Am I Oversaving For Retirement?

Am I Oversaving For Retirement?

Your boy Nelly has long been a fan of RRSPs, even preferring them over TFSAs for a lot of people.

Basically, the logic goes like this. As long as you’re making a decent amount of money, you’ll trigger a nice immediate tax refund by investing in your RRSP. That refund can then be reinvested. If you’re in the 25% tax bracket, it’s basically like getting a 25% guaranteed return and then you get years of compounding on that return.

To really illustrate the power of this, allow me to consult my oldest and best friend, the compound interest calculator.

Reinvesting $2,500 of free money turns into an additional $16,000. All you have to do to make that money appear is to reinvest your tax refund, which you only got from contributing to your RRSP in the first place. It’s truly amazing.

If you do this for a decade you can really see how immediately reinvesting that tax refund starts to add up. All it takes is a 10-15 years of investing a decent amount when you’re young to ensure there’s enough for retirement.

But we often forget about what happens once you hit retirement age. That cash has to be taken out, which becomes a problem if you’ve got a mil or two sitting there. Not a big problem, mind you, but a problem nonetheless. Just how can you deplete your RRSPs without paying a boatload of tax?

I’ve been thinking about this lately. I first started contributing to my RRSP as a slightly chubby 15-year-old flush with cash from my first job. That contribution was approximately $500 and God does that make me feel old today.

Surprisingly, the 15-year-old ladies of 1998 were not impressed with my savings ability. It’s okay though; they’re all clearly lesbians.

Remember, there were no TFSAs back then. So I continued to contribute despite not having much of a tax liability. I consistently put money away over the years to the point where I’m now sitting on some pretty solid RRSP assets.

I’ve crunched the numbers and if I compound these assets at 8% for the next 30 years — which is when I’ll hit the traditional retirement age — I’ll have well over $1 million in just RRSPs alone. I should also have another $1 million from my TFSA, which I plan to max out annually for as long as I can.

I’ve also got stocks and other investments outside of these registered accounts.

So what’s a guy to do?

The problem with all this is I’m looking at big tax bills when I hit age 65. I guess I can delay it until age 71, when I’ll be forced to contribute 4% of the portfolio.

Say it’s worth $1 million even. I’ll have to withdraw $40,000 per year that first year and then even more going forward. If I have a portfolio spinning out lots of tax-efficient dividend income (which is the plan). I add the $40,000 per year — which is fully taxable — to say $50,000 in dividend income and I’m looking at a relatively high tax rate.

And that’s assuming I only get $50,000 in annual dividend income. Considering our savings rate today and having 30 years of growth ahead of us we could easily have $150,000 to $200,000 in household dividend income by the time I hit retirement age.

It was valuable to me to defer tax when I was younger. But the more I look at it the more I realize deferring tax is no longer the right answer for me. I will likely only contribute during heavier taxed years going forward, choosing instead to channel savings into my TFSA and taxable accounts.

Yes, you can oversave for retirement

Is oversave one word or two? Screw it, I’m going with one. Even if Google doesn’t agree with me.

Somebody who blindly invests the maximum into their RRSP for their entire 45 year working life is doing it wrong, IMO. They’re going to end up with a massive amount of money set aside that’ll all have to be withdrawn at a high tax rate.

The better strategy is to end up with a moderate amount in your RRSP and go nuts maxing out your TFSA.

But at the same time, this only really applies to the very small percentage of the population that has consistently maxed out their RRSPs as a young person. If you’re 40 and are sitting with $25,000 in your RRSPs ignore this whole post and put in as much money as you can afford. Your problem is saving enough for retirement, not avoiding tax caused by oversaving.

Essentially, I’m getting close to oversaving for my retirement. If I don’t settle down on the RRSPs I’ll have a big tax bill when I get older. I’m the first to admit this is the very epitome of first world problems, but it’s still something I’d like to avoid.

Weekly Linkfest #33

Weekly Linkfest #33

Finally, an excuse to put up a Patrick Roy picture. My favorite memory of him was definitely when he sent his kid out to fight some other kid during a junior hockey game. So crazy. I love it.

Junior hockey used to be absolutely bananas. That was only 10 years ago! The younger Roy was charged in the incident, but got away with a slap on the wrist. He had quit hockey at that point to pursue a singing career in the United States, which probably had something to do with it.

I just listened to one of his songs on Youtube. It’s not terrible.

This was a fun little rabbit hole. Kind of like when I used to click random on Wikipedia until something interesting came up.

I recently acquired a new television for my basement, a second-hand unit that only has a mere 720p resolution. Since the majority of my TV watching will be video from the internet and the occasional PS3/SNES/NES Classic video games, this isn’t a big deal.

Our current upstairs TV is a 32 inch beast from about 10 years ago. It had two appeals when I first got it — the unit had a built-in DVD player (which is super convenient for the three times a year we pop in a disc) and it was free. It has served us well over the years.

I just instructed the wife to hug the TV for being so good to us. For some reason she’s opposed to this.

The new TV is 42 inches, and it seems absolutely MASSIVE in comparison. I’m sure there’s a lesson in expectations in there or something but for now I’m just enjoying watching Jonathan Roy music videos while talking to you guys.

Time for Links

The only good thing about waiting so long between these link roundup posts is it’s a lot easier to come up with a bunch of good stuff. I’ll even sneak in a little bit of my own writing from other sites too.

1. Let’s start things off with my new favorite genre of article, those that shit on your local 35-year old’s retirement dreams. I continue to say that striving to save as much as you can is admirable goal, and there’s nothing wrong with making life changes to maximize your free time if that floats your boat. I’ve done exactly that. I just hate that we call it “retired” and there are hundreds of “retired” bloggers who make millions collectively selling that dream.

2. If you’re on Twitter and I notice I’ve liked something, chances are you’ll see it here. Either that or someone’s posting excerpts of some interesting-sounding book. On that note, here’s probably the most scathing book review I’ve ever read, absolutely eviscerating Ray Dalio’s Principles. I’m just happy I wasn’t the only one who hated it.

Seriously, what a boring book. Don’t waste your time.

3. Let’s pivot to something completely different. Here’s Value Stock Geek admitting his struggles with alcoholism. This is a brave post that takes more intestinal fortitude than I have to write. One of the reasons why I don’t touch the sauce is because I know something like that could very well happen to me.

4. One of the reasons why I didn’t venture to Toronto for the recently concluded Canadian Personal Finance Conference was because the theme of “pushing the boundaries of personal finance” didn’t really do it for me. I still have no idea what the hell that’s supposed to mean, and listening to a former Hudson’s Bay exec talk about personal finance doesn’t seem like something worth my time. Anyhoo, here’s Million Dollar Journey opining on the same topic, and he concludes pretty much what I do — that there aren’t really many personal finance topics that haven’t already been fully analyzed.

5. My Money Wizard might be the best personal finance blog you’re currently not reading. Or maybe you are. He profiles Orville Rogers, a retired pilot who used smart investing and a long lifespan to amass a crapload of money. It really can be that simple guys.

6. The Stronach family is currently suing the crap out of each other about what else — money. Currently, dad Frank and brother Andrew are upset with Brenda, the former politician/lover of Peter McKay. We’re talking some pretty serious money here; the dad’s lawsuit is for $250 million. Now I’m kinda bullish on Magna and I’m so happy none of the family is still actively involved in the company.

This is a good set of links. One of my better collections lately.

7. Let’s sully things up with a little bit of my own writing. I told millennials how they can generate a $10 million TFSA by investing well over a long period of time. It really isn’t that hard. I also wrote about why I recently added Canadian Utilities to the ol’ portfolio.

8. I wrote a portfolio update over at Canadian Dividend Investing, which is where you want to go to see what I’m investing in these days. I might merge CDI with FU at some point but I also realize the people who read my investing stuff might not want to read my PF stuff. And vise versa. I dunno. Voice your opinion in the comments if you have strong feelings about what I should do.

9. Cold and Rich offers a alternate solution for your emergency fund — putting the cash to work in preferred shares, which yield 5%+. If I was liquidating my portfolio and needed cash I’d turn to the bonds/preferred shares first. Hell, bonds only exist in my portfolio to eventually be invested in stocks. I just don’t need the cash right now.

10. Dale Roberts from Cut The Crap Investing offers a piece of investing advice I wish I followed 15 years ago — buy the bank stocks, not mutual funds. I owned both TD and BMO at much lower prices than today, picking them both up as a much younger man. I remember TD shares being worth $27 each when I bought them. They’ve split since then and are now worth $72. Sigh.

11. Mortgage rate comparison site RateHub recently announced it was acquiring MoneySense, a decades-old institution in Canadian personal finance. It’ll be interesting to see the direction they take their new acquisition; if RateHub itself is any indication, look for a lot of posts on why you need a new credit card.

12. Boomer and Echo listed their 2019 goals, including such major milestones as continue contributing to a TFSA and spend some money on a vacation. It highlights something we should all know but us bloggers don’t focus on because it’s shit for pageviews — good financial goals should be boring. The outlandish stuff just doesn’t get done.

13. And finally, here’s Rob from Passive Canadian Income, who’s contemplating buying a rental property. An interesting look at the mindset of a first-time real estate investor. These days my real estate investing is limited to REITs, but it’s fun to read about someone else’s experience.

14. One more before I go. Here’s David Chilton talking about how he invests. It turns out it’s not just gold-plated scissors all the time. Get it? Because he’s the Wealthy Barber? WHATEVER I’D LIKE TO SEE YOU COME UP WITH SOMETHING BETTER.

How about David Chilton encourages investors to cut their investing fees by putting their money to work in low-cost alternatives?

Damn you.

And that’s about it. Have a good weekend, everyone.

Fund Review: Pender Growth Fund

Fund Review: Pender Growth Fund

It’s not very often I’ll talk about some closed-end fund on the TSX Venture Exchange (which is basically the trailer park of North American stock exchanges), but the Pender Growth Fund is actually pretty interesting.

The Fund

The Pender Growth Fund (TSXV:PTF) isn’t like the average mutual fund. It doesn’t simply buy stakes in publicly traded companies. I’ll let the fund’s website do the explaining for me. No, you’re lazy.

Pender Growth Fund is a closed-end investment fund invests in opportunities identified by the Pender Investment team. The Fund aims to uncover unique investment situations in small but profitable companies, often in the technology sector. We invest in both public and private companies and look to invest in businesses that have hit an inflection point.

The Fund has invested in a number of publicly listed companies with an emphasis on established businesses requiring capital for growth, expansion or restructuring. In each situation, the Fund’s capital has been invested to improve the equity value of the company.

This results in, uh, some interesting holdings. A real list of blue chips right here.

Is that the worst Photoshop you’ve ever seen? Probably!

The joke was a crime against humanity too.

Uh, Italics Man?

Yes?

This is Nelson’s mom. You’ve made him cry and he’s not coming back until you apologize.

Finally. All my dreams have come true.

You’ve also probably noticed the size of the fund by now. With just over $17 million in assets, the Pender Growth Fund is basically a rounding error when compared to most mutual funds. Even when looking at the closed-end variety, which are usually not big.

The size actually works to the fund manager’s advantage, since he’s not forced to make a whole bunch of investments to get all the capital invested. Remember, these are tiny companies Pender is investing in. They’re not putting much more than $1 million to work in any one of these organizations.

One note before we move onto how well this fund has done. It charges a big management fee. You’re looking at a 2.5% fee taken off the top every year, and the manager is taking an additional 25% of the profits on any returns past 6% annually. So if the fund returns 10%, the manager gets 3.5% of that. Some people might consider that a bit excessive.

Performance

Let’s put up a chart comparing the Pender Growth Fund to the TSX Composite Index (as represented by XIC, the ETF that tracks that index).

You see that red line that hasn’t done anything? You probably assumed it’s just symbolizing where zero is. No, it’s not. That’s the TSX Composite performance, which is up a little over 30% in the last decade. The Pender Growth Fund is up 2,553%.

To put it another way, the Pender Growth Fund went from $0.13/share a decade ago to $3.32 today. It’s actually down considerably from its 52-week high, which flirted with $5.

And that’s after those terrible management fees. Absolutely bananas.

You forgot all about the management fees once you saw those returns, didn’t you?

Should you buy the Pender Growth Fund?

Can the fund’s manager, David Barr, continue his glorious success with the Pender Growth Fund? That’s ultimately what this comes down to.

It has a few things going for it. With a current market cap of approximately $14 million — the fund’s value has gone down since it posted those top holdings — there’s still plenty of room left for growth. Barr is also portfolio manager of the Pender Small-Cap Opportunities Fund, another mutual fund that has absolutely crushed the market despite its high fees. You might argue he knows what he’s doing.

It’s hard to analyze the underlying holdings in a fund like this one. We’re putting a lot of faith in Barr and his team. These folks have performed in the past, but as we all know past performance doesn’t really mean squat going forward. Still, it’s obvious the people at Pender are good investors.

Finally, we have to remember there really aren’t many ways to get this kind of exposure in your portfolio. The Pender Growth Fund is akin to venture investing, something the rest of us can’t really access. Even if we could, I doubt we’d do a very good job at it. So it makes sense to have Pender doing it for us.

Ultimately, I don’t hate the set-up as it stands today. Sure, Pender gets paid generously when the fund performs well. But that’s okay, since their incentives are aligned with mine. They want the value to go up just as much as I do.

I don’t own this fund currently and probably won’t buy it because I lean dividend investing these days, but it’s interesting.

Screw It. I’m Not Tipping Any More

Screw It. I’m Not Tipping Any More

Oh God. What a jerk. Why do you hate the working poor?

It turns out they’re not so poor, Italics Man. About a week ago the National Post ran a story about tipping in Canada, arguing that servers were surprisingly well paid. In fact, a waitress making six figures is surprisingly common.

Read the whole article. It is absolutely bananas. Some takeaways:

  • The average server is making about $30/hour including tips. This is about what a registered nurse makes
  • Recent minimum wage hikes in both Ontario and Alberta could make this total even higher
  • Servers give an average of $2/hour to the kitchen staff, meaning cooks average about $15/hour
  • Tax evasion on tip income is rampant
  • Only 9% of Canadians ever deviate from their standard tip, automatically debunking the “tip for good service” myth
  • It encourages restaurant theft (servers give free food/booze to customers in exchange for larger tips

This is a goddamned outrage, and it’s about time the rest of us working Joes do something about it. Allow me to start.

I’m no longer tipping. Fuck it. I’m done.

These people don’t get a living wage? Bullshit. A server in Alberta is paid $15/hour, which is a fair wage for basically relaying a message to the cook. Oh, you brought me a water? Thanks, but I’m not sure how that’s worth about $5.

There are dozens of different jobs that only make minimum wage yet are getting sweet bugger all for tips. The cashier at the grocery store gets you checked out in an efficient manner and will likely tell you about great deals you’ve missed. Where’s their tip button? It’s the same thing with that poor bastard working at the cell phone place or the guy who drives people around for the car dealership. Either everyone gets tipped or nobody does.

Consumers have the power. Servers know they’re screwed if you decide not to tip. They have to wait until after the meal to get paid. What are they going to do at that point? They’re screwed.

(Fun fact: in Montreal they will yell at you if you only tip 10%. This did not go over well when they tried it on my wife.)

A caveat

Here it comes. Watch Nelson backpedal guys. 

If I lived in a big city, you bet your ass I’d stop tipping tomorrow. But I don’t. I live in a small town where I go to the same five restaurants over and over again.

(Note that if I lived in a city with 1,000 different dining options I’d start my no tipping policy immediately. The next time I eat at a restaurant where they don’t know me it’s exactly what I’m going to do)

So here’s what I’m going to do. First up, I’m going to restrict my eating out. I know, such sacrifice.

I’m also going to be more inclined to choose fast food when I do leave the house in search for food. Sure, a burger and fries at my local diner for $15 (plus tip, naturally) is a lot better than a $9 Big Mac value meal, but it’s not twice as good. Besides, the Big Mac combo ends up being less calories simply because there’s way less food there.

Next, if I hear any stories about a local restaurant tip shaming anyone in any way, I will immediately stop going to that establishment. Especially if a manager is involved in any form.

Finally, I will tip a flat 15% when I go out to a local restaurant. Note that the only reason I’m doing this is for insurance. Because let’s face it, that’s what tipping really is. It’s simply an exchange of money for feeling confident about the food that’s coming out to the table.

Who’s with me? Let your voices be heard in the comments! It won’t do anything but it’ll feel good, dammit.  

Everything You Know About Canada’s Real Estate Bubble is Wrong

Everything You Know About Canada’s Real Estate Bubble is Wrong

Let’s talk a little about Canada’s real estate market. We might as well start with Toronto and Vancouver, AKA Bubble Central.

What’s that? I’m being told 2014 Nelson would like to chime in. This is highly irregular, but I guess we’ll allow it.

GODDAMN YOU GUYS THE BUBBLE IS GOING TO BURST AND IT’S GOING TO BE BAAAAAAAAAAAD.

Wait, Nelson. One thing before you go. How’d you get access to a time machine?

YOU READ MY ARCHIVES YOU DOPE.

You’ll have to forgive the all-caps. 2014 Nelson was a little bit angrier than today’s version, who is all about calmness and cute kittens.

After many hours of research and some critical thought about my long-held assumptions, I began to realize about a year ago how wrong 2014 Nelson was about Canadian housing. The fact is places like Toronto and Vancouver have expensive housing because everyone wants to live there.

Say you’re an immigrant who’s won the right to come to Canada. Where are you going to go — Nelson’s hometown of 10,000 people in rural Alberta or a place filled with all other nationalities? Sure, the potential to be my friend is pretty strong, but I’m betting you’d pick the city.

I’m the first to admit a large city has all sorts of amenities my small-ass town just can’t offer. Our airport doesn’t even have a full-time employee. Our local hospital sends anything more complex than a runny nose to Calgary. Hell, our Wal-Mart isn’t even a Supercentre.

It’s basically a third-world country is what I’m saying. I’m going to push to get that on the next tourism poster. Wish me luck!

Now don’t get me wrong. I still wouldn’t be caught buying a place in Toronto or Vancouver. I just couldn’t bring myself to pay the premium. But I totally understand why someone would. And have you seen the rental market lately? Hot diggity damn.

Read this and weep if you’re a Toronto renter. The best cleavage in the world isn’t getting you that apartment. FINALLY, A CLEAVAGE REFERENCE ON FINANCIAL UPROAR. So you’d buy, because spending a lot to live in the city is preferable to being Nelson’s neighbor even though I promise I’ll totally throw all my trash into the other neighbor’s yard.

The rest of Canada

One of the most-cited affordability metrics for real estate is a simple as it is powerful. You take the average house price and divide it by average household income. Generally, a market that sits between 3-4 times earnings is considered reasonably affordable, at least historically.

Let’s take a look at national price-to-income ratios in Canada, at least until 2014. You’ll notice Toronto is on there. That’s on purpose.

Sorry about including Hamilton. What a cesspool.

Toronto — and many of its suburbs — are insanely unaffordable right now. Vancouver is even worse. Both of these cities are clearly skewing the average higher. Approximately a quarter of Canadians live in these two metro areas. This is a big deal.

Say the rest of Canada has a price-to-income ratio of 4x. As you’ll see, that’s not unrealistic. With interest rates as low as they are today, I’d argue carrying costs today are only a little more than they were in the 1990s and early 2000s when prices were 3x income.

Say you bought a $100,000 house in the 1990s. You made $33,333 per year and signed up for a standard 25-year mortgage. You paid 6%, because that’s what mortgages cost back then. It cost you $639 per month, or $7,668 per year. That works out to 23% of your gross income.

Note we’re excluding all sorts of home ownership expenses here.

Now it’s 25 years later and you’re buying a $200,000 home. You make $50,000 a year and again get standard 25-year mortgage. You pay 3.5%, which you can get from most mortgage brokers as long as your credit isn’t trash. You’re looking at a $998/month payment, or $11,976 per year. That works out to 23.9% of your gross income.

Affordable cities

There are plenty of cities where the average home costs approximately 4x median family income. Here’s a small sample:

  • Calgary: Average price $449k; median income $97k; P/I ratio 4.6
  • Edmonton: Average price $362k; median income $87k; P/I ratio 4.2
  • Ottawa: Average price $393k; median income $85k; P/I ratio 4.6
  • Winnipeg: Average price $303k; median income $68k; P/I ratio 4.5
  • Saskatoon: Average price $330k; median income $79k; P/I ratio 4.2
  • Regina: Average price $277k; median income $81k; P/I ratio 3.4

There are more as you get smaller, but you get the idea.

Naysayers will be quick to say I’m missing a lot of cities, not just Toronto or Vancouver. Montreal is a big one. The average price of a house there is close to $500k, while the typical family earns about $50k. Damn, Montreal. You gotta get your earning game up. Even Laval, the big suburb, hardly has cheap real estate when compared to average incomes. Quebec City, which has held a reputation for affordable real estate for years now, has a price-to-income ratio of close to 5x. Victoria’s P/I ratio is much higher than average as well. Anything remotely close to Canada’s three largest metro areas is expensive, too. And so on. There are lots of exceptions here.

Is Canada’s real estate really that cheap?

Canada is filled with many regional real estate markets. Some are not affordable, while others are surprisingly so. These metrics ultimately affect rents too, so your strategy should be simple — avoid markets with a high cost of living for ones that allow you to make a similar wage while paying less for housing.

Ultimately, it comes down to this. If you make the average family income and buy an average house in Ottawa, which has a 4.6 price-to-income ratio, you’re looking at a mortgage payment that equals 26% of your gross income (assuming a 5% down payment and a 3.5% mortgage rate). This is not terrible. Most people can afford this.

Toronto, Vancouver, and now Montreal are increasingly unaffordable. The rest of the country isn’t bad. It might even be affordable. And, as always, if you want really cheap real estate, check out Canada’s medium sized cities. If you can scratch together $100k family income in Medicine Hat, Lethbridge, Halifax, St. John’s, Moncton. or numerous other places, you’ll live like a king. Some sort of royalty, anyway.

To truly live like a king you’d need Nelson as your neighbor. I’d totally rub my balls up against whatever window pointed to your house.