Savers rejoice! We’re in the midst of a high interest savings war. The battle for your business isn’t being fought by the big banks, but by upstart FinTech companies looking to build up deposits. Indeed, the big five have mostly ignored the high interest savings account market. Why bother, when they’re hauling in record profits elsewhere?

That meant savvy savers had to look elsewhere to stash their cash and keep ahead of inflation.

LBC Digital

The first shot was fired several months ago when the relatively unknown LBC Digital (an offshoot of Laurentian Bank) started promoting its high interest savings account that pays 3.3 percent with no minimum balance required and no monthly fees.

That kind of interest rate was sure to draw wide-spread attention, but the sign-up process and user experience has been clunky at best. LBC also must have been getting some high-roller deposits because they recently changed to a tiered structure that pays 3.3 percent on balances up to $500,000 and 1.25 percent on balances above that threshold.

Time will tell whether the 3.3 percent interest rate is here to stay. Colour me skeptical.

Shades of EQ Bank’s launch four years ago, I thought. Back in 2016, EQ Bank burst on the scene offering a chequing / savings account hybrid that paid a whopping 3 percent interest. Deposits flooded in, and EQ Bank had to temporarily halt new account sign ups until it sorted out its back-end procedures. The 3 percent rate didn’t last long, settling in at a still competitive 2.3 percent everyday interest.

Wealthsimple Cash

Next to make a splash was the always creative and customer-centric Wealthsimple. Last week, the company best known as Canada’s top robo advisor announced a new product – Wealthsimple Cash – a saving and spending account that pays an eye-opening 2.4 percent interest.

Wealthsimple Cash has no monthly account fees or low balance fees. But it’s the ‘coming soon’ features that have people talking. A prepaid Visa card called the Wealthsimple Cash card will allow clients to make purchases from their account like a debit card (anywhere Visa is accepted). Clients will also soon be able to withdraw cash from ATMs across Canada, send e-Transfers, and pay bills. There’s also a promise of no foreign exchange transaction fees coming soon. The Cash card will even be made out of Tungsten metal.

I noticed a lot of confusion about whether Wealthsimple Cash deposits were covered by CDIC (they’re not). Funds are actually protected by CIPF (Canadian Investor Protection Fund) coverage through ShareOwner, Wealthsimple’s custodial broker.

I’m getting lots of questions from readers about the new Wealthsimple Cash account (hybrid chequing / savings with 2.4% interest) and its lack of CDIC coverage. I reached out to clarify what this means, and here’s what I found out:

— Boomer and Echo (@BoomerandEcho) January 23, 2020

EQ Bank

Not to be outdone, EQ Bank surprised everyone when it announced that its everyday rate of 2.3 percent got bumped up to 2.45 percent. The EQ Bank Savings Plus Account has no minimum balance, no banking fees, plus unlimited e-Transfers, bill payments, and EFTs.

Accounts are limited to a $200,000 maximum per customer. All deposits at EQ Bank are also eligible for CDIC deposit insurance.

Tangerine and Simplii

Once thought of as the pioneers of no-fee banking and high interest savings, Tangerine and Simplii (formerly PC Financial) have fallen behind these young upstarts. Both offer a pathetic 1.05 percent on their high interest savings accounts.

Their go-to acquisition strategy is to offer teaser rates for 3-6 months before the interest rate drops back down to 1.05 percent. The current promotion has Tangerine offering 2.75 percent for five months, while Simplii is offering 2.8 percent until May 20.

The Globe and Mail’s Rob Carrick also weighed in on the savings account interest rate war, led by these feisty FinTech upstarts.

This Week’s Recap:

I made a big move with my portfolio this week, switching to Wealthsimple Trade – Canada’s first and only zero-commission trading platform.

WestJet just (temporarily) deposited $50 into my WestJet Dollars account. I wrote about WestJet’s clever marketing trick over on the Rewards Cards Canada blog.

I’m finally getting into a groove after my third full week working from home this year. I’ve been doing a lot more financial planning than I expected – which has been a pleasant surprise. Freelance work has also picked up, so I find my days just fly by.

My wife and I joined a gym nearby and visit there three times a week before lunch to break up the day. I’ve stuck (for the most part) to not working during the evenings or weekends. It’s a tough habit to break when you’ve been used to doing that for a number of years.

We’ve also slowly switched to a plant-based diet (my last taste of beef was an Irish Stew in Dublin last summer). Our reasons are primarily health, environmental, and ethical. The jury is still out on whether this diet is actually saving us money. We tend to buy lots of fresh fruit and vegetables, which are not exactly cheap – especially in the winter.

I’m tracking our food budget more closely and hope to report on any significant difference in our spending. In the meantime, here’s a great post on the How To Save Money blog on cheap vegan food and how much you can save by going vegan.

Weekend Reading:

Our friends at Credit Card Genius have updated the best gas credit cards in Canada for 2020.

The brilliant Morgan Housel uses a weight-loss analogy to explain why wealth is what you don’t spend:

Food “compensation” seduced its way into 90% of the exercisers’ lives. Another study found that “people fresh from the gym overestimated their energy use by up to 400 percent and ate more than twice as many calories” as they had just burned off.

Something obvious but hard to deal with in real time is that exercise only works when its gains aren’t cashed in.

Are active managers really better in downside protection? It’s a common argument against passive investing, but the data doesn’t hold up.

Some good thoughts by Michael Batnick on the active vs. passive debate: Save more, stay invested, and avoid market timing.

Millionaire Teacher Andrew Hallam is such a prolific writer and with his latest post on how to be a great investor he channels his inner Norm Rothery to come up with some wild metaphors:

“The Russian stock market, for example, offers an intoxicating call. It grew faster than a crowd offered free vodka near the Kremlin. It swelled 53.2 percent in 2019, when measured in USD.”

Michael James reports on his 2019 investment returns. Not bad for a newly retired investor!

A great post by My Own Advisor blogger Mark Seed about staying invested even in the face of uncertainty.

In his latest Common Sense Investing video, Ben Felix looks at market forecasts and says there are two big problems with these forecasts – they often make investors nervous, and they are usually wrong:

PWL Capital’s Justin Bender must be the leading expert on foreign withholding taxes in Canada and in his latest blog post takes an in-depth look at FWT on equity ETFs.

Dale Roberts at Cut The Crap Investing says not to let foreign withholding taxes drive the ETF investing bus.

An interesting post by Nick Maggiulli debating whether big tech is taking over the stock market.

Bank of Canada governor Stephen Poloz shares an idea about how splitting home ownership with investors could make housing more affordable.

A Wealth of Common Sense blogger Ben Carlson explains why owning a home is not for everyone.

Preet Banerjee looks at the pain of paying – how the method of paying affects spending and happiness:

Global News updates its annual look at the best cellphone plans in Canada – including which deals are worth the money.

A detailed breakdown of ride sharing versus car ownership and why you might want to ditch your car.

Finally, the real challenge of the next decade is matching your retirement dreams with reality.

Have a great weekend, everyone!

2019 was a terrific year for stock market returns. This bull market has gone on for so long now that investors can’t help but wonder, are we due for a correction this year or in the near future? 

It’s a question I get a lot from my clients these days, especially the soon-to-be-retired and the recently retired. Understandably, they want to take some risk off the table in preparation for an inevitable correction.

It makes sense. As we watch stocks continue to reach all-time highs, we want to believe we are “due for a correction”. This type of thinking has occurred several times in the past 10 years, and if you chose to pull money out of the market to avoid a potential correction you would have missed out on even more gains.

The truth is, nobody knows if or when a correction will take place. The best we can do is guess at a range of possible outcomes based on historical returns. As investment blogger Nick Maggiulli points out in the investor’s fallacy, markets are never “due” for anything:

Assume I flip a coin 5 times and get the following result (let H = heads and T = tails):

HHHHH

What is the probability that my sixth flip is also a heads (H)? Assuming the coin is fair (equal likelihood of heads and tails), you already know that the answer is 50%. Because coin flips are an independent process, prior flips have no bearing on future flips.

But it doesn’t feel that way does it?

What’s an investor to do? First of all, we know that any money invested in the stock market is money we won’t need to touch for at least five years. That means, for a retiree or soon-to-be-retiree, you have an appropriate amount of your spending needs in cash (1 year), another bucket of spending in short-term bonds or GICs (3 years), and the balance of your portfolio invested in an appropriate mix of stocks and bonds. 

Since we know the long term trajectory of the stock market goes up, we’re not concerned about any short-term volatility. We have four years worth of spending available in easy-to-access cash or fixed income instruments – plenty of time to ride out any market crash and avoid tapping into our investments at an inopportune time.

For younger investors in the accumulation stage, a market correction represents an ideal time to buy stocks at a discount. Again, since you won’t need to touch these invested assets until retirement, a correction should be treated like a buying opportunity as opposed to a scary event.

What want to avoid is the notion that we have any predictive abilities whatsoever when it comes to market events. No one can correctly identify the ideal time to escape a correction, or to get back in to catch the ride up. Indeed, these events tend to happen close together, with the stock market’s worst days followed closely by its best days (and vice-versa).

That’s why it’s best to stay the course with a sensible long-term investment strategy – even at what could potentially be the tail end of a long bull market. The only time you should be worried about a correction is if you need the money within the next five years and haven’t made an appropriate plan to access the cash.

If that describes your situation then now might be a perfect time to consider trimming some of your portfolio gains from last year and building your two retirement income buckets (1 year of spending in cash, 3 years of spending cash in GICs). 

This Week’s Recap:

I felt especially grateful that I get to work from home and that I didn’t have to venture out too much in the brutally cold temperatures this week. 

Great day to work from home.

Who am I kidding? They’re all great! pic.twitter.com/1b3a3Qw3UW

— Boomer and Echo (@BoomerandEcho) January 13, 2020

Earlier this week I explained the difference between tax deductions and tax credits.

Next, we had a reader story from Kevin who wrote about his ‘mortgage gambit’ where he loaned himself a mortgage from his LIRA. 

Promo of the Week:

To help kick-start your 2020 savings, Oaken Financial is giving away a GIC with an opening value of $500 to one lucky winner! How to participate? Simply fill out all required information on this link (takes 1 minute)

At Oaken, you’ll find some of the highest savings rates on the market. You’ll never be surprised with a hidden fee or have to search through fine print. And you’ll always sleep soundly knowing your deposits are eligible for CDIC coverage, up to applicable limits.

Oaken’s contest is open to legal residents of Canada (excluding Quebec) who are over the age of majority in their province/territory at the time of registration. Starts January 13, 2020, 12:01 a.m. ET and ends on January 31, 2020 at 11:59 p.m. ET. Prizes available to be won: 1 x Oaken Financial GIC with an opening value of $500.

Weekend Reading:

Millionaire Teacher Andrew Hallam explains why your financial advisor doesn’t deserve credit for your gains.

Rob Carrick offers some great advice in this column on whether to pay down the mortgage or set aside an emergency fund:

“When you own a home, the pilot light of anxiety about both expected and unexpected costs is never off. The best way to ease this worry is to have financial resources you can draw on.”

I was happy to contribute to this excellent piece by Jonathan Chevreau in MoneySense on mutual fund fees and the future of investment advice. 

Dan Bortolotti updated the 2019 Couch Potato Portfolio returns for his model portfolios. Of note:

• Tangerine Balanced Portfolio – 14.06%
• TD e-Series (Balanced) – 14.79%
• 3-ETF Balanced Portfolio – 15.02%

How did your investments perform in 2019? Did your balanced portfolio come close to those returns? If not, maybe it’s time to switch to a passive indexing strategy.

David Aston delivers the definitive answer to the RRSP vs. TFSA debate.

Our friends at Credit Card Genius look at the best small business credit cards in Canada.

Air Miles has a Flight-A-Day Giveaway where you can earn a chance at a $25,000 flight voucher.

Travel expert Barry Choi answers the question: Is the American Express Platinum Card worth the $699 annual fee? 

American Express Membership Rewards is arguably the most valuable travel rewards point ‘currency’. Barry Choi explains how the Amex Fixed Points Travel Program works.

Speaking of rewards programs, it’s time for Aeroplan to stop grabbing back the miles of their inactive customers.

Alyssa Davies at Mixed Up Money looks at how meal planning saves you money. Indeed, this budget friendly exercise has saved us thousands of dollars over the years.

Preet Banerjee shares his latest Money School video with a look at how to save money on term life insurance:

Finally, a long but important read on the topic of aging and how we’re using technology (a pacemaker is just one example) to extend our lives – yet what happens when the mind gives out before the machine?

Have a great weekend, everyone!

This is a reader story from Kevin in Toronto, who, after getting laid off, took an unconventional approach with his locked-in retirement account (LIRA) – paying off his mortgage and then setting up a LIRA mortgage.

What are the pros and cons of loaning yourself a mortgage from your RRSP or LIRA? Read on for the details.

Growing up, I never had sufficient exposure and education to personal finance. My grandparents lived in a decent home, which was bought at a very reasonable price in an incredibly valuable neighbourhood that benefited from 40 years of real estate growth, all while living more modestly than they needed to.

My parents also bought their home in the booming 1980s when prices and wages were decent, but interest rates were punitive. They eventually moved up the property ladder and into their dream home. All along I was kept in the dark about all this and, as I grew into adulthood, eventually found myself reading more books and blogs around personal finance to learn the context of their history.

First Time Home Buyers in Toronto

Back in 2012, my wife and I bought a house in a family-friendly neighbourhood near a subway station in Toronto. We had both saved up since before we met and knew we wanted something we could start our family in without feeling too crowded for space.

We were lucky and grateful to have saved more than a 20 percent down payment, and we locked-in to a mortgage at 2.99 percent for five years. We have been told how lucky we were to have bought when we did, especially by friends and family who have been left on the sidelines of homeownership.

Fast forward to 2019, after we renewed early at 2.49 percent in 2016 and added two kids and a whole lot of daycare costs to the family, we were looking to renew once more while rates are still considered historically low. Unfortunately, we were not able to get a renewal rate as low as even our initial mortgage. We needed to determine the best option for our renewal considering we may want to move up the property ladder and still have access to an emergency fund.

I became more interested and engaged in personal finance, drawn to the likes of Boomer & Echo for the practical advice and relatable stories of Robb and his contributors. As our family grew, and our situation demanded more personal and financial attention, I knew I had to make sure the money we brought in was being utilized to its best potential.

The Best Laid Plans

Then in 2018, while waiting for our second child to join our family, I experienced a major shock and life setback: I was laid off. This was a double hurt as we knew the impact would be felt both in the short-term – going on EI and utilizing severance pay – and long-term that I was no longer enrolled in a defined-benefit pension plan.

At the time, I decided to take the pension money and manage it myself inside a LIRA, or Locked-In Retirement Account, in case I found myself in another workplace pension and could use it to buyback service. However, my new job only has a defined-contribution pension, so I’m left to manage my LIRA on my own, with no ability to contribute to it and no early access.

I knew I’d have to be a prudent investor to carefully grow this retirement fund in the age of rock bottom interest rates, low fixed income yields, and the tail-end of a long-running bull market. How can I get this to grow enough to meet my retirement goals?

My Mortgage Gambit: How To Set Up an RRSP or LIRA Mortgage

Here’s where our mortgage and my LIRA will come together, and I embark on what I jokingly call the “Mortgage Gambit” (in honour of Norbert’s Gambit): I’m going to stop worrying about my retirement fund and raid my LIRA as an RRSP mortgage!

Starting this process early in 2019 allowed us to do the research and take stock of what was needed to have in place to be able to raid my LIRA at mortgage renewal time in mid-2020.

First, I needed to have a LIRA with an institution that can hold a Non-Arm’s Length Mortgage. Fortunately, I happen to already be a customer with the brokerage arm of a big bank that can hold a mortgage in an RRSP.

Second, we needed enough money in said LIRA to cover the balance of the mortgage. Since I could not add funds to the LIRA, it meant having to knock down the remaining principal of our mortgage debt.

After many years of diligent TFSA contributions, and the severance from my lay off, we planned to use our savings to pay down the balance over two calendar years using the mortgage’s prepayment options.

My wife and I began to slowly exit our investment positions and hold cash or short-term GICs to ensure we would not compromise our plan. We would track and control our spending for the year, limiting purchases to necessities and travel to a minimum. By the end of 2019, we would maximize the annual mortgage prepayment and then, in the beginning of 2020 before our renewal, we would make another prepayment to bring our balance down to below the amount available to hold the mortgage in the LIRA.

Third, we had to visit the bank and ensure they would allow us specifically to engage in this plan and that we met all the requirements. Thankfully, we would qualify and got a rough idea of the costs and what our interest rate might be. We would have to pay a set-up fee, an annual maintenance fee, a CMHC premium (as a requirement for Non-Arm’s Length Mortgage), and some legal fees.

The eligible interest rate was the bank’s posted 1-year open rate. After crunching those costs, and considering those factors, we still decided to pursue this endeavour.

Why I Took This Approach With My LIRA

Now you might be asking, “why would someone go to this hassle when he could just renew with a “vanilla” mortgage and invest aggressively in his LIRA to get the returns needed to grow it over 20 years?”

I thought about this, as a Couch Potato or Four-Minute Portfolio seemed appealing for the LIRA. It all came down to the one thing most Canadians, especially our dual-income, kids in daycare, contemporaries struggle with: cash flow.

While we are grateful to no longer be living paycheque-to-paycheque, we wanted our kids to have a standard of living that would allow us to have fun and feel comfortable without going into debt or dipping into our savings.

When my wife went back to work in mid-2019, after being on parental leave, we started paying for full-time infant daycare while already covering before & aftercare for a kindergartener and started feeling the pinch. When we felt short on both time and money, we resorted to dipping into our savings more regularly than we were comfortable with.

As I alluded to earlier, we bought the house knowing we’d have enough room for our family, but we knew we’d feel cramped when our kids got older. We wanted to move up the property ladder in the near future, and if we were dipping into savings every month and watching the housing market jump in value every year, we were concerned we would not be able to move up to a bigger and/or better property when we wanted to.

As the stock market went up, so did my concerns that it could run out of steam and come crashing down. We could not comfortably stomach any more loss of invested savings, especially the funds earmarked for our next down payment.

After enduring some past investment mistakes from my time before I learned to simply my portfolio, I had hurt some of my TFSA with unrealized losses and learned that not everyone should be invested heavily in equities without knowing the risks. Lesson learned.

With these three above concerns, we wanted to stop worrying about our mortgage, the inevitable rise of interest rates, free up cash flow to allow us to save for our next home, put ourselves in a better position to move up the property ladder in the next few years as house prices continue to climb, and have a guaranteed income to grow my LIRA without the ability to contribute. With an RRSP mortgage, I could have it all, with a small fee and a few caveats.

RRSP / LIRA Mortgage Benefits

The benefits of an RRSP or LIRA mortgage well outweigh the drawbacks:

• The money we would have given the bank in interest is now coming back to us. While we will still pay a small portion towards one-time and annual fees, the majority of our mortgage payments come back to us as repayments to the LIRA;
• We benefit from our already low remaining amortization, after previous prepayments, and are putting more towards the mortgage. This equates to a guaranteed return on investment equal to the savings in mortgage costs (in our case 2.49 percent tax-free with no capital gains on our primary residence);
• The money we pay as a mortgage has a guaranteed return on investment as we pay back the LIRA in the form of our mortgage payments at the posted 1-year open rate of 4.5 percent (as of this writing), plus when the cash goes back into my retirement savings account where I can pursue a Couch Potato or Four-Minute Portfolio with monthly dollar-cost averaging. Should the rate go up then I end up paying myself more, and should rates fall I can adjust the amortization and keep the same payment;
• The inability to contribute to a LIRA is superseded as holding a mortgage, allowing us to put back more than we take out in the form of loan payments that include an interest premium to myself and not the bank;
• Reducing our monthly mortgage payment by 80 percent to allow for improved free cash flow to cover our fixed expenses and have money left over to save up for our next house down payment;
• Allowing us to add to the overall amortization of the loan from eight to 25 years without adding to our indebtedness to a bank, as we want to be mortgage free before retirement, since I cannot access the money before retirement anyway.

Risks and Alternatives

We understand the risks involved, that’s why I nicknamed this a “gambit” move. We are putting a large amount of our cash savings towards a debt, albeit a manageable one secured against a valuable (and currently growing) asset, instead of investing it.

We could keep the cash and put it back into our TFSAs and invest it with a risk-appropriate plan. With that in mind, consider that in the past decade while the S&P/TSX has doubled in value, the Toronto housing market has tripled. Can either of these be sustained? I don’t know and I would like to believe that neither do the bulls or bears who have been arguing about either of these markets for as long as I can remember.

What I do know is the simple fact that my family needs to live somewhere, and we love our home, our friends & neighbours, our neighbourhood, and the memories we have made. We want to ensure that we take care of it and can afford to stay as long as we want to. We also want the ability to be able to (in the near future) find the right property to call our next home without too much sacrifice to our lifestyle.

I am not as worried about my retirement (no more than I was since my lay off) because if the bull market finally loses steam and my LIRA takes a hit in value I know that I’m not going to retire in the next 20 years – but we still need to live in our house.

I was more worried about eating away at our savings and if either my wife or I lost our jobs that we’d be able to keep the mortgage payments in check. If the bull market and economy keep roaring ahead, we’ll ideally both keep our jobs. If interest payments go up, the extra money will go back to my retirement and not the bank’s bottom line.

Final Thoughts

I am looking forward to sleeping a little more soundly and reconciling the loss of a rewarding career with its rare and coveted guaranteed DB pension and take advantage of my circumstances to benefit my family’s security. What do they say about life and lemons?

Thanks to Robb for letting me share my story. While I am not endorsing this move (in fact I asked Robb about it back in March 2019) as one needs to be in the right circumstances personally, professionally, and financially, I wanted to share with my fellow Boomer & Echo readers our story to promote to all those interested and engaged in their personal finance situations to take stock of your overall financial situation and determine what is best for you, your family, and future, and to find ways to keep (legally) as much of your own money in your pocket and still live a life you’re happy and comfortable with.