Retirement planning mistakes- part 2

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In part 1, we examined 5 common retirement planning mistakes. Here are a few more:

mistake # 6: not investing

Saving is not enough. The most you can earn by leaving your money in a Canadian high interest savings account is 2%. Most savings accounts barely pay 0.5%.

Inflation is the biggest money eater. $ 1 000 today will not buy the same amount of goods 5 years from now, let alone 30.

Historically, the stock market has always recovered and outperformed anything else. From 1900 to 1999, the average return was a little over 10%. This number does not account for inflation and taxes, but it is definitely better than 0.5%.

mistake # 7: paying too much for your investments

A 2% MER charged annually on a mutual fund can eat up almost a third of you have invested in said mutual fund over a 20 year period.

Beware of how much your investments cost you. Do not rely on your financial adviser to be upfront about this. Look for deferred sale charges as well as redemption fees and the likes.

mistake # 8: not taking advantage of tax minimization opportunities

In Canada, the RRSP and TFSA are your two best friends when it comes to retirement planning.

The RRSP is a tax-deferral mechanism, whereas the TFSA does not levy tax on dividends, capital gains and interests received from your investments.

mistake # 9: counting on an inheritance

This is banking on money that you don’t have, and that you may never receive. If you are an actual beneficiary, the amount you receive could be smaller than you think after probate.

MISTAKE # 10: THINKING YOU WILL NEVER RETIRE

No matter how much you love your career, your business or your job, there will be a point in time you will no longer be able to do it. Aging is real!

 

Retirement planning mistakes- Part 1

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Planning for retirement is a very complex task. For many, including myself, it can be daunting. The road to retirement can also be paved with traps. Let’s look at a few of them.

Mistake # 1: not having a (retirement) plan

What makes retirement planning so daunting and difficult is that we have to think about a future that does not exist.

But, in order to plan for your retirement, you need to think about what you would like it to look like: when, what, where. If you want to travel or live in an upscale retirement community, you will need more money than if you plan to live in a condo and spend time with your children and grand-children.

If you are a couple, communication is crucial, as your retirement goals and dates may be different. Both of you need to be involved in the process.

Once you have an idea of what you want your retirement to be, you can start planning financially.

mistake # 2: assuming the process will be linear

Unfortunately, times have changed. Gone are the golden days of steady employment, regular salary increases and generous company pension plans. Today, only 20% of Canadians have a pension plan through their employers. Job hopping is the norm and wages are stagnant.

Be realistic and ready to adjust your plan a few times over the course of your life. There will be times you won’t be able to save anything, perhaps due to a job loss or an illness. Other times, you will be able to save more.

mistake # 3: solely relying on the federal government

The average monthly CPP pension amount Canadians receive is $600.00. Both the OAS and GIS are subject to claw-back and income threshold, i.e. if you make more than a certain amount of money, you either have to reimburse the government (OAS), or no longer qualify for the benefit (GIS).

Want to take your CPP pension before 65? It will be minored. Retiring overseas? Your GIS payment will be suspended after 6 months. Spend less than 40 years in Canada? Your OAS amount will also be minored.

Beyond the paltry amounts, there is no way to know for how long the system will be viable.

mistake # 4: underestimating longevity and healthcare costs

With progress in medicine and living conditions, a lot of people live well into their nineties, if not 100. In my humble opinion, longevity is what you should focus on when planning your retirement. You should assume income needs of at least 35 years post-retirement if you retire in your sixties. If you retire early, you need to increase that number.

Contrary to popular belief, you will still have expenses when you retire, including big ones such as a new car and home repairs if you own. You will also need some new clothes and shoes from time to time.

One of the expenses that is guaranteed to increase is healthcare. Even if you eat healthy and exercise daily, aging will result in various health issues. The older you become, the higher your insurance premiums will be. As a reminder, many items are not covered by provincial health plans, such as vision and dental.

mistake # 5: waiting for too long to start saving

The best time to start saving for your retirement is in your twenties. If you start young, you actually don’t need to save that much on a monthly basis, as time is definitely on your side. You can also take more risks with investing and earn higher returns.

The longer you wait, the more you will need to save in a reduced time frame. You may not be able to do it. You will have to take on more risks, which could result in greater losses you may not be able to recover from, if the markets tank.

final word

Stay tuned for part 2!

Labor sponsored investment funds explained

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In Canada, labor-sponsored investment funds -LSIF- were introduced in the 80’s to encourage Canadians to invest in small companies and start-ups.

A LABOR SPONSORED INVESTMENT FUND IS BASICALLY A SMALL CAP MUTUAL FUND…with a few twists

This type of funds is composed exclusively of small businesses and/or start-ups companies that are looking for capital and financing.

It can be bought from an investment firm or directly from the fund company.

Like any small cap fund, these funds are fairly speculative and riskier. The companies they invest in are in early stages of development, and may fail.

the (only) advantage of these funds is the tax credit

If you invest $ 5 000 in a labor sponsored fund provincially registered, the Federal Government will give you the maximum $ 750 tax credit.

The province where the fund is registered will also give you an additional tax credit. For example, British Columbia will also give a 15% credit for $ 5 000 invested.

Tempting, but there is a big catch.

most funds lock your money in for 8 years

You can always redeem before that, but if you do so, you will have to repay the tax credits back. Same goes if the fund is sold or goes bust.

The fund company can also stop redemption at any time. You may not get your money back when you need it.

the mer on these funds is EXTREMELY high

It is fairly common to see a Management Expense Ratio -MER- of 6% to 8% on Labor Sponsored Investment funds.

The MER directly impact the fund’s return, as expenses are paid regardless of the fund’s performance, which brings me to my next point.

labor sponsored funds are under performing

It is actually not surprising given their core nature. When you take into account the high MER, most of the times, investors are loosing money.

final word

Personally, I would not invest in a labor sponsored investment fund. If you choose to do so, carefully read and understand the prospectus.

Any investment decision should never be solely based on obtaining a tax credit.

The Conservative Federal Government had actually scrapped the tax credit before loosing the election to the Liberals….who then decided to restore the credit.

Thoughts on the financially privileged & the not so privileged

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I don’t necessarily think there is anything inherently  wrong with growing-up in financial privilege. When I was younger I actually wished many times for my own upbringing to be different. Unfortunately, it wasn’t to be.

My parents had -and still have- horrendous money management skills. On top of that, my dad did not believe in the concept of keeping a job, which created further issues. Issues that impacted me both directly and indirectly. But I digress a little here.

being financially privileged can definitely propel you ahead…

There is no question money can open a world of opportunities, in many, many ways: education, business, travel etc…It also takes a lot of worries away.

That being said, now that I am a little bit older and perhaps, a little bit wiser, I don’t envy people who grew up financially privileged.

…but it can also make you lazy and unappreciative

I have seen this countless times with friends whose parents and grandparents had more money than mine.

The friends in question tended to take everything for granted and had no real appreciation for what they had.

I had very little financial resources growing-up, and even as a young adult. I definitely appreciate everything I have and don’t take it for granted.

privilege can take away the sense of accomplishment

Growing-up poor makes me want to get out of poverty, and fast. I worked very hard for everything I have accomplished so far, and I am proud of this.

One of my childhood friends had absolutely no motivation or drive to do anything, because he was lulled by too much family money.

And where is the sense of accomplishment and pride when you never have to work for anything or figure anything out by yourself?

When money is scarce, you become resourceful and creative. You make do.

PRIVILEGED PEOPLE USUALLY can’t handle the slightest discomfort

Life is a bitch at times. Privileged friends and acquaintances of mine have the most difficulties handling any temporary discomfort of curve balls thrown at them. I recall another childhood friend of mine having a panic attack at the airport because her flight had been cancelled! I kid you not.

When money is scarce, you also develop resilience and adaptation. You don’t sweat over the small, insignificant stuff. You learn to prioritize very quickly.

FINAL WORD

With a little perspective, I now see how growing-up in a poor environment gave me great qualities, that have been very useful to me, such as determination, adaptation and resourcefulness.

Maybe I am bashing on privileged people. Maybe not. My point is more that there is a silver lining when you are underprivileged, financially. If you are lucky to be financially privileged, appreciate it and do something meaningful with your life.

The cost of dog ownership

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Over the last year or so, I have been thinking about getting a dog. I took the first step in contacting a reputable breeder in my province. I will not be going through the “rescue road”, in case you are wondering.

I am only interested in a specific breed and I actually did contact several shelters and other rescue organizations. None of them has the breed I want. But this not the point here.

Let’s chat about the financial cost of owning a dog. Many people completely underestimate these or do not really budget for them.

adoption or breeder costs

The SPCA and other rescue organizations will charge you a fee. In BC, it can go up to $ 500.00, depending on the dog and the organization.

If you decide to use a breeder, fees will easily go from $ 1 000.00 to $ 5 000.00, depending on the breed and the breeder.

material costs

Your dog will need a bed, a food bowl, a few toys, a collar/harness, a leash, a crate, poop bags. You should budget $ 200.00 to $ 300.00 for these items. They will need replacing at some point.

Depending on your house, you could need additional supplies like gates.

food

Dry food is cheaper than wet food. It is mostly because you can preserve it for longer and it usually lasts longer.

A 5 lbs bag costs between $ 15.00 to $75.00. If your dog has allergies , lean toward the $ 75.00 price. Same if your pet is big.

Puppy dry food will cost between $ 10.00 to $25.00 for a 5 lbs bag.

Treats will also add up. A bag of high quality treats can cost up to $15.00!

HEALTHCARE

Your dog will need regular check-ups, vaccinations, worm and flea treatments at the very least. If you have a puppy, you will need to have them neutered. This alone can cost up to $ 500.00.

None of the above is covered by pet health insurance. All breeds are also prone to one health issue or another. Some breeds are predisposed to more issues. Some surgeries can cost over $ 5 000.00.

The cost of insurance varies depending on the insurer and the dog, but usually goes from $ 30.00 to $ 60.00/month for basic coverage, i.e. $ 360.00 to 720.00 per year.

grooming

It all depends on the breed. A large dog with long, shedding hair will cost $60.00 to groom. You may have to do it on a monthly basis. A smaller dog with short hair will cost half of this and may only need it every 2 to 3 months.

daycare and boarding

Chances are you won’t be able to bring your pet to work with you. You need to make arrangements, as your dog needs to exercise and walk at least 3 times a day, rain or shine.

A dog walker charges $ 25.00 to $ 30.00 for an hour walk. You might be better off leaving your pet at daycare. Most daycare centers charge $ 20.00 to $ 25.00 per day. A lot have extended hours.

Same if you are going on vacation and can’t take your pet with you. Kennels can charge up to $ 50.00 per day, depending on the dog size.

A lot of people do not realize how expansive this is. Leaving your dog at home or in the back yard is not the best.

training

If you have a puppy, taking an obedience class will be most helpful. This costs on average $150.00.

If you dog has behavioral problems, you may need more sessions.

final word 

There is a lot of variables in estimating dog costs, mostly the breed, the age and where you live.

Having a dog will cost on average $ 100.00 to $ 300.00 per month in BC. Beyond wanting a pet, you need to insure you can actually afford one. Most dogs have a lifespan of 12 to 14 years…..

Curbing Summer expenses

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After one of the snowiest and coldest Winter in Vancouver, followed by a very wet Spring, Summer is finally here. We have been blessed with sunshine and hot temperatures lately.

Along with Summer, usually come higher expenses. Gas prices tend to spike for starters. Then the kids are out of school, you may decide to actually go on a vacation and social invitations are flowing in.

Here are a few tips on how to make the most of Summer without breaking the bank.

plan ahead, save ahead

Just like taxes and death, Summer will always be here, like clockwork . And, just like clockwork, save for it throughout the nine months prior. Planning ahead can lower your costs and even give you discounts, particularly if you are going away.

set your social calendar

When the weather is better, people tend to go out more and to throw more BBQ parties. It doesn’t mean you have to accept all the invitations you receive. Be a little selective. It is perfectly acceptable to say no.

go potluck style

This is the best way to save on eating-out costs when entertaining.

check-out free and low cost activities

Cities and RecCentres always offer low cost or free activities such as outdoor movies or swimming. Libraries also offer reading programs and other crafty activities.

take a staycation

It is no surprise Summer is the most expensive season when it comes to traveling.

Staying home -or close to- will save you a ton of money. If you don’t have children, travel off-season. If you want to go away, try camping or rent via AirBnB rather than a hotel.

You can also take day trips.

KEEP KIDS ACTIVE FOR LESS

Summer camps can rake up hundreds of dollars. Coordinate with other parents to take childcare turns. Refer to above point on free and low cost activities.

go easy on the a/c

A/C units are suckers for electricity. The last thing you want is a huge Hydro bill. Set your thermostat slightly higher; turn-off the unit when you are away; only use it when it is really hot.

final word

The best way to avoid overspending this Summer is to plan ahead and be organized. Doing so is actually fairly simple.

 

Valuing a stock with the Graham formula

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There are several ways to assess a stock, besides the stock table. One of them is the Graham formula, created by Benjamin Graham.

graham is the father of “value investing”

His book, the Intelligent Investor is considered a classic in the financial industry. Despite being published in 1949, its principles still hold true today. Graham hired Warren Buffet so we can safely say the guy knew what he was talking about!

what is the graham formula?

The formula was created to assess how rationally priced a stock is. In today’s market, when it is becoming more and more difficult to find fairly valued or undervalued stock, the formula is very relevant.

For you math-diggers out there, the formula was initially as follow:

V*=EPS\times (8.5+2g)

V as the intrinsic value, EPS as the company’s Earning per Share over the last 12 months, 8.5 being the ratio for a company not making any profit, g being the company’s estimated growth for the next 5 years.

Later, it was revised to: V*={\cfrac {EPS\times (8.5+2g)\times 4.4}{Y}}

Y being the current yield on 20 year AAA corporate bonds. Graham thought taking interest rates into consideration would give a more accurate intrinsic value (V).

how do I use the formula? 

Don’t worry, there are plenty of calculators that will give you the intrinsic value of any stock. There is a good one here.

Once you have the intrinsic value divide it by the stock current price. If the result is below 1, it means the stock is overvalued. If it is above 1, the stock is either fairly valued or undervalued.

final word

The graham formula is an helpful way to assess a stock. That being said, it should not be the only one way used. It is important to do research on the company and to read – and understand-its financial statements.

 

The dog years of compounding (in investing)

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Albert Einstein dubbed compound interest the eight wonder of the world. It truly is when looking at the concept: investing money, earning interests/dividends/capital gains on investments, reinvesting said interests/dividends/capital gains/ thus earning more interests/dividends/capital gains.

It seems simple, yet it is a tad more complicated than it seems

Most people in the financial industry do not talk much about the time factor, when it comes to compounding.

You see, compounding is actually very slow to start. That’s why conventional wisdom says one should start saving as early as possible. But I almost digress here.

with COMPOUNDING, time is actually not of the essence

For the sake of simplicity, let’s assume an initial investment of $ 10 000, with an additional monthly contribution of $ 100. Let’s assume a constant return of 5% for 25 years, and that interest is compounded monthly.

I am aware this is really unlikely to happen in really life, but I am writing for the sake of simplicity here!

After said 25 year-span, the $ 10 000 will turn into around $ 94 364. Great!

But when looking at the timeline, you realize your investment will take over 5 years to double, and an extra 4.5 years to triple.

it takes at least 15 years…

15 years is the mark where your investment starts to grow faster and another 3 years for cruising speed. Before that, progress is actually fairly slow.

patience is the key word

A lot of people become discouraged, long before the 15 year mark. If the market becomes bearish, it can be even easier to give-up, but don’t!

By doing so, you will only have principal with very little interest/capital gains/dividends. Over the years, interest/capital gains/dividends will exceed the principal amount, and that is the beauty of compounding.

Managing lifestyle inflation

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“Lifestyle inflation” is a very popular topic amont financial planners and personal finance bloggers. But what is it exactly?

lifestyle inflation is increasing your spending when your income goes up

This is the very definition of lifestyle inflation. And yes, we are all pretty much guilty of lifestyle inflation.

This is particularly true when transitioning from student to employee. Most students have to get by with very little, and most make do.

But once the first real paycheck arrives, boy, oh boy!

lifestyle inflation is not always bad

Once you make more money, it is perfectly normal and acceptable to want to live and enjoy life more. Actually, it is not expected of anyone to keep living like a student or a pauper for the rest of their lives!

It is normal to think about having your own place, going on vacation, buying new clothes vs.second hand ones etc…and to actually do those things.

Lifestyle inflation becomes a problem when your spending causes you to live paycheck to paycheck, prevents you from paying debt off and from saving for retirement and other goals.

lifestyle inflation can be managed

Yes, you can still have your cake and eat it too. Here are a few tips.

figure out your new compensation to the penny

If you landed a higher paying job or a promotion, figure out how much you will make on each paycheck. Keep in mind salaries are always gross amounts in North America. After taxes, you may be surprised to realize it is not as much as you thought.

revisit your budget, particularly the “fun” category

Give yourself permission to spend a set amount each month on things you really like and that makes you happy. Don’t worry about what other people think. It is their problem not yours.

revisit your goals

I found it also helps to focus on short-term, medium-term and long-term goals. When you have saving goals, your save towards them instead of spending mindlessly.

If you are about to charge something to your credit card, ask yourself whether this purchase is in line with your goals and within your budget.

forget about the joneses

They are probably broke anyway! Not to mention your material possessions do not define who you are as a person.

final word

I personally do not believe lifestyle inflation can be completely avoided. I also believe it is normal to somewhat spend more when earning more. However, it is possible to manage lifestyle inflation. Like everything else, it does require some discipline.

Buying a rental property (or not)

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Unlike my previous post, the criteria to decide whether to buy a rental property -or not- are very different. This post may also shed some light if, for example, you already own and have accepted a job in another city/province.

First, understand the tax implications

Although you can deduce some expenses from it, rental income is taxed at your marginal rate, if the property is registered under your name.

In Canada, selling your principal residence for profit does not result in taxes levied. This is definitely not the case with a rental property!

Upon selling, any profit you make is considered a capital gain. In Canada, 50% of the capital gains are taxed at your marginal rate, if the property is registered under your name.

It gets a little bit more complicated if you elected to deduct the Capital Cost Allowance -CCA-from your rental income. CCA is a “wear and tear”amount set by Canada Revenue Agency depending on the type of property, the year it was built etc….

CCA is a tax-deference mechanism. It allows you to lower the amount of taxes levied on the rental income. Note you can’t use the CCA to trigger a loss or if you are already claiming a loss.

Upon selling, the CCA amounts previously claimed become 100% taxable, are added to your income and taxed at your marginal rate. It is called “recapture”.

As an individual, claiming CCA usually does not make much sense, unless you are in the highest tax bracket.

Second, cash flow is king, forget the 1% rule (or almost) 

When you live in your property, land appreciation is important. This is what increases your property value. As an investor, and although this is nothing to sneeze at, this is not what you should be looking for.

As a potential landlord, you need to look at your investment from a business perspective. In other words, will the income generated from the property be enough to cover all its expenses and taxes?

A common principle used is the 1% rule, meaning the rent should be 1% of the purchase price.

Unfortunately, in North America, real-estate has become increasingly expensive. Rents have not necessarily followed that trend. It has become almost impossible to find properties meeting the 1% rule.

Which does not mean you should not consider becoming a landlord.

There is another formula to help you determine if a property has cash flow potential, the Gross Rent Multiplier or GRM:

(gross annual rent/purchase price) X 100

If the number is above 8, the property has potential, if it is under 8, pass. If it is above 10, cash flow is guaranteed. This quick and easy formula takes out all the guesswork and emotions from the search.

Once you have your cash flow number, dig into the details: proposed rent, mortgage payment, property tax, condo fees if applicable, potential repairs, estimated income tax..etc and see if it still adds-up.

As a landlord, you won’t be able to postpone or skip maintenance and repairs. It is best to budget for them. Some utility costs, such as Hydro can be passed on to the tenants.

Third, vacancy rate

The lower, the better for you! It is pointless to buy a rental property if there is little demand for rentals….CMHC provides info on the matter.

Final word

It is crucial to leave your emotions at the door when deciding to purchase a rental property or to rent out your main residence.

There are also lots of other factors that could influence your decision such as how much equity you are able to start-up with or the amortization on your mortgage. In Canada, you need at least 20% down for rental properties.

“Landlord-ing” is not for the faint of hearts. It is actually a lot of work.