Entries from January 2020 ↓

Dr. Garth

First, patients, stop bleeding on the furniture. We have an important MSU. Pay attention. It’s from Bryn who’s just done something she feels is spectacular. We agree.

So after following your advice for years, I seem to have somehow saved up enough capital to buy a business. Not a house, a thing that actually pays me to own it. Customers since 1993; I learn every day I sit there, yet the staff already know how to keep it running without me…

I could have bought a bunch of particle board and Elmer’s white glue. The [email protected] would have happily set me up; but by the grace of Garth have I learned what the true meaning of freedom is… BUY STUFF THAT MAKES YOU MONEY!

Anyhow, thanks. Myself and everyone who I can get to listen is ahead in life thanks to your blog.

Atta girl. You get what many people never fathom. Houses don’t make money unless you catch a market wave you neither influence nor control. But they’re guaranteed to suck up cash. Closing costs are obscene in many places. Property taxes and condo fees are rising all over everywhere. Insurance costs are swelling. Realtors Hoover off 5% when you sell. Plus HST. And most people have to use extreme leverage to get a house, mopping up cash flow from the rest of life.

But business owners – those who know what they’re doing – get paid to own things. They have significant tax breaks. They have freedom, choice, independence and, best of all, unlimited potential. Of course they also have pesky, needy employees, government regs up the wazoo, no pensions, economic challenges and competitors just want to eat them. Totally worth it. Yay, Bryn.

Now, as for the rest of you losers…

My partner’s Aunt is retiring this year and is someone who never saved but blew any extra money each year on a trip to Mexico (gaaaawwwdd, shoot me and put me out of my misery now),” says Kathy.

Anyway, she will have a combined income, courtesy of our government, of $1,650 for CPP, OAS and GIS.  The $10,000 she does have in the bank I have talked her into buying ETFs within her TFSA so she can get some sort of monthly dividend payout.  What are your thoughts on that choice?  Or do you have suggestions for a number of ETFs I could get her into so she has diversification, even with her small investment funds?

Give it up, Kath. If the woman’s been so irresponsible that she saved only ten grand after 65 years of life, you’re not going to change much now. If Auntie got a 7% return on her funds it would amount to less than $60 a month. Sure, that helps. But if there’s a temporary market correction and she loses some capital you know damn well she’ll pull it all, go to Puerto Vallarta and buy a sarong.

Hate to say it, but someone like this is best suited for a HISA. Maybe you could also encourage her to move to another city. That would help.

Now, to the other end of the spectrum we go to find Ron, one of those irritating FIRE people who actually wants to retire before he needs knee surgery and a bottle of Tums in the glovebox. He’s aiming to retire at 45.

“Have followed your blog religiously for the past many years,” he says, “currently renting in Cowtown but have a retirement acreage fully paid for in BC.

Countdown clock says 524 days to retirement for me n the misses (me 43, her 45) on appx. $900k (mostly cash (RRSP/TFSA/some gold) investments and acreage as above.  Not much of a market fan and have been pretty conservative for the past 15-20 years.  Just been saving a bunch and avoiding the House Horny ways.  Wondering if I should be concerned at this point to retire at 45 with plans to live off 3-4% of investments/yr expecting minimal gains (would rather not get back in at the top currently but not adverse to dividend performers in the future on a dip).  Plans to enjoy RRSP income at the bare minimum for both of us (avoid income taxes and living costs appx. 20-30k/ytr).  I haven’t yet accounted for CPP/OAS in perhaps 15-20 years (if it still exists), income from the property and part time local employment, inheritances (say $200k) and the likelihood of a UBI at some point.  Is 45 too early?

Of course it is. And you don’t have enough to last 40 years without hunkering down on your acreage like a homesteader, eating roots and burning the furniture. Not without growth. This 4% withdrawal thing is a Mr. Moustache-type joke. Inflation is increasing and will continue to do so. Carbon taxes will make everything energy-related more costly. Saving instead of investing is a one-way ticket to running out of money. And if you’re a conservative person afraid of markets, why do you own one of the most volatile assets? Gold pays no income, is hard to cash when living among the shrubs and moose, and has a dim future. Bad choice.

You need income, growth and asset appreciation. Living on bugs and sap may seem appealing at the moment, but it’ll likely not be the case at 65 – if you have not yet perished from ennui. And what’s the rush? Nine hundred large invested properly for a decade will turn into almost $2 million at age 53, and kick out over $100,000 annually. Now tell me that’s not more appealing. And don’t lie.

Let’s contrast Ron with David, a hard-ass young YVR lawyer facing a big decision. Stay in the government womb, or head out and be manly?

I have been a reader for almost 9 years now and really value your daily advice and dose of humour. I could continue the mandatory suck up but will save you the time. You often go on about how valuable DB pensions are. But how valuable is valuable?

I’m a married 36 year old public sector lawyer who makes 150K. Rent with my 32 YO wife and dog in expensive Vancouver. Total household income is approximately 250K and we have about 150k saved (not enough, I know). Plan to have kids in a few years. There is an opportunity to go back to private practice. Obviously that would mean more money for me. Maybe $50k to begin with and then the potential for much more down the road. But what about the pension I would have to give up? Can you actually put a monetary value on what that is worth each year? I would have usually said who cares and that as an ambitious 36 year old I shouldn’t be making career decisions based on whether or not I get to keep my gov pension, but given how often you emphasize how valuable such things are, I was wondering your thoughts.

The pension is precious. But you’re 36, ambitious and have three decades to build your own pension. Besides, after a few years working in the government job you should be able to invest the commuted value, so nothing earned to date will be lost.

The reality is a good lawyer makes a ridiculous amount more on the street than in the cloister. Pulling down $500,000 plus as a senior associate or partner later in your career is a distinct possibility. Never will you approach that while staying on the public payroll. Depending on the structure of the firm you join, there could also be an equity build-up that will turn into a de facto pension.

The key is to invest, not spend, the additional income. Stuff the TFSAs. Open a spousal RRSP, if your mate continues to earn less or wants to stay home with kids. Eschew lawyerly things, like a crazy YVR house or needlessly expensive private schools for the little lawyers-in-training. If you can, work through a professional corporation for some additional tax relief. Consider setting up a IPP as a supplement to the RRSP. Once you amass capital and have a family, establish a spousal loan to further split investment income and drop taxes.

In retirement, you will be able to control your own income and marginal tax rate. If you stay with a DB pension, every payment will be taxable. Plus you will have become a career civil servant. We’d have to disown you.

The contagion

Mr. Market is having second thoughts about the virus thing. Flights to China now cancelled. More US cases. Fifty million under quarantine. The threat’s not that thousands (or even hundreds of thousands) will perish, but the world’s second-biggest economy will take a kick. GDP could tumble from 6% to 4.5% this quarter. That’s a big deal.

That has equity markets wavering after hitting record highs with more money flowing into safe stuff. Bonds. Always a refuge in times of uncertainty, even when they pay peanuts. This is one good reason why every prudent investor should have about 40% of their overall portfolio in fixed income, including government, corporate and provincial bond ETFs. Not only do they provide shelter in a storm, they can be profitable. One nice bond fund we like plumped 10% last year, for example.

When money moves into bonds from stocks, demand increases and prices rise. So bonds become more valuable. As that happens they pay less. Yields fall as capital values jump. (A bond always pays you 100 cents on each dollar of face value when it eventually matures. But along the way the price fluctuates. That can be caused by a change in rates, by demand or risk. A bond that’s worth more in the market sells at a premium to its face value, so it pays less. Bonds selling at a discount have a higher yield, typically because rates are rising. Clear as mud, right?)

Since the virus infected the media, bond demand has risen, yields plopped, and it looks like this will translate into lower mortgage costs. The yield on five-year Government of Canada debt has dropped over the last two weeks, and is weakening again. If this continues (seems likely at the moment) five-year mortgages could drop widely to 2.5% in February – just in time for the Spring rutting season.

This is cheap, cheap, cheap. Recall that the inflation rate is 2.2%, so locking in to a loan for half a decade at 2.5% is a gift. The cost of money will not stay at these levels, and it pretty much eliminates the logic in paying down such a mortgage. Most people will be far better off throwing their extra monthly cash flow into their TFSAs, in nice growthy equity-based ETFs, where they can enjoy a higher long-term pop.

As for morbidity and mortality, well, Mr. Market cares more about corporate earnings, US economic growth and Trump. They will prevail. Just be glad you’re not a prisoner on a damn cruise

Now, speaking of mortgages, remember that Trudeau mandate to Chateau Bill to make the stress test “more dynamic”?

Some Lib MPs are getting antsy, speaking out in favour of gutting the thing. Now we have word the bank cop – OSFI – may be considering exactly that. What an uncanny coincidence!

The current stress test for buyers who don’t need mortgage insurance (at least 20% down) is the rate the bank offers +2%, or the posted benchmark rate (now 5.19%) – whichever is greater. Given you can get a fiver now for under 3%, this becomes a high hurdle – one that will be even steeper if the virus discount takes hold in the bond market.

OSFI gets this (the real estate industry has been squawking in protest for months) and a recent speech by the No.2 guy there has opened the door to change. Seems the bank regulator will allow the test to be based on the contract price plus two per cent, and ditch the benchmark hurdle. The result? A decrease by about a third of a point – which increases the purchasing power of buyers. By the way, this is not an unreasonable position, given that the spread between the benchmark rate and on-the-street mortgage pricing has been gapping a lot lately. But you know the likely result, of course. A hormonal spring.

Now, what else can we expect?

Ah yes, the political diddling. It’s contagious.

As you know, governments have played a key role in helping make residential real estate unaffordable. The last election campaign was shameless, as all parties scrambled to woe Mills with housing bait. The Libs enhanced their silly shared-equity mortgage plan, raised the RRSP buyers plan limit and showered owners/buyers with new credits and green money. The Cons essentially matched the gifts and vowed to whack the stress test. The Dippers and Greens said, well, who cares?

While OSFI – not Morneau – is technically in charge of this thing, the fact Trudeau gave him the mandate for change shows what’s coming. The benchmark hurdle of 5.19% will not be around much longer, along with changes again seducing our glorious youth to become pickled, immobilized, paralyzed and hollowed-out by unrepayable mortgage debt. Just like they want.

Looking for something to worry about? It’s not a virus.