leaving it exposed. Besides, who wants to live in a shoebox in Squamish as a long-term strategy? Yuck.

Finally, if you read this site every morning, how could you even consider giving the bank your condo proceeds in return for 2% of pitiful, fully-taxable interest? Have you learned nothing? Is this blog just a collection of dog pictures and deplorables for you?

Linda, I’m crushed.

The wait.

When I was twentysomething, before there was Google, proper underwear or safe food and LBJ was napalming jungles, nobody my age trusted the government. Politicians started wars, rewarded cronies, were remote and unaccountable. They deserved to be protested against. So we did. I was even in a riot once. Thrilling.

Today the kids seem to loathe Boomers, corps, business owners and wealthy people, especially any with two houses. They applaud higher taxes (on others) and focus on issues like gender equity, sexual harassment and climate change. Apparently there’s nothing worth marching about, anymore. Besides, it’s easier to crowdfund.

In short, we saw government as the problem. Imposing and taking. The moisters see it as the solution. The leveler, equalizing.

This brings us, oddly, to pensions. Much discussion here yesterday about whether or not it’s smart to take your CPP when first offered (age 60) or to wait five or ten years when the stipend is larger. Boomers may be facing that decision daily now, but the moisters are the ones who will truly frame the next retirement crisis. If the kids think they have it tough now, just wait four decades. It’ll be brutal.

One reason young voters fawn over T2 (besides the weed & tats) is a belief the government will actually take care of them when they age and quit work. No surprise. It’s exactly what the feds have led their Millennial base to think. This is a core issue, since the current cost of real estate is decimating young finances. Almost their entire net worth and virtually all monthly cash flow is being concentrated in a single, inflated asset by millions of people just entering careers. TFSA contributions are piteous (93% have not maxed) and RRSPs aren’t faring any better.

Meanwhile corporate pensions continue to shrivel, turned into crappy little group RRSPs run by insurance company dweebs who shovel them into their own mutual funds. If you’re under 40 and not a public servant, chances are your retirement plan is hope.

“We have come to a conclusion that we are going to improve the retirement security of Canadians,” money minister Bill Morneau said last summer when a gaggle of provinces agreed to reform. “We’re going to improve the Canada Pension Plan that will make a real difference in future Canadians’ situations.”

“A real difference.” So what does this mean?

The average CPP payment today is $653, and the max allowable is $1,114, which you receive after contributing for four decades. To get it you pay about 5% of your wages into the pot. Starting in 2019, everyone will have bigger premiums in return for eventually higher benefits – about $4,400 per year extra (that’s the maximum – the average will be much lower). The new premium system will be fully in place by 2025 but benefits will flow much later.

To garner the extra four grand a year, a person will have to work and contribute for 40 years, which means the enhanced payments will start flowing routinely in 2065. Thus the first generation to benefit will be today’s teenagers. Not the Millennials, the GenXers or anyone else now devoting their complete financial resources to a house.

So, obviously, government, politicians or the public pension plan are not the solution. It may sound cruel, but anyone for whom the CPP (plus the taxable OAS pogey) is a major pillar of retirement income, has failed financially. This was never intended to be more than a supplement to a work pension and private savings – an enhancement to keep people out of poverty, not to finance a middle-class lifestyle. The sooner we all understand this, end the house lust and start sticking dough away for the 25 or 30 years after employment, the better.

In this context the early-CPP debate is silly. If you really need to sweat about getting $650 a month now as opposed to $850 five years into the future, you’re in lousy financial shape or already starting to lose your marbles. Having said that, everybody should collect at sixty. Once again, I will tell you why…

  • Any time the government gives you money, take it. Handing over pensions five years before most people think of retiring, when they are still employed, is idiocy. This could, and probably will, be changed on a whim in the future.
  • But what about the 30% more if you wait five years? If you absolutely know you’ll live to 95, think about it. But for most folks it makes more sense to collect the largesse as soon as possible, and invest it. Sixty monthly payments of $600 from age 60 to 65, for example, equals $36,000. That amount invested for a decent return becomes almost $60,000 in ten years, tax-free if inside your TFSA – turning out enough income to increase your OAS by 50%. That sure beats waiting to get an extra $150 a month.
  • Delaying until 65 or 70 to get more CPP income might also edge you into a higher tax bracket if you’re drawing from RRSPs. That would pretty much wipe out any benefit. Remember that during the year you turn 71 all RRSPs must be converted into RRIFs, meaning you’re forced to start taking the capital as taxable income. Why not bank your pension cheque for 11 years before that happens? Put the loot into a TFSA and when it comes out, no impact on your tax bracket.
  • You can split your CPP payments with your spouse, reducing the tax bite.
  • Do you think you’ll have more fun with your  monthly cheque when you’re 76 as opposed to 60? Seriously?
  • You’ve contributed to this plan your entire working life, thus it makes sense to suck out cash the moment you have a chance. That way you’ll drain more from the plan than you ever contributed, which is excellent revenge for being, like, really old.

Some things don’t change, moisters. Never trust the man.