An RBC mortgage ad in a newspaper drew my attention. It offered a 3-year mortgage at 2.99% and a 7-year mortgage at 3.59%. However, what really caught my eye were some percentages in large font in the fine print. It turns out the advertised rates assume a $250 processing fee, and the actual rates when this fee is accounted for are higher than the advertised rates. The fine print says that the advertised rates are “based on a $200,000 mortgage and a mortgage processing fee of $250.” The fine print goes on to say that the 3-year 2.99% offer is really 3.04%, and the 7-year 3.59% offer is really 3.61%. To RBC’s credit, the real rates were in a huge font compared to the rest of the fine print. However, it would be better if they just advertise the real rates in the first place. Being a math guy I wondered how RBC came up with the real rates. I used a spreadsheet to try one method that matches RBC’s numbers, so it may be how they did it. For starters, I assumed a 25-year mortgage...

I spent some time recently helping a low-income retired couple, the Wilsons, figure out what to do with their RRSPs now that they are on the verge of having to convert them into RRIFs. They know that because they collect the Guaranteed Income Supplement (GIS), the minimum RRIF withdrawals will reduce their GIS benefits. The question is whether there is anything they can do about this. To protect their privacy, I’m not using the Wilsons’ real names and I won’t reveal their exact incomes or amount of savings. The fact that they collect GIS puts their income into a range, and I’ll reveal that their savings are shy of 6 figures. I took a detailed look at how RRIF income affects the Wilsons’ finances, and one observation is that this is a complex undertaking. Low-income retirees don’t pay income tax, but they do receive a number of different types of benefits that are income-tested. This means that each dollar of RRIF income can reduce their benefits. Not only is the GIS clawed b...

Larry Swedroe has long advocated adding a small amount of commodities to a portfolio to boost risk-adjusted returns. The theory says that while the commodities lower the overall expected return, they more than make up for this with their lowering of the portfolio risk (standard deviation). I’ve been resistant to this idea despite Swedroe’s numerical examples of improved risk-adjusted return. I think I can finally explain my reluctance when it comes to commodities. In Swedroe’s most recent book (see my review here ), he gives a clear example showing the effect of adding some commodities to a particular portfolio based on historical returns from 1975-2011. The portfolio begins with a 60/40 split between various equities and 5-year treasury notes, and has the following characteristics. Before Commodities Annualized Return: 12.4% Annual Standard Deviation: 11.8% He then replaces part of the equities to give the portfolio a 4% exposure to commodities. After Commodities Annu...

Larry Swedroe is well-known for explaining the science of investing, but his latest excellent book Think, Act, and Invest Like Warren Buffett is decidedly less technical and much more accessible to a broad range of readers. The title suggests that the book is about beating the markets with superior stock selection, but it’s really about following Buffett’s advice rather than his actions. The first couple of chapters contain numerous Buffett quotes that make it quite clear that he thinks most investors would be best off investing passively in low-cost index funds rather than attempting to beat the market. With this approach as a starting point, Swedroe uses the rest of the book to explain how to execute this plan. The focus on concepts rather than technical detail makes this book an easy read while still being very useful. One thing that prevents investors from improving is that most have no idea how badly they are performing. A study by Glaser and Weber “found investors overes...

Royal Bank has begun dismantling Ally , the online bank they acquired a few months ago. Customers can’t open any new Ally accounts, and RBC will close existing Ally high-interest savings accounts on April 30. The Blunt Bean Counter says that it is usually a mistake to offer extra information to CRA beyond what is necessary. Million Dollar Journey explains how you might get hit with taxes when transferring the commuted value of a pension into a Lock-In Retirement Account (LIRA) if you go over the Maximum Transfer Value. Canadian Couch Potato points out that while there are problems in the mutual fund industry, not all ETFs are better than all mutual funds. In some cases, the best mutual funds are a cheaper option than ETFs. Money Smarts shows that deciding between an RRSP and a TFSA is a little more subtle than just comparing marginal tax rates before and after retirement. Big Cajun Man chokes on an article that defends the Pay Day Loan industry.

At the prodding of The Blunt Bean Counter , My Own Advisor recently answered a series of questions designed to test how well his personal finances would stand up to different types of stress . I liked the list and decided to give it a shot myself. I like to think that I’m very well-prepared financially, but let’s put it to a test. Here are the questions and my answers. Are you spending more than you earn today? No. My family spends only about half my take-home pay. If your income dropped by 50% for 6 months what would you do? Not much. I would probably delay RRSP contributions until after the 6 months were up. If you needed more income what would you do? I would take one of the job offers I get to do work I don’t really want to do, but pays more than I make now. However, I’d rather just live modestly than spend all my time working. Do you have enough insurance to pay off debts in the case of a death? I have no debts. Do you have a Will? Do both spouses know where ...

I’m a big believer in comparing your portfolio returns to appropriate benchmarks each year. Passive investors need to know if their investments are really tracking the indexes they are supposed to track. Active investors need to know whether their strategies are winning or losing. I was throwing out some old papers and came across an article in a BMO Investorline “Best of the Best” magazine that mentioned both benchmarks and the importance of controlling costs. I was a little surprised by this because a focus on costs and benchmarks would push most investors to cheap indexing strategies that would lower BMO profits. The article discussed “minimizing the costs―management expense ratios (MERs), commissions, etc.―associated with investment selections.” I’m impressed with Investorline for highlighting costs as an important factor in choosing investments. Comparing portfolio returns to the right benchmarks is important as well. If you’re losing to a simple indexing approach year...

I’m getting to like Mark Carney more and more. He was recently quoted as saying “Real wealth is built through innovation, and it’s gained through hard work.”. He’s spot on with the real source of improvements to our lives over long periods of time. Commenting on Canadian housing prices, he continued “It’s not through some magical asset inflation.” On a macroeconomic scale, the wealth gains we’ve had over the decades have been driven by hard work and innovations that make our lives easier and better. These innovations destroy some jobs and create others. The net effect is that we collectively get more for less effort. When governments create jobs through make-work projects or financial stimulus, we are getting short-term solutions. True long-term improvements come from innovation. When it comes to promoting or thwarting innovation there are no purely good actors or bad actors, but generally speaking, the enemies of innovation are large organizations that fight to maintain th...

Jeremy at Modest Money hosted a poll of the best Canadian financial blogs. Thanks to all who voted for this blog. Preet Banerjee did a very interesting TED Talk about changing the way we think about debt. Tom Bradley at Steadyhand sees risk and valuation problems with dividend-based portfolios. Money Smarts believes open houses are useful for selling your home even if some real estate agents don’t think so. My Own Advisor tackles the question of how big a portfolio needs to be before it makes sense to go from mutual funds to ETFs. The answer depends on your costs and trading patterns. The time to switch is when ETF MERs and trading costs add up to less than the MER costs of the mutual funds. This will depend on how much you pay for trades, how often you trade, and other factors. Big Cajun Man has been writing about his TD RDSP troubles long enough that TD tracked him down to talk about it. Million Dollar Journey takes a look at how to optimize your split between RR...

The Globe and Mail offers a number of free retirement and investing calculators including their pay yourself first calculator. (As of 2016 Nov. 2, I noticed that this calculator is finally no longer on the Globe and Mail web site.) I tried poking around with it but couldn’t get it to spit out numbers that matched my own calculations. I’m convinced now that it is broken. This calculator takes in 5 numbers: – Annual salary – Salary increases – Pay yourself percentage each year – Number of years of saving – Rate of return Then the calculator spits out – Total earnings – Retirement fund To narrow down the problem, I tried simple scenarios with 0% salary increases, a 0% rate of return, and a $100,000 income. I set the saving rate to 12% ($1000 per month). Sticking in just 1 year of saving, I get the expected result: – $100,000 in total earnings – $12,000 retirement fund But when I go to 2 years of saving, I get – $200,000 in total earnings – $23,000 retirement fund...

A common goal for investors, particularly dividend investors, is to build savings to the point where they can replace their salary income with dividend income. I have this goal as well, although I’m happy to generate this income from a combination of dividends, capital gains and interest. A critical factor in determining whether you’ve truly reached your goal is whether your capital is still expected to grow at least as fast as inflation after you take your income each year. Some investors say they don’t care about the amount of capital they have saved as long as they hit their income targets. This is fine if the capital isn’t shrinking, but could be a disaster if the capital can’t keep pace with inflation. An investor with the wrong focus could hit an income target quite easily – just find a few stocks with ultra-high dividend yields. I did a simple screen of Canadian stocks that showed 21 stocks with dividend yields between 10% and 20%, with an average dividend yield of 14%. ...

It’s a good idea to check your credit report occasionally to make sure the information is accurate and that your identity hasn’t been stolen to borrow in your name. Online credit report services with fees are heavily advertised, but you can get your reports for free as well. Free reports are available to Canadians by calling both Equifax (800-465-7166) and TransUnion (800-663-9980 (outside Quebec) or 877-713-3393 (within Quebec)). You have to answer a series of questions to authenticate your identity, which involves a lot of punching in numbers on your keypad or saying the answers. I did this recently and it went quite smoothly. My experience with Equifax was better because it repeats your answers back to you before you confirm that they are right. TransUnion said “if you are satisfied with your entry, press 1” after each piece of information I entered, but didn’t tell me what I had entered. In one case I incorrectly entered a date with only two digits for the year instead o...

For many years now I couldn’t see what benefit I was getting from Aeroplan miles. Every time I tried to use the miles to book a flight I wasn’t offered any decent connections, and I ended up just paying for flights that suited me better. Even having Air Canada elite status doesn’t seem to help. But, I found a way to deal with the problem that involves CostCo. Years ago the situation was different. I was actually able to use Aeroplan miles for free flights. And this was back when the flight was actually free instead of having to pay various taxes and surcharges when redeeming miles. But I haven’t been able to use my miles for a flight for a long time now. I even let over 30,000 miles expire at one point because they seemed worthless. Fortunately, there are options for using Aeroplan miles other than reduced-cost flights. Aeroplan offers a large number of goods and services in exchange for miles. Looking through the selection, I despaired of finding anything I wanted until I...

Vendors of personal income tax software impose various limits on the number of returns you can file. However, CRA imposes a hard limit of 20 returns per computer. Why? The seventh entry in CRA’s NETFILE FAQ answers this question. The explanation begins with “The CRA's primary interest is always to protect the taxpayer.” This gave me a chuckle. I can believe that protecting taxpayers is high on their list, but their primary interest is to suck up giant piles of money. OK, moving on. The rest of the explanation is a little vague, but the concern seems to be identity theft. I guess an identity thief with personal information on many Canadians could cause trouble on a large scale with unauthorized use of NETFILE. So there you have it. Anyone who wants to file more than 20 returns needs to NETFILE with multiple computers or could use EFILE which is intended for tax preparers.

Looking at my first paycheque of the year, I feel the sting of Canada Pension Plan (CPP) and Employment Insurance (EI) deductions starting again. I don’t really mind contributing to my future income in the form of CPP, but calling EI “insurance” always irked me because I thought my income level made it nearly impossible for me to ever collect. There are clawback provisions for any EI benefits you receive over and above paying normal income taxes on the benefits . I had assumed that if my year’s pay was too much above $60,000, any EI benefits would be clawed back anyway. It turns out that there is an exemption for anyone who hasn’t collected any EI benefits in the preceding 10 taxation years. So, while I don’t expect to be involuntarily unemployed, in principle I could collect EI benefits for a while and not have them entirely taxed back. This could only happen once every 11 years, but at least this insurance has modest value to me. So, instead of viewing EI deductions entirely...

The Royal Canadian Mint will no longer distribute pennies as of today . I say good riddance. It’s been decades since a penny was worth enough to matter. It seems that one of the most convincing arguments for getting rid of the penny is that they cost more than a penny to make . I don’t see why this has anything to do with it. If the government could make $1 million worth of pennies for $800,000 in costs, should we say that they have made a $200,000 profit? They could just as easily make $1 million worth of $100 bills for far less than $800,000 in costs. For that matter, they could just create money that only exists in bank computers for next to no cost. Suppose the government could make coins out of a very cheap metal with face value 1/10 of a cent at a cost of 1/20 of a cent each. Should they do this to make a 50% profit? The answer is obviously no. What is the point of a coin worth only 1/10 of a cent? Whether the coin is “profitable” is irrelevant. What matters is th...

MoneyNing has a great infographic illustrating the best and worst company retirement savings plans in the U.S. The difference between the best and worst plans is more than enough for a Virgin Galactic flight to the moon. Canadian Mortgage Trends explains the pros and cons of collateral mortgages. One thing I would add is that because a collateral mortgage is more expensive to transfer to another lender, it allows your existing lender to charge you a higher interest rate when you renew. Potato continues the housing debate arguing that an improving economy will bring both higher wages and higher interest rates, but that mortgage payments will rise faster than wages. The Blunt Bean Counter finds estimates of the cost of owning a dog to be low. I always tell people I have the perfect dog. It costs me nothing, I see as much of it as I want, and it lives the rest of the time next door. (My neighbour might experience higher costs than I do.) Retire Happy Blog explains the ru...