Dr Garth

On the front lines of the fight against the plague, Christine was in charge of Covid testing and vaccinations at a major TO hospital. She’s on mat leave now. “Very happy to get a break from that,” the trained RN says. “Sadly, too many lives lost. I feel it every day.” She and her squeeze are also blog dogs. She writes me…

A little about us, because I want to demonstrate how much your blog has saved us. We are 31 and 32, living in Toronto. We rent a beautiful semi-detached in a great area. Our best friends rent the downstairs and we have the two top floors. We only pay $2300 a month for 4 bedrooms in our place – it’s ridiculous we won’t ever leave! The landlord even pays hydro. We have air condition, heating, two floors, a large kitchen etc.

We have over $350,000 in savings. We honestly cannot thank you enough for helping us not become house horny – we feel so lucky to live where we do, have great jobs, a combined yearly income of over $270,000.

My question for you has to do with our new baby’s RESP! We have created and invested in a family RESP account (as we hope for another child or two). It is currently in equities. Our amazing ‘challenge’ is my father-in-law has given us $25,000 for the RESP. What should we do with the money while we are waiting to deposit it yearly? We plan to deposit 10,000 this year (as we will get the $2500 grant and fill the extra room, as the grant only goes up to $36,000). When we have future children we know we can put in $5000 a year. What should we do with the current amount? Any thoughts/advice on creating a separate account and transferring it to RESP every year? Should we just put it in my partner’s TFSA and transfer it every year to the RESP? Should we put it in my RRSP, and just keep an eye on the gains and make sure we give it to him in the future?

Lots of people don’t understand how the RESP works. First, never, ever, ever succumb to one of those fixed-plan salesguys who hang around hospitals. The ‘scholarship funds’ are generally ill-invested, riddled with fees and inflexible. Way better to set up a self-directed plan with the online brokerage of your bank, or similar. Christine gets it.

Second, unlike a TFSA or an RRSP, there’s no annual contribution limit to an RESP. The max allowed is fifty grand, and you can put in as much as you want, whenever, up to the limit. The money in there will grow tax-free and can be used later by the child to finance schooling. It’s taxable in the kid’s hands when removed, but that usually means zero to pay. If the child eschews school and becomes a TikTok influenster instead, the grant portion is returned to the government and you can move up to $50,000 into an RRSP (if there’s room).

Now, what about the grant?

The feds will pony up 20% of the annual contribution to a limit of $500. So, to get that you need to plop in $2,500. There’s a lifetime grant limit of $7,200, and the rules allow you to go back one year and claim any grant portion that may have been missed. To do this, regular contributions are required so it’s probably best to stash the rest in growth-oriented ETFs inside a TFSA, then move funds over annually if the grant is important to you. No cap gains tax on tax-free account growth, of course, and the TFSA withdrawal can be made up again each calendar year. And all of the money earmarked for the child continues to grow smartly in a tax-free environment. Remember, the grant is a gift. And the easiest 20% you will ever earn.

Okay, here’s Kayla. Another Millennial. Another blog addict. Another baby. Both she and her hubs have gold-plated (crypto-plated?) defined-benefit pensions, but are joining the Great Resignation.

He’s on leave without pay starting a new chapter of life with hopes to never return. He has a little over 10 years of service. I hope to join in the next chapter as well, once our second child starts school (she’s 7 weeks old), putting me at close to 20 yrs of pensionable service once that happens. We’re interested in cashing out the transfer value of the pensions (his first, mine later of course) and investing it ourselves so it becomes our actual money. If I understand correctly, the options are something like this:

A) leave it in the fund, take it at 60 and the value it was at when we left will have grown with inflation, but nothing more. We will get a set amount each month, have no flexibility with it, and a bunch will be gone when one of us dies, and nothing left for family once we both kick the bucket.
B) take it out, take a huge tax hit now, invest it – but the value grows with the market until retirement age…. and because it’s now our money, we can take it out tax efficiently and nothing disappears when we die.

Is this accurate? Am I missing something? Seems like a no brainer for option B…we have more than 20 years for it to grow!

We’ve hit on this before, but it’s worth hitting again. Mostly because of interest rates. The lower rates are, the more a commuted pension will pay as a lump sum – and the cost of money is about to embark on a multi-year escalation. If you’ve been mulling cashing in a DB, that window of maximum opportunity is closing.

Kayla’s right. It’s a no-brainer. If you can take retirement money and control it yourself, plus have the ability to pass it on within your family, that’s a worthy move. Obviously investing correctly for growth and long-term capital preservation is key. Plus, there can be tax advantages in using the money when you need it, rather than being forced to accept a fully-taxable monthly payment starting at a fixed age.

As for the ‘huge’ tax hit on commutation, remember if the funds are left in the pension plan every single cheque is taxable. So paying upfront is more a psychological than financial hit. Besides, any unused RRSP room can be used to mitigate the tax payable on the cash portion. The rest is rolled tax-free into a locked-in retirement account (LIRA) which can be invested fully in a way tailored to meet your personal goals.

Why don’t more people do this?

Scared. They’d rather opt for a guaranteed monthly amount than face the risks of personal investing. Even when they must surrender control, face recurrent taxes and usually forfeit the pension benefit upon death, leaving no pile of cash to a spouse or kid.

Yes, it’s hard to grasp this. But then, most Canadians choose GICs and mutual funds flogged by [email protected] Yuck.

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Well, Monday is January 17th. Betty White’s hundredth BD. I know she’s dead, but not really. Death is for regular people, not those who carry on through the inspired actions of the living. Think Terry Fox. Or, if you’re a shelter dog, Betty White.

The TV and comedic star left us with the Betty White Challenge, a virtual event asking for a $5 donation (by everyone) to local animal rescues or shelters. The woman was devoted to animal companions, endangered species and improving zoo conditions.

I will never forget the day I walked into the shelter 16 years ago and found Bandit, shaved, broken, with sores and a cone of shame. The people there had rescued him. We saved each other from dark moments.

Do it today. There are many pandemic puppies coming.

About the picture: “I am a long time reader but I have never posted or contacted you before,” writes Chris. “I look forward to your blog each day and I often enjoy the photos. I have attached a photo of my German Shepherd, Dax, just in case you ever want to use it. He is a gorgeous fella.”

Resolutions

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RYAN   By Guest Blogger Ryan Lewenza
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The dying Christmas tree has been hauled out to the street for pick-up. The leftovers have long been eaten and digested. And the New Year’s Eve hangover is a distant memory. So it’s time to talk resolutions and the plans that we’re going to put into action to have a successful 2022.

We all know 2021 turned out to be a dumpster fire of a year with the late Covid surge from the new Omicron variant. So let’s try to make 2022 a banner year.

First, we should begin the year on a high note by ensuring our financial security in the future by making our retirement contributions today. This includes making RRSPs (before the end of February), TFSA and RESP contributions.

RRSP contribution room is calculated as 18% of earned income to a maximum of $29,210 for 2021. This should be the first thing you do since whatever you contribute to an RRSP it reduces your income by that amount and therefore your taxes. Note the higher the income you earn in a given year the larger the impact of the RRSP contribution so it may make sense to delay contributions until future years when your income is higher.

Then you need to top up those beautiful TFSA accounts with a $6,000 TFSA contribution. The contribution can either be made in cash or by in-kind security contributions. If you don’t have the cash on hand right now, consider maxing out the RRSPs then use the tax refund to make the TFSA contribution in a few months.

With the new $6,000 room for 2022, this takes the cumulative limit up to $81,500. This may not seem like a lot but check this out.

If you contributed the max each year since the account was established in 2009 and grew the funds at a 7% return it would have grown to roughly $120,000. Not bad. Now let’s assume the government doesn’t do something silly (is this an oxymoron?) and keeps the TFSAs going and to keep things simple, maintains the current $6,000 annual contribution for another 10 years. Same deal, contribute the max $6,000 every year and it grows by 7%, you will have roughly $350,000.

This is money that you can pull out whenever you need it and never have to pay tax on. Sweet!

Next you should complete a household savings plan and a financial plan to map out your future. Start by figuring out how much you can save each year and then start doing some calculations to see how much this would grow to over time. We have a great calculator on our website to help with this.

Run some simple scenarios. For example, type in two savings amounts of say $20,000 and $50,000 per year. If it grows at 7% over a 30 year period you will have a retirement account of $2 million based on the $20k/year and $4.7 million for the $50k/year savings.

Start planning and saving today since life goes pretty fast and I can’t tell you how many people that I’ve spoken to and worked with that started too late and are now scrambling to catch up.

Finally, you could use our Will the Money Last calculator to see how long these funds would last in retirement. For example, on a $2 million portfolio in retirement, you could comfortably draw $100,000/year (5% of the portfolio) and you wouldn’t outlive the funds in retirement.

We complete much more detailed financial plans for clients but these calculators are a great place to start and can give you a rough idea of how much you need to save and how much you can draw in retirement.

Third, you should review your portfolio (it better be balanced or why have we been writing these blogs all these years!) and consider rebalancing if it has moved to far out of whack. Last the year the TSX returned 25% while Canadian bonds (I’m using a Canadian bond universe index) were down 2.65%.

If you started January 1, 2021 with a 60/40 split between the TSX and this universe bond index, by December 31, 2021 the asset mix would have changed to 66% in equities and now just 34% in bonds. So you should review your asset mix and rebalance the portfolio by trimming equities and adding to bonds, moving the portfolio back to the long-term or ‘strategic’ asset mix of 60/40.

Rebalance Portfolio Back to 60/40

Source: Turner Investments. Numbers are based on TSX returning 25% and bonds -2.65%

Fourth, you need to stop delaying on the will and get it done. You need to have your estate plan in place because you just never know. The will addresses three key aspects – the executor of the will, instructions on the division of the assets to the beneficiaries, and who will be the guardian for the kids, if any.

Naming the executor is a very big deal since it’s consumes a lot of time and energy and can be stressful for the executor, which is typically a family member. Our preference is to name a trust company as the executor to handle the estate. There is a charge for this but in most cases it’s worth it.

Lastly, commit yourself to learning more about the markets, money and retirement planning. Even with all my education, designations and work experience I still have a ton to learn so I’m always on the lookout for new books that will expand my knowledge and make me a better investor and financial advisor.

A few books that I would recommend include the classics, The Wealthy Barber and Rich Dad Poor Dad for personal finance. For investments books I always recommend The Intelligent Investor, How to Make Money in Stocks and the technical analysis bible Technical Analysis Explained. Head down to the local bookstore and pick up a few of these to get you going.

You have been given some clear instructions and tips today on making 2022 a successful year so the rest is now up to you. Get to work!

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.
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About the picture: “Buster is our Old English Sheepdog,” writes Tim, “and a gentle giant who lets my wife and two daughters play dress up all the time. Keep up the insightful blog.”