The First $100K of Investments

Posted by Canadian Dream on January 6, 2010

I’ve heard from several people that the first $100,000 of investments are the worst and after the last three years I can believe it.  It’s been  a very long road to get here.  Back in Dec of 2006 my investment net worth were a mere $32,100.  By the end of 2007 I was at $50,700 and then 2008 knocked me back down to $49, 100.  So the majority of my growth was in the last year.  So what happened exactly in 2009?

Well I’ve been looking at the numbers to sort that out since in my mind I didn’t do very much different than the previous years.  Yet this is the factors that leap to my mind when I looked at the numbers in detail:

1. Do Not Underestimate a Bottom in the Market.  During the market drop in 2008 and into 2009 I never stopped investing.  Was it scary? Hell yes!  But I keep buying stocks that looked attractive and kept putting money.  The pay off was a huge surge in growth.  For example my TFSA did a 54% return while my wife’s TFSA managed a 30% return.
2. A Good Pension Plan.  I took a new job at the end of 2008 with a damn good defined contribution pension plan.  I contribute 5% and they put in 6%.  Yet I can also tap two other programs to boost my employer’s contribution from 6% up to a total of 11%.  So grand total that’s equal to 17% of my salary going into my pension plan.  So when you add that to a bit of growth its easy to see how it went from nearly $0 to over $15,000 in a year.
3. Have a Plan.  In 2009 I wanted to add $25,000 to our various accounts (I’ve yet to confirm if I made that goal).  That goal helped me to stay focused on adding to our investments regardless of everything else in my life.  I kept at it and made sure to keep investing even when I had doubts (which trust me I had them).
4. Luck helps.  I won’t lie to you my TFSA result was more about dumb luck than skill.  I picked three stocks for that account which I bought mainly for their distributions (on average a 10% yield) and they just happen to do very well over 2009.  Also me getting the second job at the School Board obviously helps with boosting my cash available for investing for the last two months of 2009.

So overall I would say the three things that got me to my first $100,000 was having goals, being stubborn enough to follow the plan and a bit of luck.  So I’m sorry to say I don’t have any investing secrets to share or a plan to make you rich fast.  It all comes down to deciding your goals and keep working for them even when things get hard.

Pension Series – Part IV – A Modest Proposal

Posted by Canadian Dream on December 3, 2009

Well yesterday I pointed out some flaws in upgrading the CPP system to a Universal Pension Plan.  That’s not to say I think we should do nothing.  Since doing nothing will have some issues like:

1. OAS – Payments come out of general revenue from the government, if we don’t fix pensions we could end up having a lot of people relying heavily on this meaning making any reduction in payments could be a very long and hard uphill battle as the tax base sinks after the baby boomers retire.
2. Government Defined Benefit Plans – These will become much more of a burden on the tax base if we don’t deal with plans sooner than later.
3. People Shouldn’t be Left Behind.  Granted there is case for offering retirees a minimum standard of living since we don’t want be heartless about things and second there is a basic economic idea behind this.  Poor people tend to use more government services that those that are better off.  If we do nothing we still pay in the end, so let’s be proactive and nice all at once.

So here’s the outline of my modest proposal.

1. Make the Default Option on all Retirement Savings Plans an Opt In.  The idea here is simple, people  are lazy, so let’s make saving easy for them.  Also people don’t tend to notice they are saving if it comes off their cheque.  So if you really don’t want to save in the plan you need to file paper work to that effect.
2. Raise the YMPE by $20,000 for CPP.  This would only be a one time adjustment to boost inflows to the CPP plan and raise the maximum payout by about $4700 per year (FYI: current YMPE is $46,300 and max pension is $10,905/year).  The brilliant thing about this adjustment is it won’t significantly alter benefits to boomers since CPP benefits are calculated with the average of your earnings during your working life.  So a raise of contributions by the boomers just a few years prior to their retirement will only very slightly increase their payouts.  This will also allow existing retirees to keep more pension money if their spouse dies and they take over their spouses CPP payout.  This is a good idea since right now if a spouse dies and you are both at the maximum CPP payout it can drop the surviving spouse into near poverty conditions  if they have no additional savings since they also lose their spouses OAS.  Also raising the YMPE won’t effect those in lower income jobs by taking any more money from them and will allow younger people who pay in for longer to get more of the benefit over their working life.  Total additional cost per person per month is $82.50 assuming you make up the maximum YMPE.  So it’s a modest impact even for those that are going to retire early.
3. Close off all Defined Benefit Government Run Plans.  Then switch all new workers over to a defined contribution.  We collectively can’t afford the unlimited liability from these defined benefit plans going forward.

So that’s my modest fix for pensions and retirement savings in Canada.  Now obviously I likely haven’t thought of every angle on this yet, so I want to hear your ideas on this proposal.  Is it good, bad, or do you have a better idea?  Please share your ideas with a comment.

The Pension Series – Part III – Universal Solution

Posted by Canadian Dream on December 2, 2009

So with all of this mess around pensions what should be done?  Well there has been discussion from various groups with potential solutions.  One of the more interesting ones was a proposal from CARP (Canadian Association of Retired Persons) which was discussed on the Wealth Boomer blog.

Here’s a summary of the key points:

CARP says pension experts agree retirement income from all sources must replace between 60 and 70% of working income. Currently, the CPP provides at most 25% of Year’s Maximum Pensionable Earnings (YMPE): $46,300 in 2009. Thus, for those without employer-sponsored private pensions, the maximum CPP benefit this year is $10,905.

CARP suggests gradually phasing in a UPP so that coverage would eventually cover 70% of pre-retirement income to a maximum pensionable earning limit of $116,667 (which is the 2009 limit for Registered Pension Plans).  Like the CPP, the UPP would be a mandatory enrollment plan. CARP is wary of any version that would let individuals “opt out.”

The issue with a truly universal pension plan is someone still has to fund it.  In this case that someone would be you and your company (ie: they raise prices and their customers pay it).  So let’s assume for the moment we want to double the coverage of CPP to 50% replacement of YMPE and raise the YMPE to $166,667 (It’s not exactly the CARP proposal, but similar to some others I’ve seen).  That would mean that we would need to first double our contributions for both the worker and employer from 4.95% each to 9.9% each and then have to keep paying CPP on just about every dime of income you make.

In a realistic sense this would change the contributions of someone making $75,000 a year from the maximum of $2118 per year now to $7425 under the new proposal.  That would be an increase of over 250%, that your employer would also have to match.  No wonder CARP is wary of any version that let’s people opt out because you would see a huge number of people willing to take the risk of doing it on their own and keep their money.  This would be like the government jacking up taxes by 5% just about every person and business in Canada at every level of taxation.

This unfortunately is the issue with any radical reform to a mandatory plan is it places a huge burden on everyone and I think most of us are not really willing to make that trade for a benefit that we won’t see until we turn 65.  I know some people might be with that trade off, but the whole idea is working under this proposal is basically that people are idiots and can’t manage to save for retirement by themselves.  We don’t need a nanny state where the government does everything for you since you can’t be trusted to do it yourself.

So where does this leave us?  Well I’ll take a try at proposing a solution tomorrow, but in the mean time what do you think of increasing mandatory savings plans?  Would you stay in a plan like I outlined above or not?