Well, I’m a twit now. It seems that twitter is taking over blog feeds and blog comments. So, I’m now @MJonMoney on twitter. I take pride in my ability to be clear and concise, but the 140-character limit is a challenge. Here’s hoping that this leads to more useful interaction with my readers. Feel free to tell me what I’m doing wrong on twitter as I muddle through. My goal is to make my ideas conveniently accessible to people who want to read them without too much shameless self-promotion. Have a great New Year’s Eve party. Saving tip: to spend less on pills tomorrow, drink less tonight.

Just in case you need a reason to save more of your hard-earned money instead of buying yet another electronic gadget or pair of shoes, here’s a good one: the TFSA and RRSP contribution room you didn’t use in past years has been shrinking. Perhaps when you decided you didn’t have enough money to save any in a tax shelter last year you felt safe knowing that you’d be able to use the room in the future. Some magical time will come when you can save enough money to use up past room. But the trouble is that your available room has a leak. Dollars this year are worth less than dollars last year, and those dollars are worth less than they were the year before. So, let’s stop talking about dollars and start talking about loaves of bread (as a proxy for the cost of living). Suppose that your $5000 TFSA allotment from 2009 amounted to 2500 loaves of bread. The Consumer Price Index (CPI) in Canada has gone from 113 to 123 since the start of 2009. If you haven’t used this 2009 TFSA ro...

During Christmas week I wrote only one post, but I enjoyed writing it: Which Takes a Bigger Bite from Your TFSA: Income Taxes or Mutual Fund Fees? There weren’t too many financial posts this week, but here are a couple for some weekend reading: The Blunt Bean Counter explains how being named an estate executor can leave you handling two estates at once. My Own Advisor did a 2013 retrospective of his favourite posts each month.

Getting into the Grinchy side of the Christmas spirit, I thought I’d take a look at how both income taxes and mutual fund fees affect TFSA savings. The effects of these costs will vary considerably from one person to another, so we’ll just look at one particular case. From stage left, our saver Sally enters. She saves $5000 in her TFSA every year (rising with inflation) starting from age 25 until she retires at age 65. We’ll assume that she makes a return of 4% above inflation each year (before fees). From age 65 to 85, she draws $15,000 per year to live on (in today’s dollars). For Sally’s tax bite, we’ll look at how much income she had to earn to make the $5000 TFSA contribution. Let’s assume that Sally lives in Ontario and earns between $87,907 and $136,270 so that her marginal tax rate is 43.41%. This means she has to earn $8835 to get $5000 after income taxes. This makes the tax bite on her TFSA contribution $3835 per year. For the bite of mutual fund fees, let’s assu...

Solving the technical issues with my blog seems to have re-energized me for writing new posts. I have 3 this week: Do Stocks Become More or Less Risky Over Time? The Third Rail How Mutual Fund Fees Delay Retirement Here are my short takes and some weekend reading: Preet Banerjee explains his decision to rent instead of buying a home. Canadian Couch Potato explains how the slim chance of outperforming the market gets in the way of investors embracing index investing. Potato asks why do pensions exist if the future is discounted? A good question. I offered possible answers in the comment section. Boomer and Echo explain the CPP child-rearing dropout provision you may be able to use to increase your CPP benefits. I didn’t know that this dropout could be used by either parent. Big Cajun Man says you should scan your bills instead of keeping a bunch of paper around. Fortunately, I’m getting a lot of my bills electronically now. But most of my receipts that are r...

In my never-ending quest to clearly explain the devastating effect of investment fees on your savings, I’ve found another way to look at it. Instead of looking at how much of your money gets consumed by mutual fund fees, let’s look at how they affect your retirement age. Suppose that Katie is 30 years old and is just starting out saving in her RRSP. She has set up automatic contributions of $1000 per month. She plans to increase this amount each year to keep pace with inflation. Katie wants to know, “if I plan to draw $3000 per month (in today’s dollars) in retirement until I’m 95, when can I retire?” The answer depends on how her RRSP investments perform. For illustration purposes, let’s assume that her investments beat inflation by 4% per year, before investing fees . Of course, she can’t count on this, and returns vary considerably from one year to the next. But the goal here is to see how fees affect retirement, so we’ll do calculations based on a steady 4% real return. ...

Canada’s pension system is in trouble and we need to do something about it. This is the main message of the book The Third Rail , written by Jim Leech, CEO of the Ontario Teachers’ Pension Plan, and Jacquie McNish, senior writer with the Globe and Mail. The book is a fairly easy read and is worth a look. The authors take a detailed look at pension crises in New Brunswick, Rhode Island, and The Netherlands, and describe how the problems were solved. A common theme is that the pension plans were changed to make benefit levels conditional on the returns on pension assets. On one hand this makes a lot of sense. We can’t expect pension backers (taxpayers or companies) to grow benefits faster than they can grow the savings set aside to pay those benefits. On the other hand, if we make cost-of-living increases conditional on pension asset returns, this automatically takes the pressure off pension administrators to manage the funds well. They can award themselves excessive fees or all...

A very thoughtful post over at How to Invest Online looked at the opinions of various investment theory heavyweights on the question of whether owning an index of stocks becomes more or less risky the longer you hold them. I want to address the argument that because “the spread of possible ending dollar values get wider, not narrower, with time,” stocks keep getting more risky over time. At its core, this argument is playing a semantic game with the word “risk”. To explain what I mean, imagine you have the chance to invest in the following hypothetical investment: 1or2 investment : Each month you toss a fair coin. If it comes up tails, you get a return of inflation+1%. If it comes up heads, the return is inflation+2%. This looks like a fantastic investment. After one year, you’ll beat inflation by between 12.7% and 26.8%. Even the worst-case scenario gives a better return than most of us could possibly hope for. The 1or2 investment is risk-free in the every-day sense of ...

In addition to my appeal for help to keep my blog alive, this week I wrote about group RRSPs which generated quite a bit of discussion in the comments section: Employer Matching in Group RRSPs Here are my short takes and some weekend reading: Potato finds problems with an online calculator designed to help you decide whether you’re better off renting or buying a home. Retire Happy Blog reports that Service Canada’s online CPP calculator sometimes produces wildly inaccurate estimates of your future CPP benefits. Where Does All My Money Go? is offering a nearly half-off deal on pre-orders of Preet’s new book Stop Over-Thinking Your Money! Big Cajun Man describes a devious tactic used by furnace salespeople that worked on him. Canadian Couch Potato explains when it’s better to hold a U.S.-listed ETF and when it’s better to hold its Canadian equivalent. My Own Advisor finds out what’s in the Big Cajun Man’s personal investment portfolio. Million Dollar Journey desc...

My employer didn’t get much uptake when it first brought in an insurance company to offer a group RRSP because there was no employer matching. However, this has just changed. The question is how valuable is the employer match balanced against the high MERs on the pooled funds offered in the plan. My new group RRSP plan is fairly generous: they match half of my contribution up to a maximum of 5% of my base pay. So, if I contribute 10% of my base pay, my employer will kick in another 5%. That’s the good part. The bad part is that when I poked around in the investment options, the cheapest fees were on an index fund of Canadian stocks. The fees were listed as 1.401% per year (very high for an index fund). However, fee reporting on pooled funds is not the same as with mutual funds. As it happens, this percentage includes both the fund’s fees and the insurance company’s cut, but does not include HST or trading costs. I have no data on trading costs for this fund, but presumably ...

With some help from my readers, I managed to renew my domain registration. Not to bore you with the details, but there is an amusing bit: the solution involved resetting the password for an account I didn’t know existed from a year-old password reset email I received after first getting my domain. I always feel bad whenever I blog about blogging. In this case, I was rewarded with several suggestions from readers that added up to a solution. Thanks to the Big Cajun Man , Bet Crooks , Kevin Chmilar, Glenn Cooke , and Neil Jensen for suggestions and offers of help. Thanks also to Tom Bradley , Greg, Tara C, Be*en, Returns Reaper, Trish M., and an anonymous reader for assuring me that I’d be missed. Sorry if I forgot anyone. Some actual financial content: If I take the number of hours I spent solving this problem, and work out how much I would have been paid for this time at my day job, the resulting sum is the equivalent of 16 months of my blog’s income!

Update: With the help of some readers, the problem appears to be solved.  Thanks to all! Writing this blog has been a great journey for me that I’d like to continue. However, I’m caught in the strange situation of being unable to renew my domain registration. It’s only $10 or so, but after sinking about 15 hours of my time over the past month into trying to get Google to take my money, I’ve made no progress. I’ll describe the gory technical details at the end of this post. It’s not that my blog will disappear entirely, but I would have to go back to the old Blogspot address or try to register some new domain name. Either way I’d be facing losing my current PageRank which would lead to big loss in readership. I’m not sure yet if I’ll want to continue writing with this kind of setback. Other bloggers have tried hard to get me to leave Google’s Blogger and use WordPress. I have little doubt that WordPress is usually easy to use and has powerful features. However, when I a...

I wrote about TFSAs this week: Forgone Consumption More Confusion Comparing TFSAs to RRSPs Tax-Free Savings Accounts – How TFSAs Can Make Your Rich Here are my short takes and some weekend reading: Carl Richards wrote a piece for the New York Times explaining that data exists to help us make good decisions in sports and investing, but coaches and investors make guesses instead. Rob Carrick reports that more mutual fund companies are creating Series D funds that have some costs stripped out. This is a step in the right direction, but the MERs are still generally above 1% of your assets every year. Because I pay less than 0.2%, I find this still very high. Canadian Couch Potato has the most thorough guide I’ve seen yet for saving money on currency conversions using the Norbert gambit. It includes instructions for RBC Direct Investing, BMO InvestorLine, TD Direct Investing, CIBC Investor’s Edge, and Scotia iTrade. Retire Happy Blog explains why mutual fund distribut...

The book Tax-Fee Savings Accounts – How TFSAs Can Make You Rich , by Gordon Pape, is a very useful guide to TFSAs. Broadly-speaking, the book contains two types of content: 1) easy-to-understand descriptions of the various TFSA rules and 2) advice for how to use a TFSA. The descriptions of the rules are excellent. The advice contains both good and bad parts. This book is useful for financial novices as well as experts. I won’t discuss the material aimed at novices any further in this review. Instead I’ll discuss parts that I found interesting and parts where I disagreed. Some Important Fine Points of TFSA Rules “Never contribute a money-losing security directly to a TFSA. Sell it first, thereby creating a deductible capital loss, and then put the cash from the sale into the plan.” When you deposit stocks directly into a TFSA, the stocks are deemed to have been sold. You would have to pay capital gains taxes on any gains, but capital losses are not allowed. You can’t “re...

When comparing TFSAs to RRSPs, it’s important to consider only the after-tax portion of your RRSP balance or you’ll be led astray. The concept of forgone consumption is helpful. Here I look at how to compare TFSAs and RRSPs when it comes time to draw from them in retirement. In the third edition of his book Tax-Free Savings Accounts – How TFSAs Can Make You Rich , Gordon Pape includes a section on questions he has received from readers. Unfortunately, the answer he gives to one of the question leaves much to be desired. Here is a paraphrase of the question: Q: I expect to run out of non-tax-sheltered investments in about 5 years. When this happens, should I start drawing from my RRSP or TFSA? Here is Pape’s answer: A: “Let’s suppose you have a $5000 investment in each plan earning 7 percent annually. Five years from now, that investment will be worth $7012.76. Now you are faced with a withdrawal decision. If you take the money from the RRSP, using a marginal tax rate of...

People tie themselves up in knots trying to compare RRSPs to TFSAs. Even well-known author and newsletter publisher Gordon Pape has some difficulty. The idea of forgone consumption helps to simplify things. It’s important to understand how much you’re really saving when you put money in registered accounts. With TFSAs, the situation is simple. If you deposit $3000, then you’ve saved $3000. RRSPs are more complex. If you’re in a 40% tax bracket and deposit $5000 in an RRSP, you’ll get $2000 back in taxes. Your forgone consumption is only $3000. RRSPs are easier to understand if you think in terms of only having saved $3000. Think of the other $2000 as belonging to CRA. Suppose that over 30 years your money grows by a factor of 10. Your TFSA now holds $30,000. In the RRSP, your part has grown to $30,000 and CRA’s part has grown to $20,000. If you withdraw $10,000 from your RRSP and your tax rate is still 40%, you’ll get to keep $6000 from your part and CRA will get $4000...