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Money Management

Answers to Common Questions

January 21, 2014

As we turn the calendar into 2014, I thought it would be a good idea to answer some of the most common questions I have received over the past year. Also included are some rules of thumbs and musings.

On saving and investing...
Is there an easy way to increase wealth? Yes and no. Most wealth is built over the long-term such as paying down debt and contributing to a Registered Retirement Savings Plan (RRSP) on a regular basis. Setting up a monthly contribution is easy but being patient and sticking with it over a long period of time is difficult.

I want to earn 5% guaranteed? You can’t. With today’s low interest rates, any investment which pays more than 3% has some degree of risk. Rule of thumb: the higher the return/potential return, the higher the risk.

“If it’s too good to be true, it probably is.” If you cannot understand the investment you are buying you should not invest in it. A test is that if you cannot at least in general terms, explain what you are investing in, you should not invest in it.

“Don’t place all your eggs in one basket.”  Agreed. For investors who want a higher rate of return than a term deposit or GIC, it’s important to diversify among asset classes. However it does not mean that you need to deal with more than one Financial Institution/Advisor. You may end up with the same investments with both Financial Institutions or be too aggressive with one and not aggressive with another. It’s also a lot easier from a planning perspective to have your investments with one Financial Institution. So pick a Financial Institution/Advisor you trust and stick with him/her.

How much should I save for retirement? A good rule of thumb is 10% of gross income during your working years. If you do this, you should have no problem funding retirement.

Registered Retirement Savings Plans or Tax Free Savings Accounts (TFSA)?  In an ideal world, both.  RRSP, primarily used to replace income in retirement, provide you with the benefit of an immediate tax deduction with tax to be paid upon withdrawal on both the contribution and growth at possibly a lower tax rate than today. TFSA, which can be used for any savings goal, provide you with no immediate tax deduction however income is not taxable. 

If I have to make a choice between RRSP or TFSA to fund retirement, which should I choose? If gross income is greater than $44,000, you should contribute to an RRSP first. If income is below $44,000, you should contribute to a TFSA first.

Can I just hold a savings account in a Tax Free Savings Account? No, similar to RRSP, you can hold investments ranging from savings accounts to stocks.

On retirement...

Will retirement be a 365 day weekend? Successful retirees use paid and unpaid work/volunteer as a break from leisure.  Without structure, retirees can lack a sense of satisfaction. 

If you didn’t travel, read books, etc. prior to retirement you likely will not do so in retirement. Your life does not change the moment you stop working.

Will government benefits such as Canada Pension Plan and Old Age Security be there when I retire? Yes. A recent actuarial study indicates that CPP is fully funded for 75 years. Changes that are being implemented and will likely continue to be contemplated are an increase in the age to receive these benefits and a reduction and/or elimination of benefits if your income is considered high in retirement.

On leveraging...
Should I take out a loan/line of credit to buy a financial investment? No, unless the investment can be paid off within 1 year such as an RRSP loan. Leverage has the potential to increase the gain and on the flip side, amplify the loss.  Generally, there are no short cuts to building wealth.

On housing...
When should I buy a house? When you are ready.  Factors include stability, down payment and family situation.

How big a mortgage should I have? Maximum should be 3 – 3.5 x your gross annual income.

On Estate Planning...
Why should I pay $500 - $1,000 to get documents completed by a lawyer when I can buy a Will Kit for under a $100 and do it myself? In life, generally you get what you pay for. Consider the effects of ill-prepared documents on your family such as the stress, time and cost to fix vs. getting it done right.

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