Welcome to the Money Bag, where I answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about any money topic that’s on your mind.
This edition of the Money Bag answers your questions about creating retirement income from an asset allocation ETF, resources for beginners to learn about money, a comparison of all equity ETFs, and which credit card to use for your revenge travel.
First up is Paul, who wants to know how to create retirement income when holding a single asset allocation ETF. Take it away, Paul:
Creating Retirement Income With Asset Allocation ETFs
“Hi Robb. I like the idea of the total return approach to creating retirement income. Do you think that’s viable using a one fund approach like Vanguard’s VBAL?”
Hi Paul, I think it’s a really sensible solution for retirees. Many of my retired clients will hold VBAL (or XBAL) in their RRSP/RRIF. My one suggestion is to also open a high interest savings RSP (EQ Bank has one) and park next year’s required withdrawals in that account, while the rest of your RRSP stays invested in the all-in-one ETF.
Consider holding something like 10% of the total value in that RSP savings account, and the remainder in VBAL. In effect, that means your overall asset mix will be 10% cash, 36% bonds, and 54% equities. Each year, once you spend your RRSP cash, you’d sell off some VBAL units and transfer the cash into your RSP savings account and do it all over again.
This is a new approach to an excellent old idea shared by Canadian Couch Potato Dan Bortolotti many years ago, before the launch of one-fund asset allocation ETFs. Since the asset allocation ETF automatically rebalances, there’s no need to manually rebalance each year outside of selling off some ETF units and transferring the cash to your RSP savings account for the next year’s withdrawal needs.
Money Resources For Beginners
Next up is Mindy, who is looking for some money resources to share with her daughter to get her started on the right foot:
“Dear Robb, I have been reading your blog regularly for many years, and I have great respect for your financial wisdom. My 22-year old daughter has asked if I can suggest some reading for her. Of course I recommended your blog. I was wondering: do you have a collection of your blog posts suitable for someone like her—a concise and yet sufficiently broad set of articles for young adults who are relative beginners?”
Hi Mindy, thanks for this – I’m flattered you have suggested my blog, but outside of the odd post like this investing guide for beginners I worry my writing is typically geared towards an older audience. We need to meet people where they are and find resources that are more relatable to our age and stage of life.
I’d first ask your daughter, how does she like to consume her content?
For video, I recommend Preet Banerjee’s YouTube channel, and Ben Felix’s Common Sense Investing channel.
They also have podcasts, which are excellent: Preet’s Mostly Money, and Ben’s Rational Reminder. I’m also really enjoying Ramit Sethi’s podcast, I Will Teach You To Be Rich.
On Instagram you can find more relatable lifestyle and finance content at Mixed Up Money, Ellyce Fulmore, and Bridget Casey. I also find Daniel Foch has really good takes on housing and real estate.
I’m not on TikTok, but from what I’ve seen I’d avoid most of the personal finance advice you’d find there!
For books, I really enjoyed Wealthing Like Rabbits by Robert Brown, and Alyssa Davies at Mixed Up Money has a couple of great beginner books as well.
*Adding Dan Bortolotti’s Reboot Your Portfolio to the list of recommended books – thanks to a reader suggestion in the comments section.
I also think Millionaire Teacher by Andrew Hallam is an excellent book with a lot of great lessons on saving, investing and living a good life.
Blogs seem to be fading away, unfortunately, as content creators move to these other platforms.
All Equity ETFs
Here’s Tim, who wants to invest in an all equity asset allocation ETF and wants to know if one stands out above the others.
“Good morning Mr. Engen, amongst these ETFs — VEQT, XEQT, ZEQT, and HGRO — is there one that stands out, or are they comparable to one another? I am 40, and looking at long-term investing in my TFSA, RRSP, and unregistered accounts.”
Hi Tim, there isn’t a meaningful difference between VEQT, XEQT, and ZEQT. I invest in VEQT myself, but that’s because it came out first and I have an affinity for Vanguard and how they pioneered index funds and help investors.
This excellent video on asset allocation ETFs is worth your time and will give you a good comparison. It also might give you a sober second thought about using all equities versus a more conservative fund:
HGRO is a bit of a different animal. It doesn’t invest in underlying stocks directly – instead, it uses something called a ‘swap’ where another financial institution holds the stocks so that HGRO unit-holders aren’t hit with annual taxable income. This is only really advantageous in a taxable (non-registered) account, but it also comes with some risks.
I’d stick with one of the first three (Vanguard, iShares, or BMO) and hold the same one across all of your accounts for simplicity.
Which Credit Card For Travel Abroad?
Finally, Shawna asked about some missing details from my revenge travel post – namely which card I actually used while travelling abroad.
“Hello Robb, I hope you had a good summer! Regarding your European vacations, I have two follow-up questions:
1. What payment method do you use when travelling in Europe; cash or credit card?
2. Which credit card works best to minimize fees and exchange rates? Curious to hear your thoughts.”
Hi Shawna, great questions! I used the Scotia Passport Visa Infinite card in Italy and in the UK. It comes with no foreign currency conversion fees and what I liked was that immediately after a transaction I got an email with the total cost converted to Canadian dollars. Since I kept track of a loose budget while we were abroad, I found this really helped track spending and keep us in check. Otherwise it’s hard to mentally do the conversions all the time.
I used the credit card for pretty much every transaction outside of a few gift stands in Italy and a very expensive cab ride to the Rome airport when I couldn’t get an Uber. We brought $200 in cash for our trip to the UK, and returned with $200 in cash…
Don’t overthink it. A credit card with no FX mark-up, plus $100 to $200 or so in local currency should cover you, depending on how long you’re there.
Do you have a money-related question for me? Hit me up in the comments below or send me an email.
Many of my clients and blog readers are looking to change their investing strategy to a simple indexing approach using a single asset allocation ETF. This can make a lot of sense if you want to reduce fees, improve diversification, and simplify your portfolio. Indeed, investing complexity has been solved with all-in-one ETF products.
Making this transition is fairly straightforward in tax-advantaged accounts such as RRSPs, TFSAs, RESPs, and LIRAs. If you’re already using a discount brokerage account you can simply sell off your existing holdings and then immediately buy the appropriate asset allocation ETF. Done.
The process is a bit more work for those moving from a managed mutual fund account. You’ll need to open a discount brokerage account (I’d recommend your big bank’s brokerage arm or an online broker like Questrade), open the appropriate account types, and then transfer your existing account over “in cash”, meaning your existing firm will sell all of your holdings and send the proceeds to your new brokerage account in cash. The process can take two weeks or more, but once the cash has landed in your account you can go ahead and buy your asset allocation ETF.
For those with non-registered (taxable) accounts, we have the added complication of taxes to consider. When you sell your existing holdings inside a taxable account, it triggers a taxable event where you will incur either a capital gain or a capital loss.
Sometimes you can get around this by transferring your existing assets “in kind” rather than “in cash”. But if the desired outcome is to simplify your portfolio with an all-in-one ETF then you’re eventually going to have to sell the existing holdings.
This was problematic when stocks were up big over the past few years. I’d work with clients to assess the current capital gain situation and we’d determine a plan to sell off individual parts over a few years to spread out the tax hit.
But here we are now in 2022 and both stocks and bonds have suffered double-digit losses. It’s time to take another look at your taxable account and see if it makes sense to speed up that transition.
Whether your taxable account is filled with individual stocks, mutual funds, or ETFs, assess each holding’s current market value and compare it to the book cost or original price paid. You may find some positions under water, others breaking even, and some still performing well.
Time to break out your calculator. Add up all the total losses from individual holdings that are below your original cost. Add up all the total gains from individual holdings that are above your original cost.
Let’s say your entire non-registered portfolio is in an overall loss position. It’s perfectly reasonable to sell the entire portfolio and immediately purchase your chosen asset allocation ETF. The sales will trigger capital losses, which can be used to offset any capital gains incurred that tax year. You can also carry capital losses back into the previous three tax years and/or carry them forward indefinitely.
This approach is also onside with something called the superficial loss rule, which states that you can’t claim the capital loss if you buy an identical security within 30 days of your sale transaction.
And, if you’re already happily managing an ETF portfolio, you can still engage in more traditional tax loss selling by identifying non-identical ETFs to pair with your existing ETFs so you can harvest a capital loss, immediately buy another ETF, and still stay onside with the superficial loss rules. For that, Justin Bender has you covered:
One silver-lining of a down market is it may provide an opportune time to reorganize your taxable investments and move to a low cost indexing solution more quickly and more tax efficiently than if we were still in a raging bull market.
Have you done any tax loss selling this year?
This Week’s Recap:
There’s finally some activity at the site of our new house after weeks of waiting for trusses to be delivered. We should see a lot of progress over the next few months before winter arrives.
An early 2023 completion date means we need to start preparing our existing house to be put up for sale. We’re reasonably good at keeping the clutter out, but the house will definitely need some touch ups before it’s ready for prospective buyers to view.
In case you missed it, I looked at some sustainable investing solutions for DIY investors.
I also took a fun look back at my own investing multiverse of madness and the different choices I could have made when I started index investing.
Many thanks to Rob Carrick for including my post on the retirement risk zone in his latest Carrick on Money newsletter (subs).
Weekend Reading:
The Belle Curve blog explains why retirement is the biggest life event that no one talks about.
Jon Chevreau ponders whether it makes sense to retire when we’re still in a pandemic.
Is retirement possible for those who start saving and investing after 40? Yes, but you don’t have the luxury of making mistakes (subs).
This Morningstar article looks at the ‘Witch of Wall Street’ and the difference between wealth and well being:
“Although Hetty had objectively more money than almost everyone else in the world, she still believed she did not have enough. She believed it so strongly that she spent her life, and ruined her relationships, in pursuit of more.”
Moshe Milevsky and Guardian Capital unveiled a new retirement solution called a modern Tontine.
Retirement expert Fred Vettese has long advocated for deferring CPP to 70 while taking OAS benefits at 65. His rationale was more about psychology than math. It’s hard enough, he reasoned, to persuade people to delay their CPP to 70. The benefit for delaying OAS is also smaller than it is for CPP.
But Mr. Vettese didn’t expect the higher and more persistent inflation that we’re experiencing right now.
“If you believe that higher inflation is either (a) here to stay or (b) at least more likely to rear its ugly head in the future, then I strongly advise deferring both CPP and OAS pensions: pensions from these programs are fully protected from inflation, something that only the federal government can credibly offer.”
Keep in mind the usual caveats: if you have reason to believe you have a shorter than average life expectancy, or you simply don’t have enough personal savings to tap into while you wait for CPP and OAS, then it’s perfectly rational to take your benefits at 65.
Finally, looking for some personal finance book recommendations? Investment manager Markus Muhs has you covered with this impressive list.
Have a great weekend, everyone!
February is RRSP season, which for many Canadians means an annual trip to the bank to make an RRSP contribution before the deadline (March 1, 2023). It might be tempting to take out a loan if you don’t have the cash available to make a contribution – the rationale being that in one shot you’ll boost the savings in your retirement account and then use the deduction to increase your chances of getting a tax refund.
RRSP loans are great for banks because they get the loan, plus an investment on their books. No wonder lenders so heavily promote RRSP loans at this time of year.
Related: How to get more out of your RRSP this year
It’s not just Canada’s big five banks pushing RRSP loans. Online banks and lenders are also getting in on the act. Tangerine bank customers may have been surprised to find a pre-approved RRSP loan listed on their ‘My Account’ dashboard:
Most RRSP loans are used to make an RRSP contribution before the deadline in order to maximize contribution room and save on taxes. Interest rates on these loans can be obtained at or near prime rate, and the loan is paid back over a period of nine to 12 months – typically in monthly installments.
Borrowers beware. Financial institutions, both of the online and brick-and-mortar variety, employ salespeople and develop promotional materials, charts, and testimonials with the aim to convince you that a loan is a good idea. It might not be.
A chart that tries to highlight the tax savings on an RRSP contribution, for example, might show a borrower in the highest marginal tax rate to make the figures look good. If you happen to be in a lower tax bracket, you’ll get less of a refund.
One behavioural argument against taking out an RRSP loan is that if you didn’t have the discipline to contribute regularly to your RRSP throughout the year, how do you expect to stick to a loan repayment schedule over the next 12 months?
Financial author Talbot Stevens says our behaviour is the key to making the RRSP loan strategy successful.
“Even an undisciplined investor can benefit from the forced savings of paying off a loan – as long as it is well within their financial and emotional comfort zone,” he said.
Small top-up loans are generally accepted as a sound financial planning strategy and Stevens argues that once started, the RRSP loan becomes a forced savings plan, like a mortgage, that is not likely to be stopped.
With that in mind, let’s use an example of an investor who is in a 40% tax bracket, has $1,000 to contribute to her RRSP before the deadline, and has $5,000 in available contribution room.
Related: Are you putting dry pasta in your RRSP?
A short-term RRSP loan can top-up her annual RRSP contribution to the maximum. She simply borrows the extra $4,000 to make a $5,000 contribution and, at tax time, she’ll receive a $2,000 refund. The refund is not enough to pay off the entire RRSP loan, but she applies it against her loan and then pays off the remaining $2,000 balance over the next year.
This type of approach can boost your retirement portfolio in a hurry, but it can also lead to an endless cycle of borrowing ahead to catch-up on RRSP contributions. Can you afford to make regular RRSP contributions when you’re constantly making payments on last year’s contribution? In other words, at the end of the RRSP loan you might have to catch-up the contributions you didn’t make while you were repaying the loan.
At some point you’ll have to break the cycle. With that in mind, a debt-free approach to RRSPs would have you determine the amount you would have made in RRSP loan payments, then, use that amount to make regular RRSP contributions going forward. It may take a while longer to catch up but you’ll have no interest costs.
Final thoughts on RRSP loans
Using an RRSP loan can be a powerful strategy to boost your RRSP contributions and build your retirement portfolio. However, use caution when borrowing to invest and remember that this approach only works when you have the discipline to save your tax refund or use it to help pay off the loan.
Related: How an RRSP loan turned my $12,000 contribution into $20,000
Banks fuel our need for instant gratification with their well-timed marketing during RRSP season. But an RRSP loan isn’t necessary if repaying a loan doesn’t fit into your financial plan, or if you had the discipline to make regular contributions to your RRSP throughout the year.
“Truly disciplined investors don’t need the forced commitment of an RRSP loan. Those who acknowledge their tendency to procrastinate or become distracted from their retirement goal might benefit from the forced discipline of making payments on an RRSP loan,” says Stevens.
Well said.