Entering the CF and YOUR Money....

[SupersonicMax]

There are also inherent assumptions that our ahistoric intereste rates will remain in force for the long term.  One cannot reasonably assume 3% rates over a 35 year period - and I'd note that 3% is a variable rate, so there is an interest rate risk in carrying a mortgage at that rate.  As well, Max is using an example of a 15 year old buying a house, since somehow he's 50 and has paid off a 35 year mortgage.  I'm not certain how many folks here bought their first house at 15, but I suspect the number is low.

I'm actually using a 25 years old buying a house, which is not unrealistic.

If the mortgage interest rate goes up, so does your invesment interest rates (normally).

 

[Redeye]

Of course, the calculations assume only RRSP investing, which is not probable for a CF member as their pension adjustment limits their RRSP contribution room.  Even with the annual $5K TFSA contribution, this leaves other money that will be generating taxable returns, so 6% become 4% (though this can be mitigated somewhat by holding dividend stocks outside an RRSP).

Realistically, between TFSAs and RRSPs, even with the PA, for the average person there's still a lot to gain.  I have quite a few CF members as clients who still generate a fair bit of contribution room, it's not until they get fairly high in rank that it isn't as significant it seems.  It is, however, important to assess one's individual circumstances in evaluating the options available (that's why I stressed this is merely general advice).  TFSAs are an absolutely fantastic creation for people who don't have a lot of contribution room - they're also good for people in lower income brackets where the tax savings (tax deferral to be specific) isn't as valuable as the flexibility of the TFSA.  Their worst feature is the name, which is deceiving.  A lot of people think they are just "savings accounts" and use them for transactional purposes which can create problems, or don't realise there are other investment options available within them.

As well, RRSPs are not a tax avoidance method; they are a tax deferral method.  Depending on your retirement income stream, RRSPs may not provide significant tax advantage on retirement as they will be taxed at your top marginal rate; if you're drawing a $60K pension, you'll pay about 25% in tax on RRSP/RRIF income in retirement.  The tax-deferred compounding helps, to be sure, but particularly for folks with defined benefit pensions RRSPs are overrated.

That's why I'm such a fan of TFSAs.  With some decent management you deal with some of the taxes, but ultimately, CRA has to get paid, and they'll get what they want from you one way or the other.

There are also inherent assumptions that our ahistoric intereste rates will remain in force for the long term.  One cannot reasonably assume 3% rates over a 35 year period - and I'd note that 3% is a variable rate, so there is an interest rate risk in carrying a mortgage at that rate.  As well, Max is using an example of a 15 year old buying a house, since somehow he's 50 and has paid off a 35 year mortgage.  I'm not certain how many folks here bought their first house at 15, but I suspect the number is low.

That's why I used more realistic longer term numbers, the theory still holds though.

Financial advisors make money off your money - even when you're losing money.  Mutual funds are, frankly, nearly criminal in the amount they extort to provide underperformance - 2 or 3% of assets, every year, even when they tank.  Remember: financial advisors get paid by someone, so if they are "free" to you, it means they're getting a commission from the products they're selling you.  That commission is a cost to you.

Of course we do.  I don't work for free any more than anyone else.  The thing I see a lot in the industry though is that people tend to avoid discussions of compensation or feel they should hide it.  I don't go out of my way to advertise how I get paid or what I get paid, but I happen to work for an organization that actually has an excellent product shelf at resonable costs.  The funds I most commonly deal in are wraps and they all come in south of 2%, which in comparison to any sort of advisory role is pretty good.

About mutual funds: in broad strokes they are an excellent investment vehicle for people who lack the time or knowledge (or required capital) to manage their own portfolios, which is a very large chunk of the investing public.  That said, Canada has for years had the highest fees in the industry globally even though to a certain extent they've been dropping lately (some companies - most - raised fees modestly this year, but the trend for the last five has been downward).  What galls me when I see it is companies who charge obscene MERs, but the funds are also sold on a DSC basis and the performance merits nothing.  There's one major organization that is most guilty of this, and I enjoy taking their business from them, but I hate the "advice" they give.  They do lots of retirement planning, but it's not for their clients, shall we say...

What gets me as worse is when I see high-commission products sold where they're not needed - segregated funds being the prime example.  They benefits they are pitched for are rarely worth the cost, in my opinion.  I've seen them used in some horrible ways.

As far as "even when they tank" goes, most of a fund's MER is fixed costs.  Regardless of what the market's done, they have the same costs for accounting, legal expenses, distribution, that sort of thing.  Tying those fees to performance makes absolutely no sense.  Guess what?  A broker isn't going to cut his fees when the market goes against him either.

One of the most "clever" things I've seen lately is ING's "Streetwise Fund", which as pitched as a "low cost" alternative to other mutual funds.  When you delve into it, it's basically a balanced portfolio built of index funds with a wrap structure.  The MER is about twice (or more) what you'd pay for index funds.  They've figured out a brilliant way to sell index funds for a premium.

 

[dapaterson]

Max: I misread your earlier post; apologies.


Redeye: Anyone with over $50K should move away from advisors and into index ETFs.  Better performance, lower fees.  The Couch Potato approach, in other words.  Low-cost index mutuals should only be used for regular contributions to accumulate enough to make it worthwhile to invest more in ETFs - if we stick with the $400/month model, that's probably once a quarter.

I recall a chat I had with one advisor who wouldn't steer clients into ETFs, since mutuals paid him more.  I look at Bay Street (or Wall Street) and see the six-figure incomes paid to people who underperform the market - that's where MERs go, to compensate mediocrity.

 

[Old Sweat]

Whatever you do, get started as soon as you can. I started contributing to a RRSP in my twenties and continued through my career. At the time I had decided that my CF pension plus Old Age Security (pre CPP days) would probably not be sufficient to live on in any degree of comfort. The realization of that coupled with tax deferment led me to go the RRSP route. While perhaps I could have done better in my choices, overall the result has not been all that bad. Our collection of RRIFs - converted from our RRSPs - are allowing us to live comfortably with a fair amount of discretionary funds each month.

Now I am leaning towards TFSAs.

 

[Redeye]

Redeye: Anyone with over $50K should move away from advisors and into index ETFs.  Better performance, lower fees.  The Couch Potato approach, in other words.  Low-cost index mutuals should only be used for regular contributions to accumulate enough to make it worthwhile to invest more in ETFs - if we stick with the $400/month model, that's probably once a quarter.

If they know what they're doing, yes.  I agree.  But most people don't, and lack either the time or inclination to learn, which is why they get advisors.  For those with the aptitude, though, ETFs (or even some of the "D" series mutual funds) are good options for those who can't efficiently build a portfolio of stocks and bonds on their own or want more diversification.

I recall a chat I had with one advisor who wouldn't steer clients into ETFs, since mutuals paid him more.  I look at Bay Street (or Wall Street) and see the six-figure incomes paid to people who underperform the market - that's where MERs go, to compensate mediocrity.

Not all fund managers are mediocre, but many are, and at high prices (I think, particularly, of a firm that's sort of a household name... but I won't bash my competitors by name that's not fair)... there is a need to do one's homework... but yes, no advisor is likely to sell ETFs unless they have another way of making a living (ie a % of assets under management) because the reason they're inexpensive is they have no compensation mechanism for sellers.

 

[dapaterson]

Of course, the optimum method would be to employ the Smith Manoeuvre (I think that's the name):

* Take the extra $400 and put it against your mortgage
* Borrow back the $400 against a line of credit backed by your house
* Invest the $400

That way, you get the $400 invested, plus the loan interest on that $400 is now tax-deductible as an investment related expense.  (Many considerations here to ensure that the rate spread isn't too great and ends up costing you money).

It's not a move for the faint of heart since you're icnreasing leverage, and needs solid advice and financial expertise to ensure you follow the rules to the letter, but it can be a way to leverage home ownership into a larger portfolio.

(And you can also hold part of your mortgage in your RRSP - charge yourself a (relatively) high fixed rate of interest instead of paying the bank).


There are lots of ways to reduce your tax bill; just be careful and seek unbiased expert advice.  In other words, saying "RandomDude73 on the Internet said to do this!" is not a valid defence should you end up in tax court.

 

[Redeye]

It's indeed called the "Smith Maneuvre" and it's not really a bad idea.

We use it a lot, mainly to create "investment loans" when people have existing borrowing and assets to make them tax deductible - there is a risk that CRA could disallow it as a pure tax-avoidance play, but I can't say I've heard of it happening.

 

[observor 69]

I have a TD TFSA with 50% CDN Bond index, 30% Dividend and 20% CDN Index.
All the index funds are E funds with low MERs. My RRSP has the same asset allocation.
I road the market down in 2008 and back up.
I am quite happy with this portfolio allocation, it is making money and I feel it has built in safety for my age.
Thoughts?
Oh, and my mortgage is paid off.

 

[Redeye]

I have a TD TFSA with 50% CDN Bond index, 30% Dividend and 20% CDN Index.
All the index funds are E funds with low MERs. My RRSP has the same asset allocation.
I road the market down in 2008 and back up.
I am quite happy with this portfolio allocation, it is making money and I feel it has built in safety for my age.
Thoughts?
Oh, and my mortgage is paid off.

50%-50% is a good balanced mix.  I can't give you an official opinion since, well, this is an internet forum and all, but if you're looking out 5+ years you're probably in a decent position.  The key is to make sure to rebalance it often - all else being equal over the long, the market returns on the equity portion will be higher, meaning you'll drift from that 50-50 balance and the portfolio will become proportionally more risky, so you'll need to move some of them back toward the fixed income side of the portfolio.  This is one of the major problems I see with a lot of portfolios I look at as "second opinions".  Some get incomprehensibly complex.  I've seen people with literally 20 different mutual funds (often many are substantially similar) with no rhyme or reason for their choice, other than perhaps the wholesalers bought the guy a lot of drinks at their golf outing.

Only real concern beyond that - not much exposure to anything but Canada.  We're about 2% of the world's economy.  That said, we've done better than most places lately but a lot of portfolio managers are bargain hunting in the US now and that could be something worth hoisting aboard.

Candidly, look at TD's Bond Fund vice the Bond Index Fund.  Its MER is higher, but last time I looked at the two side by side, it was worth it.  TD's bonds manager is a guy called Satish Rai, and he's pretty much brilliant.

 

[observor 69]

Thanks for your comments.
I had noticed the TD Bond fund had good results.
I'll have to take another look at it. 

 

[kawa11]

You make 40-50K$/yr. You pay 200$/mn into your RRSP and in return, the Gov't gives you an instant return of the 25% you would've paid in taxes (Hopefully, you reinvest this money into something like a TFSA and don't just blow it). You continue to make payments for years to come and are collecting a nice 3-10% return (depending on how passive/aggressive you are) At the end of all these years of saving you take your money out to retire.....the bank takes it's "management" fees and the Gov't takes it's 45% income tax because now the account totals much higher than the highest tax bracket.

Does this not mean that you've essentially burned 10% or greater of your money? With those figures, paying the 11c a year tax of the interest earned from a savings account would have been cheaper.

Aren't RRSPs only good for the Gov't, the banks and the rich (ie. people who earn 120K$/yr or more or people who were going to be paying 45% tax anyway)?

 

[MJP]

You make 40-50K$/yr. You pay 200$/mn into your RRSP and in return, the Gov't gives you an instant return of the 25% you would've paid in taxes (Hopefully, you reinvest this money into something like a TFSA and don't just blow it). You continue to make payments for years to come and are collecting a nice 3-10% return (depending on how passive/aggressive you are) At the end of all these years of saving you take your money out to retire.....the bank takes it's "management" fees and the Gov't takes it's 45% income tax because now the account totals much higher than the highest tax bracket.

Does this not mean that you've essentially burned 10% or greater of your money? With those figures, paying the 11c a year tax of the interest earned from a savings account would have been cheaper.

Aren't RRSPs only good for the Gov't, the banks and the rich (ie. people who earn 120K$/yr or more or people who were going to be paying 45% tax anyway)?

No ideally you would draw from your RRSPs when your income is lower (ie you retired) and therefore are in a lower tax bracket.  There is of course more to it than simply that but the basic fact is that informed consumers that choose carefully, well managed funds do quite well with RRSPs.

 

[kawa11]

So the Gov't gives you a tax break when you "officially" retire (ie. jobless and collecting CPP)?

The only experience I have is when I settled my father's estate. Because the amount in his RRSPs exceeded the top tax bracket we were subject to taxes in excessive of 45%.
Is it different for living people? (I can't believe I used that phrase and it made sense) Or possibly, can moneys be taken in amounts under 24K$/annually and limited your taxes to the original 15% taxes paid [and that should be sitting in a TFSA]?


****, I wish my father were here. He handled the finances...and I don't mean that in a "juvenile-I'm-too-incompetant-to-count-dollar-signs" way, I mean he was a corporate fund manager LOL

 

[Rheostatic]

A question to those in the know: What should one look for in a RRSP? What makes one bank's RRSP better than the next?

 

[Redeye]

So the Gov't gives you a tax break when you "officially" retire (ie. jobless and collecting CPP)?

The only experience I have is when I settled my father's estate. Because the amount in his RRSPs exceeded the top tax bracket we were subject to taxes in excessive of 45%.
Is it different for living people? (I can't believe I used that phrase and it made sense) Or possibly, can moneys be taken in amounts under 24K$/annually and limited your taxes to the original 15% taxes paid [and that should be sitting in a TFSA]?


****, I wish my father were here. He handled the finances...and I don't mean that in a "juvenile-I'm-too-incompetant-to-count-dollar-signs" way, I mean he was a corporate fund manager LOL

The estate impact of RRSPs is why you need a plan to pull the money out as well when you retire to try to run it down as much as possible, but at the end of the day even with the big final tax hit generally speaking in almost all occasions it's still well worth it.  Now that TFSAs exist they can be more beneficial to lower income earners perhaps, but I won't stop thinking RRSPs are a very good idea indeed.

 

[dapaterson]

RRSPs can serve additional benefit for long-serving CF or Public servants.  CFSA and PSSA benefits have certain penalties if drawn before certain age / years of service combinations. 

Delaying drawing payments from the CFSA or PSSA can reduce those penalties.  Using slow RRSP withdrawals to live off can permit an earlier retirement, and increased pension benefits by reducing or elminating the penalties.



re: Best RRSPs.  Find a bank with low-fee mutual funds to start, and begin monthly pre-authorized transfers.  As you get pay increases, increase your contributions (staying within your maximums).  A good advisor will help you balance TFSA and RRSP contributions; the appropriate mix will vary depending on your employment and income, since, at entry level, you're unlikely to be able to make maximum contributions to both.

 

[Rheostatic]

re: Best RRSPs.  Find a bank with low-fee mutual funds to start, and begin monthly pre-authorized transfers.  As you get pay increases, increase your contributions (staying within your maximums).  A good advisor will help you balance TFSA and RRSP contributions; the appropriate mix will vary depending on your employment and income, since, at entry level, you're unlikely to be able to make maximum contributions to both.

Thanks, I've read plenty on how much and how often to contribute, but I've found much less information on how RRSPs are structured.

 

[dapaterson]

A registered retirement account can be almost anything - savings type account, GICs, mutual funds, stocks, bonds... but in early years, it's probably easiest to accumulate in a low MER mutual fund.  Mutuals give you diversification.

Most of RRSP savings is putting it aside and monitoring it occasionally - but not obsessing about every fluctuation.

 

[Fotoshark]

I'm not sure if it's been added yet as there's a ton of pages to go thru but for those with or thinking about getting RRSPs, for every $1000 in a yr you gain $300 back on ur income tax.  The more you contribute the better.  I am fortunate to have grown up with family in the banking industry so I have an RRSP and a mutual fund on the go.  At one point I did have Canada savings bonds but the comparison in effort to make any gain on those compared to the many options the banks have was so not worth it that I cancelled em and went the bank investment route.  My RRSP is for retirement however.  The mutual fund is for savings, and knock on wood I've never really lost much on the market I've more or less gained more in the long run.

It's def worth it to invest ur money

-T.

 

[Zinking]

Just don't get married.