Well, after all that moist Millennial angst of the last few days, I hate to bring up this topic. But it appears the feds are set to bring in a Baby Boomer Budget tomorrow afternoon.
That’s right, wrinklies. Break out a fresh oxygen canister. Stick some skull decals on your walker. Take extra Viagra and have the defib machine handy. Find the bellbottoms and the tie-tied headbands. It’s party time, like only a 74-year-old hipster finance minister can deliver, dudes!
So it looks like there are two things you can expect, both designed to help the decrepit ones retain and grow their wealth plus, of course, reduce their tax bill. This is raw politics, even if it’s lousy social policy. The Conservatives know who their loyal fan base is made up of, who gets out to vote consistently, and what they want. Being Boomers, of course, they want it all. Joe Owe is set to deliver.
First, the biggest tax dodge we’ve got is about to be extended. RRSPs favour the rich, of course. The more you earn the greater the benefit. This year you can contribute $24,930 to an RRSP, if you have the money and earn at least $135,000. That will reduce your tax bill by more than ten grand.
Guess who has the most RRSPs? Bingo. The people Mick Jagger begat. There are about eight million RRSPs in Canada which are sheltering almost a trillion dollars from tax (a thousand billion). Until now the day of reckoning was put off until age 71, when RRSPs must be cashed in or converted into in income stream, normally through a RRIF. That stands for ‘registered retirement income fund’ with a minimum annual withdrawal set at just over 7%, rising to 20% by the time you can’t find your teeth and don’t care.
Given the fact people are living a lot longer, that 71 is the new 52, that forcing people to take income can kick them into a higher tax bracket and lose their federal pogey and that people with RRSPs want all the money for themselves, the feds have been under pressure to change this. Thus, it appears the rules will be relaxed. The wrinklies may continue to amass RRSP-sheltered wealth for a longer period of time instead of having it forced into income.
Joe is likely to (a) increase the age at which RRSPs need to be collapsed, perhaps all the way up to 75 and/or (b) reduce the sliding amounts that must be withdrawn annually. This will be widely cheered by all those who don’t want their RRSPs messed with, because they don’t need the money. So you can see the voter appeal. Fortunately for the hippies, all those Millennial kids are too busy Tweeting about not having enough money to notice why!
The second change we’ve already discussed. As boldly forecast on this pathetic blog months ago, tomorrow Ottawa will double the TFSA contribution, effective the first of January. That will blast this thing to $11,000 per year, or $22,000 for a couple. And while TFSAs can be established by every resident, with no special benefits for wealthy people (like RRSPs provide), guess who stands to benefit the most? Right again. The groovy people who are making thirsty underwear mainstream.
A little less than half of Canadians have opened TFSAs, but the vast majority have peanuts in there and use them as glorified savings accounts. In fact a recent BMO survey had shocking results: 80% of all the money put into tax-free accounts has ended up in cash or brain-dead GICs. What are these people thinking, when the gains are sheltered and no tax is payable, ever? They’re not, obviously. A fifth are using TFSAs for holidays and another quarter for saving up a down payment while 40% keep a TFSA for emergency cash.
Oh yeah, and only 18% of people last year made the maximum contribution, which was $5,500. So with 82% of people not taking advantage of what they’ve already got, and sticking most of their money in the bankers’ shorts, why would the feds double it?
Simple. Because this has turned into one sweet tax shelter for Boomers and the wealthy who have maxed out RRSP contributions. They’ll be able to move substantial sums from taxable non-registered accounts into TFSAs, stick them into growth securities, and never pay a cent when collecting the income or be forced into a higher tax bracket. Moreover, since the proceeds are not reportable as income they do not count when it comes to clawing back benefits like the Old Age Pension.
And this is a money machine. A couple putting $22,000 a year into their TFSAs, starting in January and keeping it up for 20 years with a 7% annual return will have $1 million – of which $525,000 is untaxed growth they can spend while still collecting their government cheques. The kids can do the same, of course, save for one problem. No extra twenty-two grand a year.
So, please, whatever you do, prevent the young from knowing this. Or we’ll all be dead by sunup.
So what did we learn from the #DontHave1Million slugfest here on the weekend?
Simple. If the kids had lots of money they wouldn’t be Tweeting. They’d be buying houses. For the aggrieved it’s not actually about the wealth disparity, or the stupid price of real estate. It’s that they deserve more, because they’re better educated (so, smarter) than the wrinklies. Hence the unfairness.
This useless social media campaign does underscore some valid points, however. First, the gap between The Few and The Most is yawning larger every day. Wealthy people in Canada (with over $2 million in investible assets, outside of real estate) make up about 1% of the population. They own stuff – businesses, financial assets and a relatively small amount of property. The rest of the people hold debt, with the bulk of their net worth in a house. It’s a self-inflicted penury.
Second, the bulk of the population is crippled by financial illiteracy (thus the fetish over real estate, “At least I can see it”) and riddled with mistrust. Read the comment section of this pathetic blog for a few days (have a few scotches first) and see what I mean. People don’t trust banks, realtors, CEOs, immigrants with nice cars, stock markets, central banks, politicians or financial advisors.
Because The Most are so indebted and mistrustful, and their kids have such unfulfilled expectations, don’t expect much to change. The gap will grow wider. Best decide which side you wish to be on.
After thirty years of writing financial books, giving financial lectures, doing financial journalism, creating financial TV shows, and trying financial politics, I started a financial advisory practice, to help people make it. Some do. A 29-year-old couple who wrote me three years ago (I published their cynical letter here) brought a bottle of champagne to my office a month ago, on the week they became millionaires. Not because they own a $1.1 million house with an $850,000 mortgage, but because they now have seven figures in their investment account, and no debt. They’ve ‘retired’, after tripling their net worth in 40 months – by saving and obsessively investing.
As I’ve said so often, real estate brings debt, obligation and immobility. In the future it could also bring large losses and illiquidity. Reasonable people should strive for diversity and balance in their financial lives, keeping taxes low, investing in growth assets and seeking out useful advice. This is why the #DontHave1Million movement is puerile and pouty. If you can’t afford a house in Vancouver, screw it. Concentrate on what you can do – like building your wealth, and your options.
Justin wrote me last week: “Hey Garth, I am looking for an investment advisor/manager and know there are pitfalls within the investing industry. I am looking to be steered in the right direction to start investing but have no idea where to start. Any recommendations or advice would be incredibly appreciated as to where to find a fiduciary advisor or to start a portfolio. PS thanks for getting rid of my house horniness.”
It’s a question I’m asked a lot, but seldom answer, for obvious reasons. This blog isn’t a commercial for my day job. But here are a few points to keep in mind when looking for an advisor for those of you who don’t come here for news about mortgage rates or hormones.
- Don’t pick a salesman when you really want an advisor.
People who get paid by selling you stuff may have a hard time putting your interests in front of their own. That includes your best-friend high school bud who now sells mutual funds, the sweet lady with the RESP folder after you had a baby, the insurance guy you met recently or TNL@TB. They all get paid commission on things you buy, so how do you actually know the decisions they make are in your best interests?
Best seek out a fee-based advisor who refuses to sell anything and collects zero commission. The relationship should be as with your lawyer or accountant – you pay a management fee equal to a small percentage of your assets in return for unconflicted help.
- No hidden commissions or fees. No backend sales charges. Don’t pay more than 1%.
Don’t hire someone who is paid on a transactional basis – making money per trade. That’s just an incentive to churn your account with needless activity. Never buy a mutual fund with a DSC (deferred sales charge) which diminishes over time. This is nothing but a mutual fund prison. Face it – if the asset was good, then they wouldn’t need a tawdry gimmick to keep you invested in it. And any fee-based advisor charging more than 1% is too expensive or needs a new Porsche.
- It’s not all about performance. Don’t hire a hero.
Amateur investors think the only thing that matters is how fat the annual returns are. Wrong. The first goal of an advisor is capital preservation, and a stock-flipping cowboy who made 28% last year could end up losing 28% of your money next year. Find somebody with a balanced and diversified approach, who is happy to get you a predictable annual return (7% is reasonable these days), and who doesn’t throw around performance numbers when you first meet.
- The best approach is a holistic one.
An advisor should take the time to know all about you, your job, kids, house, pension, parents, spouse, health, dog, siblings and goals. It’s the only way to come up with a plan (and you should have a written investment plan given to you before you start). Saving money through tax avoidance can be more effective and less risky than trying to score on investments, for example. Knowing what the future demands might be from growing children or aging parents will help guide the strategy now. If the guy doesn’t ask when you first meet, walk.
- Trust, or you’re wasting everyone’s time.
Yeah, this is the hardest thing. Human nature tells you nobody cares about your money as much as you, which is true. But most people know little about investing, tax law or macroeconomics. So, you can follow the herd, spend all your money and get a mortgage, or you can get some help and aim for 1% status. Maybe you’ll make it. Maybe you’ll buy a house. But the odds are you’ll have more choices and find greater financial security.
This also makes you far sexier. So there.