Maclean’s author Jason Kirby wrote this week about Canada’s housing correction, saying, “Canadians are finally getting a taste of what a world with rising interest rates will look like, and one thing is painfully clear: we’re not ready for what happens next.”

National home sales are projected to post a double-digit decline when the final 2018 numbers come in, according to the Canadian Real Estate Association. What’s to blame for this housing correction? Three factors:

1. Tougher mortgage stress tests introduced by the federal government to ensure borrowers could qualify at higher interest rates
2. Higher interest rates – the Bank of Canada hiked its key interest rate three times to 1.75 percent
3. The inevitable slowdown of our decade-long real estate boom (up 56 percent in 10 years)

Not surprisingly, those closest to the housing market (mortgage brokers, real estate agents, home builders) say the federal government is to blame, with tighter lending rules keeping well qualified borrowers on the sidelines.

They say the government regulations were meant to tap the brakes on overheated markets in Vancouver and Toronto, but has caused an unintended ripple across the rest of Canada.

The Bank of Canada moved quickly to hike rates and try to keep pace with the U.S. But now they’re in a predicament. Another two or three rate hikes this year, as many economists had forecast, might cripple a Canadian economy that has become increasingly dependent on household spending. Fail to keep pace with the U.S., however, and risk further weakening of the Canadian dollar.

My take: The stress-test was always a prudent move to ensure borrowers could afford the inevitable rise in interest rates. Housing prices were going to fall eventually, but the question is whether we’ll see a full scale crash in some markets or a soft landing.

A lot of money has been made in real estate over the years, but over the very long term this asset class barely beats inflation – think 2-3 percent increases per year.

A housing correction could help those who were on the edge of affordability, but as we’ve learned over the last decade, trying to time the real estate market is incredibly difficult. Therefore, the decision to buy a home should be a personal one based on your desire to own versus rent, but also your ability to afford everything that comes along with home ownership.

This Week’s Recap:

Back on New Year’s Eve I recapped my year and shared my latest net worth statement.

Then on Wednesday my good friend Kyle Prevost explained where your CPP money goes after it gets deducted from your paycheque.

My wife opened up a new investment account this week. On Monday I’ll share which platform she’s using and why. And later in the week I’ll review a new personal finance book that I’m already calling the book of the year.

Promo of the Week: CoPower Green Bonds

If you missed my review of CoPower Green Bonds in October, you may want to catch up now.

To recap, CoPower offers Canadians the opportunity to earn fixed income at a competitive 5% annually on their 6-year Green Bond. The bonds are eligible for your RRSP or TFSA making them a great way to earn tax-free investment income.

Investing directly with CoPower’s through their online platform is always free, but if you want to hold bonds in a registered account your financial institution may charge purchase and/or administrative fees.

For Boomer & Echo readers, CoPower will cover any purchase fee charged by your bank or broker on CoPower Green Bonds held in an RRSP or TFSA up to a total of $200. To take advantage of this offer complete your investment by February 28th.

Visit copower.me/en/boomer-echo-promo for all the details of the promotion.and to get started.

Weekend Reading:

Global News columnist Erica Alini shares six painless ways to save $50 a month this year.

How to save more money every month without sacrificing happiness? Behavioural economist Dan Ariely has you covered:

Dale Roberts at Cut the Crap Investing shares some New Year’s resolutions for your financial health.

Oh Canada! The land of maple leaves, mounties, and massive mutual fund fees.

A great post by Preet Banerjee who says avoid second-guessing your portfolio when markets are volatile.

The New York Times shares the simplest annuity explainer they could write:

“At their simplest, annuities offer a guarantee. If you turn over some money, you’ll be guaranteed to get all that money back — plus usually a certain amount more. Or you turn over some money and you’ll be guaranteed a regular check for a certain period.”

Why this 20 percent a year stock picker wishes his edge would disappear.

Evidence-based investor advocate Robin Powell writes an ode to Jack Bogle, investing’s ultimate superhero.

Millionaire Teacher Andrew Hallam explains when the 4 percent rule could fail investors:

“Never assume that low-inflation rates are here forever. And don’t assume that the stock market will perform splendidly in the future. These are unknowns. As such, it’s prudent to maintain conservative levels of withdrawals. They should be lower than 4% for those who pay high investment fees.”

By not claiming CPP until 70, you could get 150 percent of the income you would receive at 65.

A reader lost her husband and wants to know what happens to his Old Age Security pension. Jason Heath explains the limits of OAS survivor benefits.

PWL Capital’s Ben Felix explains the problem with small cap stocks for those looking for a portfolio edge:

Should you own a mortgage in retirement? Mark Seed looks at a case of retiring with debt.

Finally, 35 years ago, Isaac Asimov was asked by the Star to predict the world of 2019. Here is what he wrote.

If you’re like many Canadians, you don’t spend a lot of time thinking about this whole pension thing we have going on.

You know/hope it will be there when you turn 65.

You know that a decent chunk gets taken off of your cheque each month (along with a bunch of other acronyms and taxes).

Finally, you know that life has a million new experiences to enjoy – and digging into the legalese surrounding a pension plan isn’t exactly at the top of your priority list.

However, I’d argue it’s worth knowing a little more about how that Canada Pension Plan (CPP) deduction will one day magically appear in your bank account, as well as about the folks that handle the hundreds of billions of dollars that millions of Canadians have saved to support their golden years.

How Much Does the Canadian Pension Plan Deduct?

All working Canadians outside of Quebec (whose residents have their own pension plan) contribute to the CPP. The simple idea is that we should contribute during our working years, get professionals to invest that money for us as we go to work every day, then when we hit 65 we should get a pension cheque (or direct deposit) that replaces roughly 25% of the average Canadian’s pre-retirement income.

The way CPP is set up, for every dollar you contribute to the plan, your employer also contributes a dollar. At any time, you can request a Statement of Contributions from Service Canada, and they will provide you with not only the overall amount that you have contributed to CPP, but also what you could receive in CPP benefits once you turn 65.

Currently, both you and your employer (unless you’re self-employed – then you pay both “halves”) pay 4.95% of your first $55,900 earnings into CPP. After that earnings level, no more CPP should be deducted from your paycheque.

New CPP Contribution Rules

The Federal Government announced a couple of years ago that the new program will be phased in starting 2019. CPP contributions on that same tier of income would be increased from 9.9% (split between you and your employer) and gradually raised to 11.9% from 2019 to 2023. They then added a second CPP contribution tier of 8%, to be phased in from 2024 to 2025, that will again be split between employer and employee. This second tier will cover the equivalent of $55,900 to roughly $83,000 in today’s dollars.

The idea here was to guarantee Canadians less of a drop in standard of living when looking at retirement. As the increase is phased in over the next 45 years, Canadians will eventually see 33.33% of the average Canadian’s income versus only 25% today.

So, all that to say that if you make $50,000 per year in 2025, roughly $500 more than is currently contributed to your CPP will be deducted from your paycheque. If you make say $83,000, you will still pay 5.95% on your first tier (i.e. up to $56,000) and then from roughly $56,000 to $83,000 you’d pay an additional 4% (or $920).

Related: Why you should take CPP at age 70

In exchange for that sacrifice, you can look forward to a significantly increased payout in retirement. Today, the maximum you can garner from CPP is $13,610. If you were to apply the payout rules from 45 years into the future, you’d be looking at the equivalent of a yearly benefit of almost $18,000 in today’s dollars.

So, to Whom Are We Handing Our Hard-Earned Pension Dollars?

The Canada Pension Plan Investment Board (CPPIB) is the group of professionals that handle the investing of close to $370 Billion of Canadians’ future pensions. It started to invest in 1999 and is one of the ten largest pension funds on the planet. The cost of running the CPPIB is roughly 31.5 basis points, which means 0.31 cents of each $100.00 of invested money.

The CPPIB’s goal is to “maximize returns without undue risk of loss.” In other words, their goal is to take the cash that came off of your paycheque and to invest it in excellent companies, real estate deals, and other investments from around the world – so that your money grows over time without taking on too much risk. It’s important to note that the CPPIB is legally required to act in the best interests of contributors and beneficiaries. (Us!)

The Canadian government does not control the CPPIB. While the Board is accountable to government-made laws and policies, the government does NOT choose any of the investments that go into the fund. The model guarantees that the investments are made with the goal to grow our money, and not to fund government spending projects or other politically-motivated endeavours.

Where does CPPIB Invest?

I bet that you didn’t know that Canadians indirectly benefit from the types of investments CPPIB makes because those investments contribute to the sustainability of the CPP. Some of those investments include Canada’s big banks and leading renewable energy companies – but also large chunks of a bank in India, the world’s most valuable technology companies, and even Warren Buffett’s company: Berkshire Hathaway.

Add to that, the massive amount of real estate that the CPP is invested in, and you might start to feel like a pretty big deal!

The truth is that most Canadians probably have no idea that the money that comes off of their pay cheques goes to purchase everything from shopping malls to shares of major international banks and toll roads – but they get to enjoy the benefits of these investments.

The current investments that the CPPIB has placed our pension fund money into can be summed as:

• Public Equities: 37.7%
• Private Equities 20.9%
• Fixed Income*: 18.1%
• Real Assets**: 23.3%

*Fixed Income consists of government bonds, credit investments, cash, and absolute return strategies, less external debt issuance.
**Real Assets include toll roads, shopping malls and office buildings.

Overall, the CPP’s investment return goal (according to the Chief Actuary of Canada) is to make excellent investments that grow our money by 3.9%, plus the rate of general inflation (often referred to as a “real rate of return”). Over the last ten years, in a period of growth for most of the world, the CPPIB has managed a 10-year annualized net nominal returns of 9.1%.

Will the CPP Still Be There for Me?

Yes!

A lot of people see yearly government budget deficits and worry that they will not receive a CPP payout when their time comes but the CPP is on solid ground.

In 2016 the Chief Actuary in Canada (the smartest person in that uber-smart math class you avoided in university) stated that the plan was sustainable for at least the next 75 years based on current contribution rates and their conservative real rate of return projections.

It’s true that it’s impossible to account for all variables. In theory, stock returns could dip well below their historical norms for a protracted period, and Canadians could decide they don’t want to increase their contributions to make up for it.

That said, a lot of smart people that get paid to track this stuff are as certain as possible that the CPP will be there to support Canadians for many decades to come!

I started the year with high aspirations. I wanted our household net worth to reach $750,000 and to get there I needed markets to continue chugging along at 8-10 percent. Well, that didn’t happen.

When it comes to market expectations, straight-line goals won’t cut it. Even though it’s reasonable to expect 8 percent growth over the long term (I’m talking decades), it’s downright foolish to expect that growth every single year. Markets fluctuate, in case you forgot. It’s been a while.

My portfolio took a bit of a tumble late in 2018, causing me to miss the target goal for my RRSP by a good $17,000. In fact, my portfolio is $12,000 lower than it was at the half-way point this year.

Indeed, none of my investment accounts hit their targets this year. And that’s okay. I can’t control the markets, only my own behaviour and savings rate.

So if I can take any solace in 2018 it’s that I stuck to my plan and kept saving, investing, and paying down debt. Here’s how that worked out:

Net worth update: 2018 year-end review

A few questions that I often get asked after posting a net worth update:

Credit Cards & Banking

We funnel all of our purchases onto a couple of different rewards credit cards to earn points on our everyday spending.

Our go-to card is the now discontinued Capital One Aspire Travel World Elite MasterCard. We have a grandfathered version that pays 2 percent back on every purchase and comes with a 10,000-point bonus each year.

Our secondary card is the American Express Cobalt Card, which we use at non-Costco grocery stores and on dining and liquor. Finally, we look for the best credit card sign-up bonuses and time our large annual spending (car and house insurance) around these offers.

We each have no-fee chequing accounts at Tangerine, which we use for bill payments, email money transfers, and the odd debit purchase.

The rest of our banking is done at TD, including our mortgage, line of credit, and investments.

Pension

Each month I contribute roughly 12 percent of my salary to a defined benefit pension plan that my employer also matches. The amount listed above is the commuted value of the pension if I were to leave the plan today.

The plan pays 2 percent of your highest average salary multiplied by the number of years worked. So that means if I retired at 60 with an average salary of $100,000 I’d receive $60,000 per year from the pension plan.

RRSP / RESP

The right way to calculate net worth is to use the same formula consistently over time to help track and achieve your financial goals.

My preferred method is to list the current value of my RRSP and RESP plans rather than discounting their future value to account for taxes and distributions.

I consider a net worth statement to be a snapshot of your current financial picture, so when it comes time to draw from my RRSP and distribute the RESP to my kids, net worth will decrease accordingly.

Principal Residence

We bought our home in 2011 for $425,000 and developed our basement a few years later, increasing its value to $450,000. Last year I bumped up the market value by 2 percent (which is still less than its city-assessed value), but the local real estate market has since flattened and so I’ve left the value at $459,000 this year.

Final thoughts and a look to 2019

My goal is to amass a net worth of $1 million by the end of 2020. That’s only two full years away, so we’ll have our work cut out for us if we’re going to reach that goal.

We’ll need to increase our savings rate and hope the markets rebound to boost the value of our RRSPs and TFSAs. Even still, we might need a surprise inheritance from a long-lost relative to put us over the top.

Joking aside, it’s not the end of the world if we don’t reach $1 million in two years. You won’t see any Enron-style funny accounting going on to “help” me look good on paper. My long-term focus is on financial freedom, not an arbitrary measurement along the way.

To that end we’re still well on our way towards achieving that goal by 2024. But, one year at a time. Let’s first tackle my 2019 financial goals.

How did this year go for you? Did you move the needle forward on your net worth, despite the recent stock market dip? Let me know in the comments.