Over the holidays I made a spending and savings plan for the new year. I reviewed our previous year’s finances and incorporated our new financial goals for the year. My wife and I discussed our “rich life” vision – what we want to do more of, what we what to do less of, what new things we want to try – all in an effort to ensure we continue funding a good life for our family.
As business owners, we start by estimating our expected revenue and expenses for the year. Next, we look at our personal spending and saving needs (I use this annual budget spreadsheet).
For instance, we want to catch up on one year of RESP contributions for our oldest daughter. We have big travel plans for which we need to appropriately budget. We also started using Fresh Prep and getting two meal kits delivered every week to save time.
That gives us a good sense of how much to pay ourselves for the year to make all of that work. Having everything planned out in advance is helpful for business owners, who too often dip into the piggy bank known as their corporate chequing account throughout the year without much thought to tax consequences.
We know exactly how much we’ll pay ourselves, which means we can properly estimate our personal taxes and pay the appropriate quarterly instalments to match.
We’ve always spent below our means, but now that our “means” have increased we want to make sure we’re maximizing our life enjoyment. That requires a delicate balance of spending and saving.
I’ve learned a lot working with hundreds of retirees over the years. Many have over-saved throughout their careers and can’t bring themselves to spend more in retirement. I don’t want to go through life spending a certain amount, only to discover I can safely spend double that amount in retirement. I’m looking for more of a balance.
I’ve also been influenced by Ramit Sethi’s rich life mantra, and more recently the Money Scope podcast’s early episodes on planning and living a good life.
It sparked our decision to move into a new home, custom built in the exact location we wanted to live. We wanted a dedicated home office and gym for our new work-from-home life.
It’s also the reason behind giving ourselves a raise both last year and this year. Business owners have a tendency to keep their compensation level from year-to-year. But we can’t pretend inflation and lifestyle creep don’t exist. We have to be honest with ourselves.
Funding a good life also includes a healthy budget for annual travel. We talk about the places we want to go, both new trips and return visits. Since we know that we’ll travel extensively every year, there’s less pressure to see it all in one trip. Slow travel is more our style, anyway.
As a former cheapskate frugal person I’ve had to give myself permission to spend more without the guilt and anxiety. I know that if I don’t start exercising my spending muscles now, it will be even more difficult to do so in retirement.
That’s where the spending and savings plan comes into play. I’m a planner, and always will be. By mapping out our expected income, expenses, and savings contributions I have a clear view of our finances for the year.
I know that we can meet our personal spending goals to fund a good life while still achieving our savings goals for the year. We’re not going to trip and fall into bankruptcy because we took an extra vacation or paid for one of the kids to get braces.
This Week’s Recap:
I updated our net worth for the end of 2023.
I also posted our investment returns for 2023.
Zoo(m) calls pic.twitter.com/gREdTr3uiN
— Boomer and Echo (@BoomerandEcho) January 12, 2024
Promo of the Week:
The past year or so has been tough sledding for credit card churners looking for attractive new sign-up offers and welcome bonuses. Many lucrative credit card deals dried up last year, with credit card issuers increasing minimum spend requirements and also the length of time it takes to reach those minimums.
The best offer I’ve seen is for small business owners and it’s the American Express Business Gold Rewards Card (<–scroll to the bottom and click “explore other cards”).
Earn a whopping 75,000 Membership Rewards points when you spend $5,000 within the first three months.
Transfer those points to Aeroplan where you can typically redeem them at 2 cents per mile. That’s $1,500 in value ($1,301 when you subtract the $199 annual fee). Not a bad return on $5,000 spending.
Do you need to have an incorporated business to qualify? No! Sole proprietors and side hustlers are welcome.
Sign-up for the American Express Business Gold Rewards Card here.
Weekend Reading:
A good one to start the year from Dr. Preet Banerjee. Want a financially healthy 2024? Add these six items to your to-do list.
A Wealth of Common Sense blogger Ben Carlson updates his favourite performance chart for 2023. I always love to see the asset class quilt of returns.
Emily Stewart at Vox says our expectations around money are all out of whack – why you don’t need everything you want.
Visual Capitalist charts the top 10 retirement planning mistakes. Number one – underestimating the impact of inflation, followed closely by underestimating how long you will live.
Paul Samuelson on the 4% rule – neat, plausible, and wrong:
“I can think of one case that supports a “withdrawal rule.” It is a single retired person with safe investments and consistent Social Security, pension and/or annuity payments.”
Speaking of flawed rules, here’s Ben Carlson’s take on Coast Fire – the strategy of front loading your retirement contributions early and then “coast” to retirement.
PWL Capital’s Ben Felix helps investors decide how to invest a lump sum of money:
Rob Carrick says people keep making this costly TFSA mistake – and paying penalties averaging almost $1,500.
Millionaire Teacher Andrew Hallam shares a retirement haven for the rich and the budget conscious.
Finally, Aaron Hector shares these tax planning quick facts and common strategies for the upcoming 2023 tax season.
Have a great weekend, everyone!
Your current year’s RRSP contribution limit is 18% of your previous year’s earned income, to a maximum of $31,560 (2024) plus any unused contribution room carried forward from previous years. There’s some confusion around the RRSP over contribution limit and RRSP carry forward rules. This post explains both of these rules.
RRSP Over Contribution Limit
You are allowed to over contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax. An RRSP over contribution is not deductible from your current year’s income, but the advantage is that you can add extra cash into your RRSP, where it can grow on a tax-deferred basis.
RRSP over contributions can be deducted in a subsequent year when your actual RRSP contribution is less than the maximum allowed.
A penalty tax of 1% per month applies to the amount of an RRSP over contribution exceeding $2,000. If you think you may have over contributed to your RRSP, contact an accountant to determine the steps you need to take.
The calculation of the penalty tax and filing of forms to withdraw the excess amount is not part of the normal personal tax return process.
An RRSP over contribution can be an effective tax strategy; however you are usually better off paying down non tax deductible debt first, like your credit card or mortgage. If you decide to over contribute to your RRSP, work with your accountant or financial advisor to ensure you stay within the allowable limit.
One of the reasons the government allows RRSP over-contributions is to provide you with a cushion against possible errors and unforeseen events, like a pension adjustment (PA).
Consider using your $2,000 RRSP over-contribution when you quit working. The earned income you have in your final year of employment will entitle you to an RRSP deduction in the following year.
RRSP Carry Forward Rules
For most Canadians, it’s not always possible to make a full RRSP contribution in any given year. If you don’t contribute the maximum allowable to your RRSP in any year, you can carry the unused portion forward indefinitely.
This means that if you were eligible to contribute $10,000 each year from 2013 to 2023, but you only contributed $5,000 each year, you will be able to contribute an additional $50,000 over and above your annual maximum limit.
If you are expecting a change in your income in the near future that will bump you into a higher tax bracket, it might make sense to delay your RRSP contributions until then. In this case, it’s important to consider the loss of tax-sheltered investment growth by putting off your contributions.
To accumulate RRSP contribution room, you must file an income tax return. If you have earned income for RRSP purposes, but you are not required to file an income tax return, you should consider filing anyway. While an RRSP may not be a significant consideration at this point, there will likely be a time when you have enough cash to make a contribution and can benefit from the deduction.
If you had low taxable income in 2023, but enough cash to make an RRSP contribution, consider making the contribution before the RRSP deadline but don’t claim the deduction for 2023.
As long as the amount isn’t claimed as a deduction, your unused contribution room remains intact. You can still claim the deduction in a future year, preferably when your taxable income is higher. In the meantime, the investments inside your RRSP will grow on a tax-deferred basis.
Stock markets rebounded in a big way last year after a taking it on the chin in 2022. It was technology stocks once again leading the way – with the NASDAQ gaining 52.28% (XQQ) in 2023. The vaunted S&P 500 also posted an impressive 24.39% gain in 2023 after falling nearly 20% in 2022 (XSP). Even Canadian equities had a solid year, gaining 11.67% in 2023 (XIC).
Across the pond, international stocks soared 14.35% (XEF), while emerging market stocks were up just 6.18% (VEE).
On the fixed income side, Canadian aggregate bonds (VAB) were up 6.58% in 2023 after getting walloped by nearly 12% in 2022, while short-term bonds (VSB) were up 4.95% in 2023 after losing nearly 4% in 2022.
Regular readers know that I’m a huge proponent of asset allocation ETFs as a sensible way for many Canadians to invest. For around 20 basis points (0.20%) in fees, you get a globally diversified and automatically rebalancing portfolio that you can set and forget.
Indeed, if investing has largely been solved with low cost index funds, then investing complexity has been solved with these asset allocation funds. A true one-stop shop for your investing needs.
Investing passively through index funds allows investors to capture the aforementioned returns, minus a very small fee. That’s a surefire way to beat 90% of investors who invest more actively, incur higher fees and are prone to behavioural issues like performance chasing.
With that in mind, here are the 2023 investment returns for various asset allocation ETFs offered by Vanguard and iShares:
Vanguard Asset Allocation ETFs
Vanguard offers a suite of asset allocation ETFs ranging from 100% global equities (VEQT) to 20% equities and 80% bonds (VCIP). I’m including the five-year returns of VEQT, VGRO, VBAL, and VCNS to show their most popular asset allocation ETFs:
| ETF | 2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| VEQT (100/0) | 16.95% | -10.92% | 19.66% | 11.25% | n/a |
| VGRO (80/20) | 14.86% | -11.21% | 14.97% | 10.83% | 17.66% |
| VBAL (60/40) | 12.69% | -11.45% | 10.29% | 10.20% | 14.81% |
| VCNS (40/60) | 10.55% | -11.78% | 5.80% | 9.36% | 12.06% |
Interestingly, each step up the risk ladder earned you an extra return of 2% or so. Even the traditionally conservative 40/60 portfolio posted double-digit gains thanks to a strong stock AND bond performance in 2023.
iShares Asset Allocation ETFs
iShares offers a similar suite of asset allocation ETFs with ticker symbols of XEQT, XGRO, XBAL, and XCNS. The differences between iShares and Vanguard are slight – iShares’ ETFs cost just 0.20% MER compared to Vanguard’s 0.24% MER, and iShares’ asset allocation ETFs come with a bit more US and International equity, while Vanguard’s asset allocation ETFs have more Canadian and emerging market representation.
Here are the five-year returns for iShares’ asset allocation ETFs:
| ETF | 2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| XEQT (100/0) | 17.05% | -10.93% | 19.57% | 11.71% | n/a |
| XGRO (80/20) | 14.92% | -11.00% | 15.17% | 11.42% | 17.96% |
| XBAL (60/40) | 12.78% | -11.08% | 11.06% | 10.58% | 15.19% |
| XCNS (40/60) | 10.56% | -11.19% | 6.57% | 10.33% | n/a |
You can the returns are nearly identical. iShares has a slight performance edge due to its tilt towards the higher performing US and international markets.
If you can’t decide between the two, hedge your bets by putting a Vanguard asset allocation ETF in one account type, and an iShares asset allocation ETF in another (or one spouse picks Vanguard and one spouse picks iShares). Whatever you do, don’t drive yourself crazy switching back and forth between the two chasing past performance.
My Investment Returns for 2023
I’ve been investing in Vanguard’s all-equity ETF (VEQT) since March 2019. It’s a perfect solution for someone like me who wants to buy the entire market for as cheap as possible and move on with my life.
I hold VEQT inside my RRSP, LIRA, and corporate investing account. I did not make a contribution to my RRSP (or LIRA, of course) in 2023, but I did actively contribute to the corporate investing account.
As you know, the timing (and amount) of your own contributions will affect your own personal rate of return. So, while I expect my RRSP and LIRA to have a nearly identical return to VEQT’s 2023 calendar year return of 16.95%, the returns on the corporate account may be different due to the timing of contributions. Let’s check it out:
- RRSP = 16.88%
- LIRA = 16.63%
- Corporate = 18.65%
The difference between the RRSP and LIRA returns could only be chalked up to the timing of reinvesting the annual dividend. I don’t believe I had automatic dividend reinvestment turns on in either account and may have not have reinvested the dividends on the same date.
I used TD’s e-Series funds in our kids’ RESP account. While I had maintained a 100% equity portfolio using the Canadian (1/3), US (1/3), and International (1/3) funds, last year I added the bond fund for the first time and did not contribute to the equity funds. Still, $6,000 worth of bond buying ($5,000 in contributions + $1,000 CESG) did not have a significant drag on investment returns:
- RESP = 16.22%
That said, a bigger change is on the horizon because I just transitioned their RESP portfolio to follow the Justin Bender RESP strategy to de-risk the portfolio and keep better track of their share:
Finally reorganized my kids’ family RESP to better track their share of the pie. Had to legally change their names to Vanguard and iShares (sorry!): pic.twitter.com/EkqJ6cTMQy
— Boomer and Echo (@BoomerandEcho) January 4, 2024
Final Thoughts on 2023 Investment Returns
Most Canadians still invest in actively managed mutual funds through their bank or another investment firm. These funds have a huge hurdle to overcome – their high fees – to match (let alone beat) a passively managed portfolio of index funds.
Your job this month is to pull up your investment statement and look at last year’s returns, along with the returns over the past five years, and see if your portfolio is keeping pace with the returns of an asset allocation ETF.
Make sure you’re comparing apples-to-apples, that is you’re matching up your portfolio’s asset allocation with the returns from a similar asset allocation ETF (i.e. 60/40 to 60/40) to get the full story. No sense comparing your 60/40 portfolio to the NASDAQ 100. It likely wouldn’t be appropriate to invest in 100% tech stocks.
If you’ve reviewed your investment statement and find your returns aren’t measuring up, it might be worth switching to a self-directed investing platform and buying a risk appropriate asset allocation ETF.
- I can help – DIY Investing Made Easy
I truly believe that pairing low cost index investing with on-demand financial planning advice at key life stages can lead to successful outcomes for many Canadians. Put that on your New Year’s resolution list for 2024.