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Friday, March 6, 2015

What’s It For?

Posted by Tim Stobbs on February 18, 2015

You have likely already been reminded you should be investing some money in your RRSP today.  How do I know that?  It’s the season for it so most people via the 1000s of ads out there are told they really should be investing their money.

Yet I’ll offer you a more basic question than: RRSP or TFSA, stock versus bond, or even index fund or actively managed…..the question is: why?

Pardon?!?

Why are you saving and investing the money at all? What is the purpose of the investment?

*silence*

Need a hand? Perhaps the answer is: to retire.  Which is a good idea, but what does that look like?

*longer silence with confused look*

Far too often we save blindly because we fail to really understand what sort of lifestyle you want in your retirement.  After all, depending on the lifestyle you want that will drastically change how much you should be saving and how early you can retire.

For example, let’s say you have a couple who is in their 50s and they have been really good savers and have $500,000 in investments and a paid off house.  Do they need to work any longer?  Perhaps it depends on the lifestyle they want.

If they choose a modest life of mostly hanging around the house, being involved in the local community helping out with a few organizations, reading a lot of books and playing with the grand kids, they don’t really shop a lot and when they do they tend to buy high quality items that last a long while…well depending on the exact numbers they could retire in a just a year or two.  Yep, if they don’t need much income, perhaps $24,000 a year, they could potentially retire shortly.

But if they want to travel the world for four months of the year, enjoy shopping a lot and are real foodies that enjoy all the finer things in life.  Again it depends on the exact number, but if they spend like $5000/month.  They may very well have to keep working until they turn 65 or later.

It all depends on the why.  Why are you saving?  What sort of life do you want to lead and what is stopping you from doing that at least in part right now before you even consider retiring?

The illusion is that someone one choice is better than the other, when it fact, what matters most is which one appeals most to you.  If you have never really spent on $5000/month when you were working, what on earth do you think you will be doing when you retire?

What do most retirees end up spending? It varies but on average they spend $30,000 to $40,000 a year.  That’s it.  No huge lifestyles of the rich and famous, but rather a modest but happy life having lots of time to do those things you enjoy.

You could do less than that if you want, especially if you consider your mortgage was paid off.  So if you aimed for $30,000/year target you could be retired rather easily on $750,000 in investments.  Yep, that’s it. Forget about the million dollar mark, you don’t need it.

So if someone tells you they need at least $2 million or more to retire…I would ask why?  It won’t change the answer in some people’s cases, but more often than not they don’t understand the why and end up with overly large targets.

Instead, take the quicker way out…think about what you really want from your retirement and then plan around that.  The more detail you can provide the better plan you can make.   It won’t also be easy to do, but in the end you at least know exactly why you are putting money into your RRSP or TFSA.

What are you saving for?

Saving Contributions 2014

Posted by Tim Stobbs on January 23, 2015

So this week I should have finished maxing out one of our TFSA already.  If you recall in December’s net worth update I pointed out I put some of that money aside.  Then by Feb we should finish off the other TFSA account contribution for the other account.  So where do I put the money for the other 10 months of the year?

Well you see that is actually turning into a small issue as I’m running out contribution room on where to put it.  We made an effort last year to finish off as much as my RRSP contribution room as possible into my wife’s spousal RRSP.  Now the only tax sheltered account contribution room we will have left is about $20,000 in my wife’s name.  So I have to play around with the tax implications of her buying RRSP in her name as she doesn’t make much money per year so I’m not sure if the tax savings are really worth it.  After all if we drive her income to zero with RRSP contributions, I don’t know if her basic income deduction will transfer to me…I’ve literally never tried that before.  So if anyone knows, I would appreciate some advice.

So we will be back to non-registered investment accounts at some point in the year, which is just fine. Overall I expect by age 40 we should have approximately $100,000 in non-registered savings (give or take a bit). The longer term plan for the non-registered money is fairly simple, after I stop working at my day job I will drawing down the non-registered accounts first and also move what we can over to our TFSA accounts for anything that produces taxable income (like a GIC).  The idea is to keep our income tax bill as low as possible so we will likely keep dividend paying companies in the taxable accounts and any cash savings will eventually end up the TFSA (even if they don’t start there).

Perhaps the only thing I’m debating in my head is where do I open up the non-registered accounts?  On the one hand I like to keep our fees low and the other hand there is a certain ease of access if I put the accounts with our existing bank.  So I’m curious what other people have done and why did you pick that option?

How Isn’t Investing the Same as Gambling?

Posted by Dave on October 28, 2014

I like to bet on sports, mainly hockey and NFL football, which I also enjoy watching. Before I make a bet (my normal bet being somewhere between $2-$5), I do some basic research on the money I’m about to wager. I look at the piles of information available (for non sports fans, you would be amazed at the tomes of information compiled in support of a 60-minute game) and make my pick, laying money down and hoping that the hypothesis I had about the game was correct.

This past Sunday, I felt that the Indianapolis Colts would win at a margin higher than the posted “line” of 3.5 points. I played for higher odds and bet they would win by 7 points. If you were to look at the score of the game they played in, you would see that I was completely wrong with my bet (not only didn’t they win by 7, they lost by 17). A loss betting is not good, as you lose 100% of the wagered amount, which is the reason why I keep my bets small enough to make watching the game interesting to me, while minimizing the impact of the losses on my available betting money.

For me, Investing works the same – prior to investing – whether it’s in a house, individual stocks or bonds, or Exchange Traded Funds, I research thoroughly (there is actually less information on a lot of investments than there is on sports games). I filter through all of the information and make my investment decision based on what I’ve read. As I invest, similar to when I bet on a football game, I have a story of why I’m making the particular investment I’m making, as well as an expected outcome of the money I have laid down.

To me, the main difference between sports betting and investing is the amount of faith I put into the information available. While there have been cases of falsified information, management and the auditors hired by corporations have much more to lose when they make reports on companies than some guy who makes a living selling pageviews on a sports website. Another difference is the “soft” decline offered by stock investment, compared to a binary win or lose outcome of a football game. Any company I’m investing in at least has assets that can be sold off which I have a chance at receiving some money for if the company fails.

Both sports betting and investing depend on third parties acting out the hypothesis you have in place for them – whether it’s a projected 7 point win for the Indianapolis Colts, or by maintaining the current market share and profitability in the long-term for a company I’m investing in. I’m sure other people may see it differently, but I see both of these activities as somewhat risky, just in different ways. It’s for this reason I’m much more willing to sink thousands of dollars in the stock market and a very tiny fraction of this amount into sports betting.

When you “pull the trigger” on an investment, how do you convince yourself you’ve made the right decision out of the thousands of things you could invest in?