Weekend Reading: Lifestyle Creep Edition

By Robb Engen | September 28, 2024 |

Weekend Reading Lifestyle Creep Edition

I swear half my job is to convince my frugal clients to spend a bit more money. I’m not talking about making a complete 180 degree turn to become a different person. But if you’ve always stayed at a Best Western, then an upgrade to the Ritz every once in a while won’t kill you. Heck, you might even enjoy it!

Part of this push to spend more comes from my work with hundreds of retirees who don’t (or cannot bring themselves to) spend up to their capacity. After years of frugal living, never exercising those spending muscles, it’s next to impossible to turn off the savings taps and turn on the spending taps in retirement.

Seeing this firsthand caused me to reevaluate my own priorities. I always prided myself on a high savings rate without necessarily looking down the road at what I was saving for. How much money was enough? As John D. Rockefeller famously quipped, “just a little bit more.”

We’re also fortunate as business owners to get to decide (for the most part) how much we pay ourselves. It’s common advice for business owners to shelter as much income inside their corporation as possible and pay themselves just enough to pay their personal expenses. 

That’s pretty much what we were doing until 2022, when we decided to make a big change and upgrade our house. Our larger mortgage payments, increased desire to travel, and our growing children meant life was more expensive on the personal side of our ledger.

We needed to give ourselves a raise, and so that’s exactly what we did last year and again this year.

We also needed a system to strike the right balance between enjoying life today and having a comfortable retirement.

Very loosely, we’re saving about 20% of our personal income (TFSAs and RESP), setting aside 20% for taxes (paid in quarterly instalments), spending 20% on total housing costs, 20% on daily living (groceries, transportation, health, kids’ activities, etc.), and 20% on travel and guilt free spending.

Yes, the 20-20-20-20-20 budget. I should patent that!

In the past, it was tempting to limit some of the spending categories by either allocating more to personal savings, or by simply paying ourselves less and leaving more in the corporation to invest. In fact, it was typical for us to invest 25% of our business income.

The problem was that trajectory was reducing our standard of living today while kicking a big ol’ tax can down the road in retirement when income sources like corporate dividends, RRIF and LIF withdrawals, and CPP and OAS collided.

And, as I’ve learned, if I didn’t start exercising those spending muscles a bit now there’s a good chance I couldn’t bring myself to live it up in retirement. 

I decided it would be better to introduce some lifestyle creep now to make sure we could maximize our life enjoyment today, tomorrow, and throughout retirement.

So, we’re paying ourselves more while still investing 15% of our business income. That allows us to meet our desired spending needs on the personal side while also investing 20% of our personal income to catch-up on our TFSA contributions.

It’s a nice balance, and it’s freeing to know that we can enjoy life to the fullest today and still have a secure retirement.

Don’t get me wrong, I’m still a saver at heart. But tomorrow is never promised. My wife has MS. Our kids are getting older. If we have the chance, we’re going to take the trip, attend the concert, eat at the restaurant, splurge on the nice Airbnb, and still try to max out our TFSAs.

The trade-off? We might take 15 years to pay off our mortgage instead of 10. We’ll have a smaller corporate investing account balance and may have to work part-time as a way to ease into retirement. That’s okay, I might have done that anyway!

Perhaps no book has influenced people’s behaviour when it comes to money and lifestyle creep more than Bill Perkins’ Die With Zero

And while I’d take the advice of a multi-multi-millionaire energy trader with a grain of salt, the concepts of building memory dividends and maximizing life enjoyment will truly cause you to reflect on what really matters, and whether it’s about enjoying life or watching numbers go up on a spreadsheet.

To summarize, we’ve had some intentional lifestyle creep over the past two years and I don’t regret it one bit. We’re still saving appropriately for retirement with a good system in place – and this trajectory strikes a better balance between living for today and saving for the future.

Promo of the Week:

There are still a few days left to take advantage of Wealthsimple’s 1% transfer bonus. I’ve spoken with several readers and clients who have already taken advantage. One deposited $500,000 from the sale of a rental property and secured a $5,000 cash back bonus. Another transferred $2M(!) from Questrade to secure a $20,000 cash back bonus.

Note that the bonus is paid into a Wealthsimple Cash account (their high interest savings account) in 12 monthly instalments to encourage you to keep your funds at Wealthsimple. Still, it’s an incredibly lucrative offer if you’re in the mood to move your savings and/or investments.

Open your Wealthsimple account today, and download the mobile app. Login and in the upper righthand corner you’ll see a picture of a present. Click on that and you can enter my referral code: FWWPDW to tell them Robb sent you and we’ll each get another $25.

Then, register before October 1st and you’ll have 30 days to transfer or deposit a minimum of $15,000 to get a 1% cash back matching bonus.

It’s that easy!

Weekend Reading:

Short and sweet this week.

A Wealth of Common Sense blogger Ben Carlson compares this bull market run against the epic bull market of the 80s and 90s. Pretty close!

Here’s how to move Locked-In Retirement Account (LIRA) funds to another institution without tax consequences.

Mark Walhout answers the top 10 probate and estate planning questions in Canada:

Here’s a surprising fact. The most common outcome from buying a stock is that you lose all your money:

“The stock market is NOT a rising tide lifts all ships story. It is a haystack with unknown, but required, needles story. So buy the damn haystack.”

How will Canada’s new mortgage rules affect your plans to buy a home? Erica Alini and Rachelle Younglai answer your questions.

In many ways, index funds have effectively “solved” investing. Yet many people continue to delegate their investment management and financial decision-making to financial advisors. PWL Capital’s Ben Felix answers the question of why you’d hire a financial advisor:

You might be surprised to hear that if something happened to me, my wife has been instructed to hand everything over to PWL Capital. That’s how much I believe in the good work that group is doing.

Finally, Shawna Ripari couldn’t resist a spending spree, so she tried a no-buy challenge. Here’s what she learned.

Have a great weekend, everyone!

Weekend Reading: Renting Vs. Buying Edition

By Robb Engen | September 22, 2024 |

Renting Vs. Buying Edition

Canadians are nuts for home ownership, but with real estate prices soaring to unaffordable levels in many areas of the country it has become increasingly difficult to buy a home.

Still, the prevailing narrative around renting vs. buying is that renting is throwing away money and buying is a surefire path to building wealth. That has young Canadians in particular stretching their finances to buy a home, and relying more and more on the bank of mom and dad to help fund the down payment.

Speaking of mom and dad, where do you think this real estate obsession is coming from? Many parents put pressure on their young adult children to buy a home – citing their own anecdotal evidence of price appreciation from the time they bought their first home.

national home price index

The problem is, we can’t go back in time and buy a house in 1984, or even 2004. Aspiring home owners need to buy at today’s prices, which are exceedingly unaffordable.

Meanwhile, there are approximately 5 million rental households in Canada (representing one-third of Canadians). Are they really throwing money away? Hardly. 

PWL Capital’s Benjamin Felix tackled the problem of renting vs. buying in Canada in the latest episode of the Rational Reminder podcast, and then bravely shared the findings in a Globe & Mail article (read the comments if you dare).

“In perfect equilibrium, renting and owning should cost the same because house prices and rents adjust such that the cost of paying for housing is the same either way. But it doesn’t work like that in the real world. A 2012 paper in Real Estate Economics suggests that demand for homeownership, fuelled by perceptions that renting is throwing away money, may make renting even more economically attractive.”

Predictably, criticism included someone who bought a house for $40,000 in 1974 and sold it for $2M. But while the dollar amount sounds impressive, it’s an 8% annualized return before factoring in all the phantom costs that went into owning that home for 50 years (namely maintenance and transaction costs). Meanwhile, the TSX returned 9.36% annualized during that time, and the S&P 500 returned 12.09% per year.

I think one of the major takeaways is to answer the question of whether renting is “throwing money away” and the clear answer is no. Buying then becomes more of a personal lifestyle / happiness decision.

For some, renting provides a sense of freedom and lack of stress. For others, renting is a source of anxiety due to the threat of eviction and lack of control.

Homeowners, on the other hand, often feel a sense of pride and may benefit from the forced savings (mortgage payments). But others feel stress over maintenance and upkeep, and may find the total cost of home ownership leaves little cash flow left over for retirement savings and enjoying life.

Your mileage may vary.

This Week’s Recap:

Last weekend I shared four retirement mistakes to avoid.

The US Federal Reserve slashed its target interest rate by 0.50%, and Canada’s inflation rate for the month of August slid in under target at 1.95%.

The market widely expects similar rate cuts from the Bank of Canada when our central bank makes its next decision October 23rd.

With the inflation dragon slayed (or at least tamed), central banks have turned their attention to employment and will try to stave off a recession. Time to stick this soft landing.

Promo of the Week:

Well, well, well. Wealthsimple extended its 1% transfer bonus promotion. Register before October 1st and you’ll have 30 days to transfer or deposit a minimum of $15,000 to get a 1% cash back matching bonus. Incredible!

Don’t forget to tell them I sent you. Use my referral code: FWWPDW and open your Wealthsimple account today.

Seriously, folks. If you’ve got a few hundred thousand dollars (or more) at another brokerage platform, you’ll get a few thousand dollars (or more) just for moving it over to Wealthsimple – where you can buy and sell stocks and ETFs for free. It’s a no brainer.

Weekend Reading:

Mortgage rates are falling fast and furious – including 5-year fixed rates that start with a 3.

Yes, a cottage is an investment property—here’s how to minimize capital gains tax.

Seniors seeking a decumulation strategy may be asking the wrong questions. Start with your spending plan, then model how you’re going to pay for it. Agree 100%.

The CPP death benefit of $2,500 is ripe for broader reform, like an increase or indexation.

Now for something I disagree with – Industry groups call on the feds to reduce or ditch RRIF mandatory withdrawals. Why?!?

Two recent CRA disputes show Canadians still don’t know TFSA contribution rules.

Morningstar’s personal finance expert Christine Benz says retirement is not a math problem:

“People might be surprised to see a book from me that is half nonfinancial — maybe not even half. But I feel like people are overly focused on the financial and not enough on the nonfinancial.”

After being told Freedom 55 was out of reach, this retiree changed his financial trajectory and retired at 51.

Finally, a great post by the Loonie Doctor on CIPF coverage and whether you should use more than one brokerage to mitigate risk.

Have a great weekend, everyone!

Weekend Reading: Retirement Mistakes To Avoid Edition

By Robb Engen | September 14, 2024 |

Retirement Mistakes To Avoid Edition

Retirement is often put on a pedestal – the pinnacle of achievement after a decades-long career. But the transition from full-time work to full-time leisure can be challenging, both financially and psychologically, if you’re not prepared to meet them.

I’ve witnessed these challenges firsthand working with hundreds of retirees over the years. Here are four retirement mistakes to avoid:

1.) No Clue How Much You Spend

The most successful retirees I know have mapped out their spending plan well in advance of retirement. Rather than relying on rules of thumb, they tracked their spending in the years leading up to retirement to identify their true cost of living.

They’re not necessarily focused on hitting a certain portfolio milestone because they know it’s their spending that matters most. Who needs $2M if you only spend $50,000 per year?

This is one of the most critical pieces of your retirement plan. I often say that the best predictor of your future spending is what you’re spending today.

Indeed, most of my retired clients want to maintain their current standard of living, if not enhance it if they can with additional spending on travel, hobbies, and helping out their kids and grandkids.

Once you have a good sense of your desired spending you can determine which accounts to draw from, when to take government benefits, and how to fit all of your retirement income puzzle pieces together in a tax-efficient way. But it always starts with your spending.

2.) Not Considering One-Time Costs

Okay, so you’ve figured out your desired annual spending needs. But life doesn’t move in a straight-line.

Over a 30+ year retirement you can certainly expect to replace a vehicle, renovate or repair parts of your home, offer financial assistance to your children (post-secondary, wedding, house purchase, etc.), or take your own bucket list trip.

Some of these expenses can converge all at once during your earliest retirement years. You buy a new car, renovate the kitchen or backyard, take a dream vacation, and still pay your kids’ phone and auto insurance bills.

Many also find themselves paying out of pocket picking up prescriptions, mobility aids, in-home care, and groceries for their own aging parents. 

Meanwhile, a poor sequence of investment returns can wreak havoc on your retirement nest egg at the worst possible time – while you were counting on significant withdrawals.

Don’t go into retirement blind to these realities. Consider a 3-5 year plan of one-time costs and how you’ll fund these expenses. Ideally, take care of some of them in your final working years. Set aside a bucket of cash from which you can draw for lump sum expenses or emergencies.

3.) Not Switching From Saving to Spending Mode

This is a two-part issue. One, aggressive investors are often still focused on achieving the highest rate of return in retirement. They’re chasing stocks, concentrating investments in smaller niches, and ignoring that they’ve basically already won the game.

Now I’m not suggesting you need to sell all of your stocks in favour of bonds, GICs and cash. Not at all. I’m just saying to think more sensibly about diversifying away risks by investing more globally instead of concentrating on one country, sector, or a handful of individual companies. 

The risks that got you here might have paid off, but you’re playing a different game now that you’re retired. The stakes are much higher, with less room for error.

Two, investors have a hard time turning off the savings taps and turning on the spending taps. I’ve worked with retirees who have no plans to stop contributing to their TFSAs throughout retirement.

Hey, if you don’t need that money to fund your lifestyle, you want an extra margin of safety for potential poor health outcomes in your final years, or you want to leave a large inheritance to your kids then I say go for it – keep funnelling money into your TFSAs until you die!

But some retirees take this too far. They forgo vacations because they’d prefer to make TFSA contributions. Discussions around RRSP or RRIF withdrawals are often about where else to invest those funds (TFSA, non-registered investments) instead of using the funds to meet desired spending needs.

Retirement shouldn’t just be a shell game of moving money from one account to another. Ideally, you’re using your available resources to maximize your life enjoyment. Isn’t that what you saved for in the first place?

4.) Not Considering Your Home Equity Release Strategy

Most Canadian homeowners have seen an unprecedented rise in property values over the last 20 years.

Canadian home prices

It’s likely that your home is your largest asset in retirement, if not a close second. But you can’t eat your cupboards, so unless you have a plan to tap into that unproductive home equity you may end up living a smaller lifestyle than you’d like to in retirement.

For many Canadians who lack retirement savings, downsizing (or selling and renting) is the most obvious solution. You can add hundreds of thousands of dollars back into your savings pool that can be used to maintain your desired standard of living, or at least prolong it for several more years.

Even if it’s not necessary to tap into home equity to maintain your standard of living, for health reasons it simply may not be practical to remain in your home indefinitely.

A paid-off home is a nice back-stop to have for your later years, but selling earlier should not be overlooked if it would lead to a drastically improved retirement outlook.

This Week’s Recap:

An important piece on the pitfalls of leaving your advisor to invest on your own. Yes, you can slash your investment fees to the bone. But you need to be able to stick with your investment plan, and seek out professional advice at key life stages.

A look at two types of overconfident investors and how they can self-sabotage their portfolios.

My latest for MoneySense: You’ve reached your 40s, are mid-way in your career and realize you’ll never have a pension. Here’s how to get ready for retirement.

Promo of the Week:

Many of you took advantage of Wealthsimple’s 1% transfer bonus promotion this summer. That promo has ended, but you can still take advantage of Wealthsimple’s zero-commission trading platform and they’ll reimburse any transfer-out fees (typically $150 per account) if you move $15,000 or more.

I’ve almost fully converted to Wealthsimple, starting with my RRSP and TFSA several years ago, and my LIRA earlier this year.

The in-kind transfer from TD Direct to Wealthsimple was completed in three business days.

The platform is so easy to use. Set up recurring contributions AND purchases of your favourite ETF right from the mobile app. You can also turn the dividend reinvestment feature on or off with a simple tap.

Generation clients (individuals or households with more than $500,000 in assets) enjoy other perks like a 4.25% interest rate on their Wealthsimple Cash savings account, 10 airport lounge passes, priority support, and a host of other benefits.

Use my referral code: FWWPDW and open your Wealthsimple account today.

I’ve been told the addition of RESPs and corporate investing accounts are coming to the Wealthsimple Trade platform soon. Once added, I’ll move my corporate account from Questrade and my kids’ RESP from TD Direct.

Weekend Reading:

Canada is in the midst of the greatest wealth transfer of all time, as some $1 trillion passes from boomers to their millennial kids

Seniors’ scams are on the rise. Some advice – don’t pick up the phone.

Here’s Jason Heath on which types of pension income can be split with your spouse in retirement.

Michael James with an honest review of The Canadian’s Guide to Investing:

“The authors would need to put extensive work into this book to bring it up to date. As it is, I can’t recommend it to others.”

The Globe and Mail’s Erica Alini says that fixed mortgage rates of below 4% are being spotted in Canada for the first time in years.

Dr. Bonnie-Jeanne MacDonald and Doug Chandler are doing the lord’s work, tackling misconceptions around the decision to claim CPP early. Their latest research looks at the common narrative around taking CPP early to invest on your own.

“It concluded that holding on to RRSPs savings, instead of using them to finance a delay in receiving CPP/QPP benefits, carries more risk and less reward.”

A Wealth of Common Sense blogger Ben Carlson shares the success rate of the popular 60/40 balanced portfolio over the last 100 years or so.

Finally, Canadian seniors are wealthier than ever. Is it time to do away with the seniors’ discount?

Have a great weekend, everyone!

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