Through most of the five years the Financial Independence Hub has existed, Boomer & Echo’s Robb Engen has been kind enough to allow the “Hub” to republish some of his blogs that first appeared on his own site.
He recently suggested we turn the tables and invited me to write a guest blog for Boomer & Echo recounting some of the lessons I’ve learned in my decades as a financial writer and what I’ve learned so far in Retirement. Here it is.
For starters, my age alone qualifies me as a Boomer: I recently turned 66, but do not consider myself retired: at most, I consider myself semi-retired. As Robb would know, running a website is no trivial undertaking and I aim for new content 5 days a week, 52 weeks a year. That and writing for a handful of media outlets keeps me fairly occupied, although the privilege of doing this from home means I gain a couple of hours that would formerly have been expended on commuting.
Indeed my last full-time salaried staff job that involved commuting and bosses ended five years ago, when I stepped down from the editorship of MoneySense magazine. That two-year stint followed 19 years at the National Post/Financial Post, most of which time I was the paper’s personal finance columnist.
Those familiar with my books or blogs would not expect me to describe myself as Retired, since my shtick has long been Financial Independence, or my contraction for it: Findependence. That’s as in Findependence Day, a financial novel I wrote in 2008 (Canadian edition) and 2013 (US edition.)
As I have often written, I do not regard the terms Retirement and Findependence as synonyms. You can be Findependent but not Retired, as I am; but it’s hard to be Retired if you’re not Findependent.
In the old days, the traditional “full-stop” retirement was considered to happen at age 65, which even today is when you can first start receiving Old Age Security benefits. (And yes, I do now collect OAS, for reasons I’ve explained elsewhere). But “Findependence Day” can be years or even decades earlier: you may still choose to work for money but on your terms: the magic day is when you’re completely free of debt and have enough saved (and properly invested) that even if you never earned another dime you could meet all your major living expenses, assuming some variant of the 4% Rule.
Even if I considered myself as having “retired” at age 61, that’s relatively old by the standards of the so-called FIRE movement, which of course stands for Financial Independence Retire Early. True FIRE people aspire to “retire” in their 30s or 40s, sometimes even in their 20s, typically by saving like demons for a decade or so: in the most extreme cases they may save something like 50% of their income.
I’m more like Robb, where he described in his blog why he wasn’t yet paying down his mortgage because he first wanted to maximize RRSP and TFSA savings. Mind you, my books do argue that “the foundation of financial independence is a paid-for home” but I’m old school and we bought our first home (of only two) back in the 1980s, when Toronto real estate was pricey but hardly at the lofty levels of today. Of course, interest rates were much higher then: close to 12% in our case, so we were motivated to pay off the mortgage as quickly as possible.
There have been some interesting critiques of FIRE, nicely summarized by Fritz Gilbert in a guest blog for the Hub: Is the Fire community full of hypocrites? Fritz is an American Pluto award winning blogger for RetirementManifesto.com, who I’ve come to know through our joint membership in the Younger Next Year 2019 Facebook group, which I helped found and have moderated since late 2017. Fritz “retired” himself at age 55 about this time last year. But as we would both argue, he’s hardly retired in the classical sense of the term.
In my experience few “FIRE” proponents actually “retire” in the sense of never again setting their hand upon work that pays. What I think most FIRE people are talking about is leaving the corporate rat race and salaried employment or full-time wage slavery. They typically keep working, often for money, but become self-employed consultants, freelancers and generally run their own show. Most of the big name FIRE bloggers are making a good living running their own web sites, writing books and making paid speeches about how they “retired” so early. Not my definition of true retirement.
So no, I don’t regard myself as either an early retiree or a FIRE blogger. Certainly, I’d argue that you don’t want to enter traditional retirement with any significant debt, whether mortgage, credit cards, line of credit or anything else, including leveraged investment loans. Call me ultra conservative!
My idea of retirement and findependence is contained in a book I co-authored with ex corporate banker Michael Drak, called Victory Lap Retirement, now in its second (and U.S.) edition. Mike came up with that title, and it more or less describes what I’ve been going through the last five years. Call it simply a post-corporate “Victory Lap” or an encore career or a Third Act, it all amounts to much the same thing.
Actually, my wife has just retired this month (she’s slightly younger than me) and has been slowly ramping down the last six months in what she calls both her own Victory Lap and/or the Glide Path to Retirement. The Glide path is a term coined by now-retired advisor Warren Baldwin, which I’ve described in a few articles I’ve penned for media outlets like the FP and MoneySense.
The way I understand it is that if you’re flying in an airplane from Los Angeles to Toronto, the pilot doesn’t precipitously descend 30,000 feet when he is above Pearson Airport. He starts gradually to descend somewhere near Chicago, so as to make a smooth landing on the runway in Toronto. So it is with the Retirement Glide path.
Another good term for this phase is Work Optional. I first came across this idea in blogs written for the Hub by Retirement Navigator’s Doug Dahmer. More recently, you may recognize the term as the title of a new book about the FIRE movement by Tanya Hester, which I reviewed recently here: How Work Optional can fit into your Retirement plan.
There’s that term Retirement again: it seems it’s inescapable no matter how hard we try. Hester claims to have “retired” at 38 but she’s typical of the FIRE movement as described above. I agree in principle with her and most other FIRE devotees: we all want freedom as soon as possible in life, and the fewer and simpler your needs, the sooner that can happen. Eschew wants and luxuries, be frugal consistently, spend less than you earn, save the difference and invest it wisely and tax efficiently.
The bigger your savings the sooner it can all happen but then again, if you have found passion in your work, you’ll want to continue some kind of meaningful work into your 70s. Look at the Stones’ Mick Jagger, many other artists and writers, and even politicians like Donald Trump and many of his would-be replacements.
It doesn’t really matter what term you use; I think we all more or less agree on the basic principles that can be found on all of the blogs mentioned here.
Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He writes regularly for MoneySense, the Financial Post, and occasionally the Globe & Mail, and Motley Fool Canada. He can be reached at jonathan@findependencehub.com.
With Robb on vacation, I am honoured to have the opportunity to guest post on Boomer and Echo and meet some new readers! For readers here who don’t know me, I’m the blogger behind MillionDollarJourney.com. In the early days (the blog started in 2006), I wrote quite a bit on the Smith Manoeuvre and continue to get questions about the wealth building strategy to this day.
Let’s rewind a little and get back to the basics. What is the Smith Manoeuvre and how can it help build wealth?
What is the Smith Manoeuvre and How Does it Work?
The Smith Manoeuvre is a leveraged investment strategy made popular by Fraser Smith. Leveraged investing is where you borrow to invest in income-producing assets. The long term goal is for the assets to appreciate faster than the interest owed on the loan. A major side benefit is that the interest you pay on the loan is tax deductible – as long as you have invested using a taxable account (ie. not RRSP/TFSA/RESP etc).
Why leveraged investing? For starters, it’s a way to supercharge your gains, but leverage can also supercharge your losses. Needless to say, leveraged investing is only for those with the highest risk tolerance. After all, you’ll be using your home as collateral on the investment loan.
While leveraged investing has been around for eons, the differentiator is that the Smith Manoeuvre uses the equity in your house (usually through a home equity line of credit) towards investments in the stock market.
The Readvanceable Mortgage
To dig a little into the details, the strategy involves using a special type of mortgage called a readvanceable mortgage (offered by most of the big banks).
This type of mortgage is made up of a combination of a regular installment mortgage and a home equity line of credit (HELOC). As the installment mortgage portion is paid down with every payment, the HELOC credit limit increases by the same amount (minus interest).
As money from the HELOC space is made available with every mortgage payment, the new credit is used to invest in the stock market, businesses, and/or real estate.
For homeowners with lots of equity, the HELOC can be used right away in a lump sum to invest. For new home buyers with little equity, you can invest small amounts per month as it’s made available in your HELOC.
So really it’s a two (maybe three) step process:
- Obtain a readvanceable mortgage on your home
- As your HELOC limit increases, use the balance to invest in income-producing assets (ie. the stock market, rental real estate, a business).
- *Bonus: This step is not really the “Smith Manoeuvre”, but more of a Smith Manoeuvre accelerator (maybe the MDJ Manoeuvre?). In this modification, you invest in dividend stocks and use the dividends to further pay down your non-deductible mortgage. The extra mortgage paydown will further increase your HELOC limit, which will allow you to buy more dividend stocks. The snowball will result in paying down your mortgage and building your portfolio faster.
Personal Example
In my own personal example, we built our house in 2008 and obtained a readvancable mortgage on the property for the purpose of investing the HELOC. With a large down payment from selling our starter home and liquidating our non-registered portfolio, we were able to put a large down payment on the house and maximize the starting point for the HELOC.
I used the credit available in the HELOC to invest in Canadian dividend stocks with the plan to use the dividends to help pay down the mortgage faster. It turned out however that with a focus on savings, and selling our rental property, we were able to pay off our installment portion of our mortgage in about three years.
Related: Why Don’t I Pay Off My Mortgage?
Throughout the years, I have continued to invest in dividend stocks (started before the crash of 2008). While investing in my leveraged portfolio has slowed down over the years, it continues to grow and generate dividends every year. In fact, in my most recent financial freedom update, I revealed that my Smith Manoeuvre portfolio generates $7,500 in eligible dividends annually.
Using the Smith Manoeuvre with a Cottage
Having explained the background on the Smith Manoeuvre, one question I get often is if the strategy can be used with a cottage or rental property instead of investing in the stock market.
Before I get into this, let’s talk a little about the tax deductibility of the HELOC, which is one of the big attractions of the Smith Manoeuvre. Who doesn’t want another tax deduction?
The rule with the tax deductibility of interest is that the loan proceeds must be invested in income-producing investments (or the potential to produce income). So that can be equities, business and/or income-producing real estate.
Can this strategy be used with a personal cottage? As the tax rules state, the proceeds to be put towards income-producing investments. So unless the plan is to Airbnb or rent it out via other means, the strategy would not be feasible – at least not in a tax efficient manner (ie. the interest would not be tax deductible).
Using the Smith Manoeuvre with Rental Real Estate
What if you are not a believer in the stock market and would prefer rental real estate instead? This strategy can work, but you may be super leveraged.
As mentioned above, you can use your HELOC towards purchasing rental property and the HELOC interest (along with the rental mortgage interest) will be tax deductible. What some really aggressive real estate investors do is when their rental properties obtain enough equity, they leverage those properties to further grow their real estate empire.
For example, an investor can use a HELOC for a 25% down payment on a rental property and obtain a mortgage for the remaining. Hopefully, the cash flow from the rental is enough to cover the mortgage and HELOC payments. As time passes and the rental property gains value/equity, the property can be re-mortgaged with proceeds invested towards another rental property.
As tenants pay down the mortgage, in the long term, you’ll have large paid off assets that pay a healthy income stream during retirement. Although direct real estate investing is not for me (I own REITs instead), I personally know a number of investors who have funded their retirements through investing in rental real estate.
Final Thoughts
Leveraged investing is a risky strategy and requires the ability to take and have faith in the long term view. If market crashes with 50% corrections (like 2008) scare you, then leveraged investing may not be the best strategy for you. However, if you can tolerate the ups and downs of the market, then a following a proven investment strategy over the long-term can be lucrative.
I have written quite a bit on the Smith Manoeuvre over the years and have compiled all the articles into a resource post. Check it out if you are interested in learning more about the strategy.
https://www.milliondollarjourney.com/the-smith-manoeuvre-resource.htm
FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on MDJ, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. After achieving the big net worth milestone, his focus has shifted to building his passive income sources (up to $45k+) towards achieving financial freedom.
Collecting credit card points is one of my favourite things to do and over the years I’ve decided to take things to the next level by really understanding how most of the rewards programs work. I’m not referring to Aeroplan or Air Miles which are both totally different beasts, but rather, I’ve recently dived deep into bank rewards programs.
Bank or credit card provider points programs can vary quite a bit. They all have different earn rates, ways to redeem and transfer partners. Making a redemption is usually easy, but if you really look into the details, you’ll quickly realize that you may be able to get more value out of your points. Today I’m going to show you how to maximize your American Express Membership Rewards Points and RBC Rewards.
American Express Membership Rewards and Marriott Bonvoy
In my opinion, American Express has some of the best travel credit cards in Canada. I favour them because the American Express Membership Rewards (MR) points you earn are so flexible. At their base value, 1,000 MR points are worth $10 in value. However, you can transfer your points to Marriott Bonvoy at a 1:1.2 ratio where they may be worth even more.
Related: Is the American Express Platinum Card worth the $699 fee?
For example, let’s say you’re booking a category 2 hotel that has a real value of $215 or will cost you 17,500 Marriott Bonvoy points. Well, to get 17,500 Marriott Bonvoy points you would need to transfer 14,583 MR points. Had you used the regular Amex MR points to claim $215 in travel, it would have cost you 21,500 MR points. In other words, you would have saved 6,917 MR points by transferring your points to Marriott Bonvoy.
Now keep in mind that sometimes it makes sense to not transfer your points. Let’s say you’re interested in a category 6 hotel with Marriott that would cost you 50,000 points and has an average nightly rate of $375. To make a reward redemption, you’d have to transfer 41,667 MR points to get 50,000 Marriott Bonvoy points. Booking that same hotel through the Amex travel portal using your MR points would cost you 37,500 MR points which is 4,167 fewer points.
There’s one more thing to consider, Marriott Bonvoy gives you the 5th night free when you book 4 nights on points so transferring your points may still be worth it since you’ll pay less points on the average nightly stay even though each individual night is technically costing you more points.
Booking flights with American Express Membership Rewards
With American Express Membership Rewards, you can also transfer your points to Aeroplan at a 1:1 ratio. Amex MR also has a fixed mileage program where you can fly to certain regions for a fixed amount of points. This essentially gives you three ways to book your flights on points.
I recently flew to Seattle from Toronto and the flight was $900 (yeah I know, that’s crazy expensive). With Aeroplan, that route only requires 25,000 Aeroplan miles which is obviously a much better deal than the 90,000 MR points I would have spent if I had use them at their base value. However, Aeroplan is famous for having limited availability so I had to make sure I could actually book a seat first before I transferred my points. I couldn’t, there was no availability.
Since Aeroplan was no longer an option, I decided to book with the American Express Fixed Mileage program. For my route, it would cost me 40,000 points for a flight with a base fare value up to $900. That worked out for me since my flight had a base value of $800 and about $100 in taxes. Those taxes cost me 10,000 points, so in total I spent 50,000 points for my flight. Yes, it was double what I would have paid with Aeroplan had there been availability, but it was also 40,000 points less than if I had claimed through regular MR.
Getting to know your RBC Rewards
American Express Membership Rewards is honestly one of the best loyalty programs but not everyone uses it. Many people just use their regular bank’s travel loyalty program. They typically have limited transfer partners but that doesn’t mean you can’t maximize the value of your points. Here’s a breakdown of some of your redemption options with RBC Rewards:
- 1,000 points = $10 in travel when booked through the RBC Rewards travel portal
- 1,200 points = $10 in RBC financial rewards (your mortgage, RRSP, etc.)
- 1,400 points = $10 in gift cards for non-travel merchants
As you can see, travel rewards clearly give you the best return yet many people are still using their points for gift cards. I suppose you could argue that financial rewards are the best if used towards an RRSP contribution since you would get a tax break but I’m trying to keep things simple here.
Another thing to note is that RBC Rewards can be transferred to WestJet Dollars. The transfer ratio is 1,000 RBC Rewards points = $10 in WestJet dollars. This is valuable to know in the event you want to cancel your RBC credit card and you’re looking for a way to covert your points into “cash.” The transfer value to WestJet is much better than for gift cards.
RBC is the only major bank to offer an airline transfer partner but the other banks also allow you to redeem your points for other things besides travel which is why you want to know the value of all those transfers.
Final thoughts
I’ve showed you how to maximize your American Express Membership Rewards and RBC Rewards points. But there are many other rewards programs across Canada.
As you’ve likely quickly learned, understanding how you can use your points can greatly affect the value of your points. I’m not saying you need to know the details of every program or the different earn rates of specific credit cards, but you really should look into your rewards program to see how it can benefit you the most.
Barry Choi is a personal finance and travel expert at MoneyWeHave.com. He has been quoted by media in Canada and the United States, including The Financial Post, The Toronto Star, Business Insider, The Globe and Mail, and has appeared on HuffPost Live. You can follow him on Twitter: @barrychoi