Most of us have heard of wealthy families setting up trusts. We have a vague idea that they’re set up to reduce taxes or provide a controlled income to young beneficiaries. Income taxes on trusts can get complex. But people who set up trusts know what they’re getting into and are usually prepared to pay an accountant. However, as I found out, there’s a type of trust that comes into existence automatically. When a person dies, their executor must file a final tax return by tax-filing season the next year (or 6 months after death, whichever is later). However, this final tax return only applies to income that arrived before or at the person’s death. There are many easy-to-understand websites that explain these tax rules and basic tax-preparation software can handle these returns. But what about the income that comes after death? If there is no surviving spouse, it takes a while to distribute assets to beneficiaries. In the meantime, RRSPs, RRIFs, TFSAs, houses, and other asse...

When it comes to investing, we should keep things as simple as possible. But we should also keep costs as low as possible. These two goals are at odds when it comes to choosing between Canadian and U.S. exchange-traded funds (ETFs). However, there is a good compromise solution. First of all, when we say an ETF is Canadian, we’re not referring to the investments it holds. For example, a Canadian ETF might hold U.S. or foreign stocks. Canadian ETFs trade in Canadian dollars and are sold in Canada. Similarly, U.S. ETFs trade in U.S. dollars and are sold in the U.S. Canadians can buy U.S. ETFs through Canadian discount brokers but must trade them in U.S. dollars. Vanguard Canada offers “asset allocation ETFs” that simplify investing greatly. One such ETF has the ticker VEQT. This ETF holds a mix of Canadian, U.S., and foreign stocks in fixed percentages, and Vanguard handles the rebalancing within VEQT to maintain these fixed percentages. An investor who likes this mix of glo...

We hear a lot about how tough it is for young people to afford sky-high rents today. However, many of the articles I read measure affordability of renting for a single person of modest income. When I was young, few young people could afford rent on their own. Most rented rooms in a house or went in with one or two others to cover rent. This left me wondering if rents really are tougher to afford than when I was young. The last time I rented was decades ago, but I still remember what I paid. Using the CPP maximum pensionable earnings as a proxy for the rise of wages, the townhouse I rented years ago with my wife should cost $1180 per month today. But, a nearly identical place currently rents for $1760 per month. This is just a single example, but it appears to be typical of rents across my city. Renting now takes about a 50% bigger bite out of wages than it did when I was young. So, to the baby boomers who remember how hard it was to make rent decades ago and who might doub...

I managed one post in the past two weeks: Estimating the Value of 0% Financing Here are some short takes and some weekend reading: Robb Engen at Boomer and Echo looks at the range of investment options from the point of view of doing it the easy way or the hard way. He finds the right balance of costs and convenience with owning one of Vanguard Canada’s all-in-one portfolio exchange-traded funds with the ticker VEQT. He avoids the troubles and potential mistakes that come with owning U.S.-listed ETFs. However, there is a middle ground. One can own a base of VCN and U.S.-listed ETFs along with some VEQT so that most rebalancing doesn’t require currency exchanges. This approach is still more complex than just owning VEQT, but eliminating most currency exchanges reduces complexity and the possibility of errors significantly. The benefit of this compromise approach is lower costs than just owning VEQT. Canadian Couch Potato talks to Dr. Stephen Wendel, Head of Behavioural S...

I recently helped a family member buy a new car. She was paying cash for the car, so we had to estimate the value of the 0% financing offered to figure out a sensible price to pay for the car. The key factors that matter for estimating the value of low financing interest rates are duration and interest rate reduction. For example, suppose financing is offered for 4 years at a rate that is 4% below a competitive interest rate. This is a total of 4x4%=16%. However, if the car will be paid off over 4 years, the average balance owing will be close to half the price of the car. So, the value of the financing is about 8%. For this example, you can reduce the car’s MSRP by 8% as a starting point for a cash sale negotiation. This is equivalent to paying the full MSRP and taking the financing. From there you can negotiate down from the adjusted MSRP. It was interesting to talk to multiple dealerships and take this approach. A couple just pretended they didn’t know what I was talki...

Here are my posts for the past two weeks: Switch: How to Change Things When Change is Hard How Fast Will Your Portfolio Shrink in Retirement? Here are some short takes and some weekend reading: Preet Banerjee explains why you should never accept a foreign merchant’s offer to let you pay in your home currency. Benjamin Felix compares renting to owning a home in terms of unrecoverable costs. Big Cajun Man can probably hear the circus music after completing another round with CRA. They’ve accepted both halves of his documentation, but not both at the same time.

Once you’re halfway through retirement, you’d expect about half your savings to be gone, right? This turns out this is very wrong when we don’t adjust for inflation. The return your portfolio generates causes your savings to hold steady for a while and then fall off a cliff. I read the following quote in the second edition of Victory Lap Retirement : “A recent Employee Benefit Research Institute study found that people in the U.S. who retired with more than $500,000 in savings still had, on average, 88 percent of it left eighteen years after retirement.” Frederick Vettese provided further detail. This 88% figure is the median rather than the average. This statistic was used as proof that retirees aren’t spending enough. After all, if you planned on a 35-year retirement, half the money should be gone after 18 years, right? Not even close. Below is a chart of portfolio size based on the following assumptions. - annual portfolio return of 2% above inflation - annual wit...