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RRSP Meltdown

People who have savings when they retire are faced with tough choices for how to spend their money to get the most out of retirement.  Their instincts to try to preserve their savings often leads them to mistakes such as living too small, overpaying their taxes, and not getting the most they can out of CPP and OAS. The common investment accounts retirees have are RRSPs, LIRAs, TFSAs, and taxable (non-registered) accounts.  Trying to figure out which accounts to draw from is already a complex problem.  To add more complexity, retirees might have a workplace pension, a possible inheritance, income from part-time work, and face decisions on when to start drawing CPP and OAS.  Fortunately, it’s not important to come up with a perfect plan.  What you need is a good plan that isn’t too far from the best possible. It’s not possible to go through all combinations of retirement scenarios in a single article.  Instead, I’ll discuss how some good savers go wrong in re...
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Optimizing RESP Contributions

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Suppose you’re in the happy position that Grandma has offered to fully fund your child’s RESP with $50,000.  The big question is whether you should put the entire $50,000 into the RESP right away or spread it out over time to maximize the government grants.  David Chilton asked for my thoughts on this question when he interviewed me for his podcast . To begin with, let’s make sure this really is a math problem.  If you choose to spread the RESP contributions out over time, how will Grandma react?  Will she say “If you’re not going to put it all in the RESP, I’m not giving it to you.”?  If so, then your choice is made for you.  We’ll assume here that Grandma doesn’t mind if you spread out the RESP contributions.  We’ll also assume that your child is young enough that there is time to spread out contributions before post-secondary education starts. Overview of RESP rules The lifetime limit of total RESP contributions for one child is $50,000.  Each ...
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Investment Fees are a Big Deal

Over a lifetime, investment costs take a huge bite out of people’s savings, but many investors don’t understand how they work.  It’s not that they’re complicated, it’s that the final answer seems unbelievable.  How could it be that these fees nearly cut my retirement nest egg in half? Let’s go through some of the misunderstandings. I don’t pay investment fees Some people think that because they never swiped a credit card or wrote a cheque to pay investment fees, they didn’t have to pay them.  This isn’t true.  If you own mutual funds or exchange traded-funds (ETFs), then fees are quietly deducted from your savings.  The total of these fees for the year is called the Management Expense Ratio (MER). The investment returns you see on your statements are net of fees in most cases.  An exception is that some group RRSPs report before-fee returns.  The fact that you see net returns is good in the sense that you see represent what you actually got.  On t...
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Wealthy Barber Interview

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David Chilton, The Wealthy Barber, has a great podcast with amazing guests, and I was thrilled to be invited to chat with Dave.  He’s done so much to help Canadians with their finances, most recently with his updated book The Wealthy Barber . Years ago I wrote a positive review of his book The Wealthy Barber Returns , and Dave left a message asking for a phone call.   At the time, I didn’t know Dave was a good guy who just wanted to thank me.  At first I thought I might have said something to upset him.  So, I spent the first minute of the conversation giving two-word answers.  As it became clear Dave wasn’t upset, I relaxed a little, but Dave must have come away with the impression that I can’t talk to people.  Fortunately, we got past that first impression years later, and I was human enough for Dave to invite me on his podcast. Over the coming weeks, I intend to write blog posts or point to existing blog posts giving fuller answers to Dave’s excelle...
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Book Review: Rethinking Investing

I liked Charles Ellis’ book Winning the Loser’s Game so much that I had to read his latest: Rethinking Investing .  It is very short at just over 100 small pages, but is packed with good advice.  Some of it is specific to U.S. tax laws, but most of it useful for Canadians. Ellis takes on three huge areas of personal finance.  The first is your portfolio allocation, or what you should invest in.  The second is your savings plan, and the third is your “spending rule,” or how to spend your assets during retirement.  A detailed treatment of these areas could easily run to thousands of pages, so this book is necessarily at a high level.  Ellis wants you to get the broad ideas right, so that you won’t make big mistakes as you fill in the details. Ellis calls compounding investment returns “your power curve.”  He explains that most of your investment growth comes at the end, which provides motivation to begin early.  Saving is “your first priority.”...
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Book Review: Just Keep Buying

When it comes to big questions about saving and investing, author Nick Maggiulli is critical of the answers given by the financial industry.  In his book, Just Keep Buying , Maggiulli brings data and evidence to answer these questions in interesting new ways.  I find myself agreeing with most of his conclusions, but not always with how he arrives at them or expresses them.  Whether you agree or disagree with his conclusions, Maggiulli adds to the discussion with thoughtful points of view. This book is organized around 21 questions that many people ask, including “How much should you save?”, “Should you ever go into debt?”, "Should you rent or should you buy?”, “What should you invest in?”, and “How soon should you invest?”  The discussion and answer to each question is its own chapter. In the rest of this review, I’ll examine some of these answers. Save what you can How much money should you save?  Maggiulli says to “save what you can.”  On its own, this is...
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What Does Generation Squeeze Have Against Couples?

An organization called Generation Squeeze is calling for big cuts to Old Age Security (OAS) .  For some reason, these cuts are aimed exclusively at senior couples.  Digging into the numbers, the proposal makes no sense. The stated goal of the proposed OAS changes is to free up government money for other priorities.  Whether or not OAS is the right target for reducing government spending is a different discussion.  The puzzling part of this proposal is having all the cuts apply to senior couples. Currently, OAS will get clawed back from any senior whose 2025 net income (Line 23400 of the tax return) is over $93,454.  For each dollar over this income threshold, OAS payments are reduced by 15 cents.  The current rules make no distinction between singles and couples.  The calculation is based on each person’s own income without regard to whether they have a spouse. Generation Squeeze wants to change the threshold to $100,000 for total household income....
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