November 4, 2014
I ran into an old friend of my nephew yesterday outside a store and he was telling me that they have most of their money is in GIC's in RRSP's, RESP's, TFSA's.
He is a young guy, 32 years old as well is spouse and they amassed so far $295,000 which is split between $66,000 is in TFSA's, $175,000 in RRSP's, $19,000 in RESP's, $10,000 in 1 year GIC's, $10,000 in 1 year after 90 days cashable GIC's, $15,000 in higher interest savings accounts.
Basically, he told me that they are putting most of their money in 5 to 7 year GIC's within these plans since 2005. They are disappointed that the current highest 5 to 7 year rates are stuck at 3.00% to 3.05%. They still have some 3.5% and 3.75% GIC's that have not matured yet.
However, he said the key factors that is working for them is being aggressive savers in tax free, tax deferred accounts TFSA's, RRSP's, RESP's and being conservative GIC'ers with those plans. I know GIC'ers is no a word but that is what he kept saying to me and told me they are.
They always make sure they max out their $11,000 TFSA's every year and RRSP's which this year was $14,500 as well. They have not put the most they can for RESP's for their 2 children now 5 and 7 but he told me they will do more with the RRSP annual income tax refund of $5,500 to $5,800 he will get in 2015.
The main reason he told me that their only using GIC's as their main investments is because his spouse stays home and watches the kids so she has no income and he has 3 different jobs, sources of income during the year as a handyman, contractor, landscaping and window installer and an auto mechanic or technician.
He told me that they were considering putting in $10,000 for 6 months known as dollar cost averaging into some equity, dividend paying ETF's but his wife more than him was not as comfortable with that. They said they need to sleep at night. They could not this.
They can't tolerate market volatility and can't see risking their principal value, investments dropping, especially if they need it at that time. This is the main reason why they have about 16 to 18 months of living expenses in 2.00%+ safer, guaranteed, liquid, accessible savings, cashable GIC's so they don't have to touch their GIC's.
He works between 60 hours to 65 hours a week and has no benefits, workplace pension or other benefits paid through his employers. He did lose 1 of his 3 jobs in 2008 to 2009 for about 12 months but found a comparable job but with 15% lower wages.
They did make sure on the advice of their father to get term life insurance of $600,000 and a non-tax deductible long term disability insurance policy for $2,000 a month tax free if something were to happen to him since he is the only main income source for the whole family.
They bought this disability insurance policy 5.5 years ago when they had much less assets and less income plus had a child already so it still makes sense today but is not as urgently needed as before. As their assets, investments, income grow and debt shrinks, they may get rid of this disability policy.
The reason he told me this is because C.P.P. disability pays on average $900 a month plus a disability child benefit of $230 a month is paid and they have a much lower mortgage balance of $45,000 today compared to $195,000 10 years ago.
They have no non mortgage debts, no auto loans, auto leasing, lines of credit, credit card debt etc. He told me this was another very important reason they could save aggressively. They have a 4 year old vehicle only which is fully paid off.
I hope this story has given a different perspective that may or my not help someone but I just found it interesting that this young spouse and friend of my nephew and mine was conservative one way but aggressive another way.
I know some people will say they should be putting some money in equities and using dividend reinvesting as a main priority and using other investments like possibly REIT's, bonds, foreign investments etc. but people have to do what is comfortable for themselves and what works for them.
This reasoning for someone to say owning equities is important is because of inflation and taxes but GIC's in RRSP's, RESP's, TFSA's helps protect on taxes to a certain point and possibly higher GIC rates in these plans will help too.
They are more comfortable with saving much more than others say they need to save and accept a 3.00% GIC rate in RRSP's, RESP's, TFSA's today which they have spread between ICICI Bank of Canada, Scotia Bank, Oaken Financial, Duca Credit Union and State Bank of India Canada.
In this case, they chose to be aggressive savers and conservative investors in tax free, tax deferred investments and not forgetting that accumulating debt but rather being debt free as soon as possible plus by not living a more expensive lifestyle than they really need will not create more risk for them now and in the future.
Take care and do what you think is right for yourselves. It is your money afterall.
August 9, 2014
I am glad that he is wilful enough to save so much money, but I also question is saving all the money in saving account and GIC a suitable strategy for him as the return is so low and its is frequently in the red after inflation. As a young man, he should put most of his money is certain sectors of equity, such as utility and consumer stable so he can out run inflation without carrying too much risk.
It strike me how conservative young folks are getting, especially after the financial crisis. We (I am guilty of it), are missing out the huge rebound after the crash and it really is a bad strategy for our age, both in long run and short run.
November 4, 2014
Jon, I am 55 almost 56 so I am not a young guy as my nephew's friend and his spouse and most of their money is not in savings accounts at 2.00%+ or less.
They have at least 90% of their total investments, $260,000+ in RRSP's, RESP's, TFSA's at around currently 3.35% in GIC's that are and were 5 to 7 years.
Inflation according to the Bank of Canada is around 2.4% over the last 12 months which means so far they are ahead of inflation because they have most of their money in tax free, tax deferred accounts.
Also, when inflation rises, 5 to 7 year GIC rates will go up so that should give some protection. He told me that they are saving around $33,000 a year when including their annual RRSP tax refunds too.
The good news is according to him as they look at 10 year periods for themselves, 3.00% GIC rates compounding in their RRSP's, RESP's and TFSA's and annual aggressive saving, they should have around $750,000 to $755,000 in total investments and no mortgage, debts either.
When they look at the next 20 years, they will have about $1,400,000 when they are both 52 years old and still no mortgage, debts and a fully paid off house that could be worth $500,000 as well if their house prices rise at a conservative 2.50% average rate per year.
Jon, they are conservative and more cautious than most people accepting 3.00% annual rates of interest versus maybe 4.5% to 5.50% others could probably get with a balanced portfolio but what makes up for their lower annual rates of return is they are saving $33,000 a year versus $16,000 a year their adviser/accountant recommends they should save earning at 5% to 5.5% annual rate of return projections over 10, 20 and 30 years.
This is more than double what most others are probably saving at their age if they are saving much at all plus they don't have much debt today and in or near retirement compared to many Canadians that may probably just paid off all their debts or have some debt in or near retirement.
Finally, their modest living expenses and their modest primary residence which is an illiquid asset and non income, interest producing asset that will represent 20% or less of their total net worth by or near retirement is another good, risk reducing benefit to them.
My personal opinion if I was a young man with a family today, I would focus on saving and investing much more in 3.00% to 3.50% fixed rate investments like GIC's, government bonds holding to maturity compounding interest in RRSP's, RESP's, TFSA's and establishing an 18 month cash or cash equivalent reserve, getting rid of debt and asset plus income protection using life, disability insurance rather than trying to earn an extra 1.50% to 2.00% a year on my investments and RRSP's, RESP's, TFSA's etc.
Maybe they could have some equities say 15% to 25% of their entire investments earning 6% to 7% over the next 10, 15, 20 years but they are not comfortable with that. They were conservative and cautious with their money since 2005, years before the 2007 to 2008 financial crisis, market downturn.
Take care and different points of view is what makes discussions interesting and engaging.
August 9, 2014
I agree modest living life style definitely help reduce future $ needed for retirement, however, investing in stocks is generally going to yield much higher return and I think it is something that worth considering.
I am very glad that he is able to save so much money, but he also need to understand that there are many things people can only do when they are young. You do not want to leave most of them when you are old because your physical and mental ability cannot catch up anymore. Moreover, some form of entertainment and "luxurious spending" are necessary as you need them to socialize with your colleges and bosses for a better future in career.
Lastly, as he have most of his money in RRSP, he will need to pay tax when he withdraw them and if you factor that in, the return will probably be much lower, if not negative; depends on how you withdraw them.
Personally, I will gradually move 70% of my assets to equity as soon as Canadian stocks become low enough (which is soon). Personally, I think this country have a bright mid-term perspective because we have many university graduates and a much lower wealth gap (hint: poorer people spend greater portion of income, which contribute more to GDP). When this combine with the fact that TSX only grow around 20% in total in last 5 years compare with S&P 500 growing at whopping 87% in total in the last 5 year. I feel Canadian equity is a good investment opportunity, just need to be aware that some sectors such as energy and banking as they are expose to the the low oil price and a possibly over-valuated property market. However, I have confident in our bank as it seems that many real estate is brought with cash from foreigners (with dubious sources ), while banks are fully aware of the problem and they have plenty of time to prepare.
November 4, 2014
Jon, you are only mentioning him as having all the assets, investments and compound interest, future income as if he has to pay tax on all of it. This is not correct and accurate.
They are thinking and doing all their finances, investments, assets, income planning as a family with him and his spouse as the central, main participants for years but as their 2 children grow up into adulthood, there is other income and asset, investment splitting opportunities that they will for sure use to keep taxes lower and keep their family finances strong.
As you can see RESP's will be most likely taxed at 0% rate as their 2 children are the beneficiaries and can earn income in the future of about $15,000 to $16,000 a year each with no income taxes.
Also, he makes the annual RRSP contribution and receives the annual RRSP income tax refunds but they use spousal RRSP's to split assets, investments and future income which you mentioned from RRSP's.
They are on track to have close to a 50%/50% equal, balanced RRSP for many years ready for retirement and income taxes in the future.
Jon, most of their investments, money is and will not be in RRSP's as it will workout to be around 48% will be in RRSP's, 35% in TFSA's and about 17% will be in non-registered investments, GIC's, cash reserves, insurance protection like life, disability etc.
More than one third is income tax free money so this will keep their overall annual income taxes lower as well.
When you look at it on a total net worth basis, it is about 35% which is only a little more than a one third of all their money, assets as being in 100% fully taxable RRSP income.
As mentioned above, this will likely be split between both of them. He told me they did this is because if senior pension income splitting rules disappear, they will have no problem.
Jon, many make the mistake that RRSP's will be taxed at a high rate but after taking into account pension income tax credits, personal and age amount and income thresholds, their RRSP's will be taxed at probably at the most 25% in their retirement.
Their $600,000 in life insurance policies is a bonus on top of this that will also help pay a big portion of their income taxes if any are left from their RRSP's.
I don't know why you assume that they are saving so much money and are not doing anything entertainment wise and taking time to relax, enjoy life when they can.
Jon, $33,000 a year is not from all their annual aggressive savings, $5,600 is from annual RRSP income tax refunds and then another $920 a month or $11,200 is from not having a monthly mortgage payment because they paid off more or less about $150,000 or their mortgage in the last 10 years so now it is really $16,200 that they are really saving out of discretionary, disposable income.
This $16,360 is really a 20% annual savings rate based on his only $81,000 annual income for the family.
We hear it many times from personal finance and investment, financial experts, advisers, planners, pay yourself a minimum of 10% from your paycheck and use mostly tax deferred plans which are RRSP's in Canada, IRA's, 401K's, 403B's etc. in the U.S. first and then other plans like TFSA's, Roth IRA's etc. if you can.
What people are failing to realize in any stock market, equity, interest rate and economic, financial environment is that debt and higher expenses versus incomes is the main reason people have a hard time building savings, investments, retirement etc.
On the investing side of this discussion, others that are depending on 7% to 10% annual rates of returns to achieve higher RRSP, RESP, TFSA, investment etc. account balances which may or may not work but as we have seen since 2008-2009 and even before in 2000-2001, 2003 to 2004, it can be bad timing with no fault of their own that derails their retirement and plans.
In my opinion, people should save not a minimum of 10% but a minimum of 15% to 20% of their income and expect a 4.0% to 5.00% annual rate of return with their balanced portfolios or investment mix.
If they are more aggressive such as having 60% to 80% in equities, stocks, equity ETF's, REIT's etc. they may get 6% to 7% to 8%. No one can really predict it will turn out this way.
This way they have a buffer, cushion if they make lower interest rates or annual rates of returns than they expect should be considered.
They do take a few vacations for 3 or 4 days occasionally maybe every 12 to 18 months. They have internet, a big screen T.V. 50 inches, computers, a modest 14 year old, 3 bedroom home, 1 decent, 4 year old car that is not the top of the line but is middle of the road.
They do occasionally eat and socialize with their friends, coworkers, family members etc. which is maybe every 4 to 5 weeks.
Jon, they are just smarter and plan ahead with their personal finances and do not get trapped with using easy credit and overspending. They are doing anything special here.
As for him trying to get a promotion with socializing more with his bosses, employers, he has 3 different jobs a year, he is not getting a career so that is a non starter especially in his lines of work.
As explained above his wife is taking care of their 2 kids, 5 and 7 and also taking care of the household as well so she has other issues to deal with.
In my personal opinion, lower interest rates on safer, government guaranteed investments of 3% to 3.50% these days should not discourage people from saving but actually they should save more in their RRSP's, LIRA's, RESP's,TFSA's etc.
This is if they can save more but a good portion of people have chosen to be in more debt and save, invest less. I don't know when saving money and using RRSP's, RESP's, TFSA's etc. was not a prudent thing to do even at 3.00% to 3.50% interest rates.
Take care and do what is right for yourselves.
August 9, 2014
Greg, he is a young fellow, so I assume his wife is also pretty young, so as his children. As he is also the head of household, I assume he make most of the decision.
48% in RRSP and 17% in non-register means whole lot of tax.
33000 saving is a lot of money on 81000 before tax income, consider he also have children, it is not difficult to postulate that he is too frugal.
7 to 10% return is an unacceptably high expectation of return, if my stock portfolio is able to do that (once in a while), I will cash in some of my stocks and move some money to fix income because what comes up must come down and I want to save some capital to invest back when it drop.
Economically speaking, the change in interest rate on saving among is ambiguous. They may save more when interest is low cause it take them longer to reach their goal, but may save less cause the return is less. (budget constraint line and indifference curve in economic).
November 4, 2014
Jon, I can see that here in this case you are not really reading my entire posts. It is no point explaining the same points over and over since what this family does is incorrect and is not doing a great job managing with their finances according to your comments.
Others that read this forum that understand where they are coming from know the real numbers I have explained and can relate in their own real lives.
I say to anyone out there don't feel guilty saving money and having more for your family. The most important economy that will impact you the most is your personal economy.
Do what is right for yourselves and the more you can save and maximize RRSP's and spousal RRSP's, RESP's, TFSA's for all eligible family members etc., the better off you will be with even 3.0% to 3.50% interest rates.
Others out there, read next time your brochures or online investments, portfolios literature and you will find that 7%+ annual rates of returns is what they are stating as projections for RRSP's, RESP's, TFSA's, non-registered investments etc.
If he loses some income or gets hours reduced they are already way ahead financially. They are prudent, financially responsible and it works for them.
They have removed one of the 3 biggest financial risks and stresses that face many Canadians today, living one paycheck away from running out of money, being very close to being debt free only 2 to 2.5 years left paying down their only debt, $45,000 mortgage and having a large asset, investments base at only 32 years old.
Most younger Canadians and some older Canadians are in debt more than ever before for the next 20, 30 years which is not very financial sound and have minimal savings, investments if that.
Take care and save, invest in things that you truly only feel comfortable and understand.
August 9, 2014
Greg, a block of word is not easy to understand.
Saving is definitely a good thing, I just think he can optimize it better by taking more risk consider his age. I cannot really understand why you think I am suggesting the old friend of your nephew is doing things wrong.
I never trust any prediction/information given from FI as long as there are conflict of interest.
November 4, 2014
Jon, if someone is really interested in reading something, they will take the time and effort to read it.
My posts are not that long compared to other business or economic reading material such as in the Financial Post, Bloomberg etc.
My sentences are pretty well separated and are not in a block as you suggested. The whole mutual fund, ETF, shares, REIT's etc., equity based investments are all based on predicting future returns.
If you trust them or not is besides the point, they are using a 7%+ annual rate of return for portfolios that have a large percentage of equities 60% to 70% at the very least.
Obviously, your comments in your posts do not accept 3.00% or 3.50% interest rates for your investments but you did not explain either what you expect and can get for your mostly equity portfolio or investments. Take care Jon.
August 9, 2014
I am finishing my exam when I am replying to you previously, so I don't have the time to read though everything in detail, I have did that now, as exam is done for me.
I am glad that he is able to save so much and compound interest is indeed very powerful tools, however, by being less conservative, he get the chance to retire early, so why not? That's is the the question that I have been asking from the start.
His saving rate is very high, and I come up with this conclusion because RRSP tax refund and "money save on paying interest is also the money he get from income, they certainly don't fall from the sky!
Personally, he live a very thrift manner, consider even I travel and eat out with friends more frequently than he is, not a bad thing through.
Personally, I am looking at a 5-7% return from stock every year, and I will re-balance it with fix income depends on the performance of stock market from the previous year.
November 4, 2014
So Jon, why do I keep hearing and reading that equity markets over 20 years or more on will return 10% and a balanced 50% equities and 50% bonds will return 8.5% a year.
They calculate this by saying that bonds usually achieve 70% of equity market returns so 10%*0.50+10%*0.70/2=8.50% annual returns.
Jon, I think that 5% to maybe 5.50% is more realistic but I would not be surprised that a 6% to maybe 6.5% is possible.
However, when people try to depend on 6%, 7%, 8%, 9%, 10% annual rates of returns and save 5% or maybe 10% of their left over income, they may not have a decent amount for retirement and a sound, strong financial position.
This is especially true if they are heavy on the spending and debt side and not reducing debt, expenses in a reasonable manner.
The more water costs, property taxes, mortgage interest and payments , repairs and maintenance, CHMC insurance, auto, home insurance etc. you have to pay, you are putting yourself at greater risk for financial downturns and problems both on the economic, unemployment and personal finance side.
If you look at many measures of savings rates, they do these calculations from actual savings after mortgage payments, debt payments and actual RRSP, TFSA and other direct, automatic savings.
They do not include RRSP income tax refunds and mortgage, debt payments that people don't have anymore. Most people squander that money away.
Jon, take care and I hope you do well on your exams and getting your higher education.
August 9, 2014
Stock market do indeed able to yield 10+% return over the long run, but what I am concern here is the timing of selling your stocks; is sweet to retire in 2007 when stocks are high, not the case for the unfortunate fellows in 2008. This is not an issue with GIC, and less of an issue with bonds as the price will get back to the face value when mature. That's why I set a very conservative target for my stock portfolio as I want to ease the short term shock to its value.
I agree higher speeding/debt means people are more sensitive to economic and interest change as sudden but small changes in income or expanses on debt service (what happen in US when the interest of sub-prime mortgages reset at much higher level) will already lead to unaffordable level of debt which is going to lead to massive personal bankruptcy if everyone in the society are like that. That's the reason why 2008 financial crisis in the State is so severe, as massive amount of bankruptcy and foreclosure lead to massive bad debt and bank crisis, which bank will refuse to lend and make interest rate even higher and even more unaffordable. Unfortunately, we may be heading to this direction right now, although I don't think it will be trigger by our housing market as many buyers are foreigners that use very little debt and many people and entity, including banks and government are aware of the problem of our housing market and they do take action about it.
Thanks for clearing your method for calculating saving rate, it seems like we have some different calculating method here, but in regardless, he is doing a good job in saving!
November 4, 2014
Jon, I would say that the one most important thing that everyone no matter how financially unsophisticated they are meaning not being financially savvy, financially intelligent is to get rid of debt even at 2.5% to 3.00% line of credits, mortgages, 4% to 6% auto loans, 10% to 29% credit card debt etc.
Any extra money that they are saving from not paying all these debt, monthly payments, just stick it in a TFSA savings account and RRSP's savings accounts, GIC's etc. and worry later what investments later.
By them not having all these payments or less of them, it will in turn reduce their income taxes and give them more money. It is a money snowball of the good kind that keeps on building.
Take care and best pursuits with your higher education, investments, Jon.