It’s generally a good idea to max out the available contribution room inside your RRSP and TFSA first before moving on to other investment opportunities. Those “other” opportunities may include accelerating your mortgage payments if you own a home, or buying a rental property, or opening a non-registered (taxable) investment account.
It’s a topic I get asked about frequently, so I thought I’d share my answer below. This question comes from a reader named Allen, who focuses more specifically on opening a non-registered account to invest. Take it away, Allen:
“Good day Mr. Engen,
I’m a regular reader of your weekly newsletter and have noticed that you use VEQT across your TFSA and RRSP accounts. I’m wondering what to do when those two accounts are maxed out. I rent, have no kids and no debt. So I see nothing to do with my money besides investing it.
Is it worth it to open a taxable account and start investing my ‘extra’ money, or is there something more valuable to do with those savings?
Also, if I go the taxable account route do I have to pay tax every single year the money is invested, and added — presuming the returns are positive — or is it only when I sell the securities inside the taxable account?”
Hi Allen, congrats on maxing out your RRSP and TFSA! Besides encouraging you to spend a bit more, I think it does make sense for you to open a non-registered investment account.
It’s all about creating a priority sequence for your savings. Priority one might be to max out your RRSP for the year, priority two is to max out your TFSA, and then if you don’t have a priority three (this could be extra mortgage payments if you had a mortgage, or money for travel, or furniture, or a new car, something more short-term in nature) then investing in a non-registered account makes logical sense.
Investing in a non-registered (taxable) account does typically create some taxable income for you. If you invest in ETFs then you’d likely receive quarterly distributions of dividends and/or interest.
For example, VGRO pays quarterly distributions of about 15 cents per unit. Here’s what that looked like in 2020:
This income is taxable to you. Using a quick example, if you had 1,000 units of VGRO then you’d receive about 60 cents per unit from the distributions each year. That’s $600 will be made up of eligible dividends, capital gains, interest, foreign income, and return of capital. You’ll receive a T3 slip from your financial institution at tax time breaking this down for you.
VEQT pays an annual distribution rather than paying it quarterly. Same idea applies, although since it doesn’t hold bonds the income would all come from Canadian and foreign dividends, plus some return of capital.
Finally, there are some ETFs that don’t pay any distributions. These are called “swap-based” or synthetic ETFs.
Horizons is famous for these and they have an all-in-one ETF called HGRO that uses this structure. Basically they don’t hold the underlying stocks directly but they use a counter-party (BMO, National Bank) to hold the securities and receive the dividends directly. The counter-party then “swaps” the total return over to Horizons.
The premise is that investing in HGRO won’t attract any annual investment income – it’s all deferred capital gains until you sell the ETF. This could be attractive if you’re in a high tax bracket now versus when you plan to sell.
But there are risks associated with these types of swap-based ETFs, including regulatory (the federal government could disallow this structure in the future). Horizons’ all-in-one ETFs are also not as diversified as traditional asset allocation ETFs from Vanguard, iShares, and BMO.
Allen, I invest in a non-registered account, it’s just inside my corporation rather than on my personal side. I hold VEQT in that account, just like I do in my registered accounts. It’s perfectly sensible to hold the same investment across all account types.
Finally, an off-the-beaten path answer to your initial question is to consider the Coast FIRE approach to savings.
I spent several years catching up on unused RRSP and TFSA room so my savings rate was abnormally high throughout my late 30s and into my 40s.
Now that I’ve maxed out my RRSP and TFSA, and got a good start on my corporate investing account, my plan is to dial down my savings rate in the future so I can work less and/or spend more on travel.
Life’s not about accumulating the biggest pile of money. We need to identify a purpose for our money so we can design the type of lifestyle that we truly desire.
This Week’s Recap:
This week we kicked-off the first of a three-part retirement series by author Mike Drak – this one on designing your ideal retirement lifestyle.
Over on Young & Thrifty I wrote about the best all-in-one ETFs in Canada.
I also reviewed the CIBC Investor’s Edge platform.
Promo of the Week:
American Express is going all out again with sign-up bonuses and perks that rival their best offers ever from this summer.
The American Express Platinum Card is offering a welcome bonus of 80,000 Membership Rewards points when you charge $6,000 in purchases to your card within the first three months.
Here’s why you might want to pay a $699 fee to hold the Amex Platinum Card:
- Get a $200 annual travel credit
- Earn 3 points per dollar spent on dining
- Earn 2 points per dollar spent on travel
- Transfer points 1:1 to several frequent flyer and loyalty programs, including Aeroplan)
Not only that, you’ll get free airport lounge access, a $100 NEXUS card statement credit, plus gold status at Hilton, Marriott, and Radisson hotels.
Alternatively, you can try my new favourite – the American Express Aeroplan Reserve Card. With this card you can earn up to 90,000 Aeroplan miles plus a Buddy Pass for an eligible round-trip flight within North America.
Here’s how it works:
Earn 30,000 Aeroplan points and a bonus Buddy Pass after spending $3,000 in purchases within the first 3 months.
Plus, earn 5,000 Aeroplan points for each monthly billing period in which you spend $1,000 in purchases on your Card for the first twelve months. That could add up to 60,000 Aeroplan points.
American Express says this is worth up to $2,900 or more in value within your first year! All of this for an annual fee of $599.
Weekend Reading:
Our friends at Credit Card Genius launched Genius Cash earlier this year and are giving away $10,000 cash or a Tesla Model 3.
A Wealth of Common Sense blogger Ben Carlson addresses the buy now, pay later phenomenon.
Rich Dad, Poor Dad author and noted investing seminar scammer Robert Kiyosaki predicted a giant market crash in October. This lines up with at least eight other “predictions” he made over the past 10 years. The problem is that even a broken clock is right twice a day.
Professor Moshe Milevsky explains why the 4% rule is too simplistic for modern retirement planning:
“There’s something odd about a rule that’s one-dimensional, Mr. Milevsky said. Four per cent regardless of tomorrow? I think decumulation plans must be multidimensional.”
Here’s Millionaire Teacher Andrew Hallam on how to beat the investment returns of almost everyone you know.
The Evidence Based Investor explains why the outcome of your investment decisions should be based more on evidence than on speculation, superstition or guesswork.
Gen Y Money breaks down the locked in retirement account and decodes the LIRA vs. RRSP rules.
Why retirees should start planning now to age in place if they want to avoid living in a seniors’ home.
Michael James on Money reviews The Deficit Myth by Stephanie Kelton.
Finally, just a terrific interview in The New Yorker with Rick Steves about holding onto your travel dreams.
“For me, Europe is the wading pool for world exploration. My favorite countries may be elsewhere. I like Indonesia and India and Japan and Central America just as much when it comes to travel, but I’ve got a calling in life. And that is to inspire Americans to venture beyond Orlando. The practical goal is to get people who have been to Disney World four or five times to try Portugal. It won’t bite you.”
Who isn’t dreaming of a trip to Europe after reading that?
Have a great weekend, everyone!
Transitioning to a successful retirement is much more than a math problem, it’s a design problem.
Every retiree needs to design a retirement lifestyle that will work for them based on their own unique values, needs and wants and then ensure they have sufficient cash flow to finance it. The challenge is that most retirees don’t know what they need and want, nor how to get it and therein lies the problem.
In this series of three articles based on content from my two books “Victory Lap Retirement” and “Retirement Heaven or Hell” I’m going to show you how to transition from your current career into a retirement of your own design.
This article and the second one covers the first and most important step which is to figure out what your sources of purpose will be in retirement. In the third article I will share how to build a lifestyle around that.
Purpose: Something To Live For
During my retirement presentations I’ve been conducting a poll asking people to indicate their biggest retirement concern. What I found was that for pre-retirees their biggest concern is having enough money saved for retirement. This isn’t surprising, as the financial services industry spends millions pushing the importance of saving for retirement.
Related: How To Think About Retirement Planning
What I found interesting is when I ask the same question to a group of recent retirees the answer switches overwhelmingly to finding purpose in retirement.
These results match up well with recent studies done by Ken Dychtwald’s AgeWave where 92% percent of retirees agree that finding purpose is key to a successful retirement – 93% of the retirees surveyed by AgeWave believed it’s important to feel useful in retirement and 87% agreed that being useful actually “makes them feel youthful.”
Lesson On Purpose From The Pandemic
Many of us learned how important having a source of purpose is from the pandemic. If you couldn’t work from home, there wasn’t much in the way of meaningful things to do, outside of just trying to survive. Not having a source of purpose made us feel a little lost, and frustrated, and life got boring real fast.
Some people woke up to the fact that having a job, any job was far better than just puttering around the house killing time, and taking the dog out for another walk around the block.
When we retire we need to find new sources of purpose in something else, or we are going to be in trouble.
When the kids leave home and we retire our sense of purpose takes a major hit. Suddenly, we wake up to days that aren’t filled by meetings and deadlines, and chauffeuring our kids to their activities. It feels like the things that defined us—our very identity—is slipping away.
We need to find a good way of filling the big hole that was left behind. Until we do that we will always feel like something is missing in our lives. Feeling like this can really mess some people up.
Retiring to nothing is equivalent to digging a premature grave.
At the end of many of my retirement seminars people will tell me stories about a family member or friend who struggled soon after retiring and ended up living a miserable life.
Many of these stories were about people who enjoyed a successful primary career, they had substantial retirement assets yet they just seemed to shrivel up and die soon after packing it in.
Doctors, teachers, business owners, senior executives, people that should have enjoyed a great retirement but didn’t because they were unable to find a suitable replacement source of purpose. Really when you think about it how do you replace a calling?
Related: Not Another Retirement Planning Book
Purpose keeps the fire going and prevents us from drying out. For me, discovering my purpose is what got me out of retirement hell.
We are all wired to need purpose and meaning. We all need something to live for and when you retire you need to find new suitable sources of purpose because without it you risk your health, happiness, and longevity.
Studies have shown us that;
- People at every stage of life are happier when they possess a sense of purpose and we know from the famous “Nun” study that happy people live longer.
- People with the highest sense of purpose live significantly longer than those with a lower sense of purpose and it doesn’t matter how rich or poor people are, or what gender they are, what race they are or their education level.
- Purposeful people have stronger immune systems, they can handle stress better and can recover from surgery quicker.
Sources of purpose
Purpose comes in many different shapes and sizes and most retirees have more than one. Your chosen purpose does not need to be grandiose; it only needs to be something meaningful to you.
Retirees find purpose from taking care of a garden, providing eldercare, taking care of a cat, going back to school, learning how to fly fish, training for an Ironman, starting a new business or doing volunteer work.
Living your purpose strengthens your sense of self; it gives you a way to explain who you are to other people. You no longer have to feel embarrassed telling people you are retired when you have a good source of purpose.
The key is to do whatever makes you feel good about yourself, whatever makes you feel that you still contribute, and that you still matter.
Purpose Helps Keep You Alive
Ask yourself why do rich people like Charlie Munger age 97 and Warren Buffett age 90 continue to work? Why do the Rolling Stones keep touring?
The answer is they work because it gives them purpose and their passion for their work helps keep them alive.
Their work excites them and makes them want to jump out of bed in the morning. It serves as their own personal ‘Fountain of Youth” and keeps them youthful and energized. Sitting on a couch watching tv doesn’t do that for them.
Related: Addressing Major Gaps In Your Retirement Plan
When you have a source of purpose, you never get up in the morning wondering what you’re going to do with yourself. When you find your purpose life becomes easier, and less stressful. There is no space for negativity to seep in because you are busy doing fulfilling, meaningful things.
Purpose is something that we all need until our last breath, and even having a lot of money will never change that.
So now that we know the important role purpose plays in a successful retirement the million-dollar question is where can we find a good source of purpose?
Be sure to read my next article where I will share how you can discover this.
Mike Drak is an author, public speaker and recognized authority on the non-financial aspects of retirement. After having spent 38-years in the financial services industry, Mike retired and personally faced what he called “retirement shock”. During this time, Mike found himself on a journey of self discovery and authored two best selling books on retirement; Victory Lap Retirement and Retirement Heaven or Hell: Which Will You Choose?. Mike is a Senior Contributor at Booming Encore and dedicates his time to helping other retirees design a fulfilling, meaningful retirement lifestyle for themselves.
I hope you’ve had a chance to check out the Canadian Financial Summit this week. This online personal finance and investing conference features more than 35 prominent experts in Canadian money matters, with a wide range of topics from investing, retiring early, travel, and much more.
In my session I spoke with co-host Kyle Prevost about how to curb your investing FOMO (fear of missing out). Investing FOMO has been rampant since the beginning of the pandemic. We’ve had the rise of meme stocks like GameStop and AMC. We’ve seen historic gains (and declines) in cryptocurrencies like bitcoin, ethereum, and dogecoin. Tech stocks have boomed. And we’ve seen massive gains in Canadian real estate.
New investors have gravitated towards commission-free trading apps like Wealthsimple Trade here in Canada and Robinhood in the U.S., making it easy for investors to trade on their FOMO.
Prior to 2020, I considered myself a fairly risky investor with my 100% equity portfolio. Now I feel like my portfolio is down right vanilla, as if I park my money in GICs.
Sure, my all equity portfolio (VEQT) is up 70% since the March 2020 lows. But that’s child’s play in a market where some individual stocks, cryptocurrencies, and non-fungible tokens are generating triple and quadruple digit returns.
What’s an investor to do?
I often say that I’m an emotionless robot when it comes to investing. There’s no core and explore, or play money in my portfolio. I stay 100% invested in 100% global equities, and have for many years.
But you’re most likely not an emotionless robot. You’re a regular human driven by fear, greed, and temptation. You may be drawn to lottery-like stocks or asset classes with the potential for huge gains.
That’s okay.
But rather than letting your emotions wrestle complete control over your portfolio, I suggest you design some rules to help curb your investing enthusiasm.
- Stick to a low cost, globally diversified, and risk appropriate portfolio inside your registered accounts (RRSP, TFSA). Gambling with risky individual stocks or crypto ETFs inside these accounts is dangerous for two reasons. One, you don’t get to claim a capital loss if your investment loses money. Two, in the event of a loss you lose that contribution room forever.
- No more than 5% of your portfolio gets allocated to risky assets. This is the equivalent of only bringing $100 cash to the casino instead of bringing your debit card to the party.
- Know your buy and sell rules and stick to them. For example, if a speculative play doubles, you trim it back to its original allocation and plough the profits into your core portfolio. Conversely, if your bet falls by 50% you cut your losses and sell.
If you haven’t had a chance to watch my session at the Canadian Financial Summit there is still time to grab a ticket and watch all of the presentations from this past week.
This Week’s Recap:
I explained how DIY investors can convert their RRSP to a RRIF on the Questrade platform.
I went under the hood to look at BMO’s suite of asset allocation ETFs.
Over on Young & Thrifty I explained why it’s more supply, not incentives, that’s going to help solve Canada’s housing crisis.
Many thanks to Rob Carrick for linking to my review of Die With Zero and the concept of consumption smoothing in his latest Carrick on Money newsletter.
Promo of the Week:
We shop online more often than not these days. One money saving tip I’m constantly trying to remember is to first visit a cash back website like GreatCanadianRebates.ca before making a purchase.
GCR is a portal to hundreds of online retailers who pay a percentage of cash back on your purchase. GCR passes some of the cash back to you, so you can earn money not just from the rewards credit card you use, but also from the GCR website itself. Talk about a no-brainer!
It’s really easy to use. Register using this link to get started. Then shop as you currently do and your rebates will be automatically credited to your Cash Back Rebate account. GreatCanadianRebates.ca also offers coupons, free shipping specials, and sales directly from the stores.
I visit regularly to look for additional sign up bonuses for credit card offers. For example, they’re offering a cash back rebate of $120 for the American Express Cobalt Card – that’s in addition to the 50,000 in rewards points you could earn for using one of the best credit cards in Canada.
Weekend Reading:
Speaking of credit cards, our friends at Credit Card Genius have a doozy of a promotion on right now – they’re giving away a brand new Tesla!
A great piece by A Wealth of Common Sense blogger Ben Carlson on the psychology of betting big and losing it all.
Globe and Mail reporter Tim Kiladze looks at the death of profit – why investing feels broken and markets no longer make sense (<–subscribers).
David Booth, executive chairman and founder of Dimensional, shares 10 obstacles to investing and how to overcome them:
“It’s natural to feel regret about decisions you’re unsure about. But it’s never too late to invest. Every day, we expect the stock market to go up. Otherwise, investors would find other things to do with their money.”
Of Dollars and Data blogger Nick Maggiulli explains why buying the dip is a terrible investing strategy.
Michael James on Money debunks a bogus stock market prediction that shows stocks will lose about 8% over the next 10 years.
Ben Felix is back with another Common Sense Investing video. This one looks at day trading and whether free trading apps has made this popular pastime more profitable:
Ark CEO Cathie Wood faces off against Research Affiliates’ Rob Arnott about whether stocks are in a bubble.
Always the creative writer, Millionaire Teacher Andrew Hallam explains a time when index investors would have been eaten alive.
Hallam also looks at The Big Con: promising stock market returns without market risk.
The Blunt Bean Counter Mark Goodfield with a great explanation of the basics and uses of term and permanent life insurance.
Are you ready to retire? Jim Wang of Wallet Hacks says probably not.
Jason Heath explains how to avoid OAS clawbacks when you’ve had a temporary increase in income.
The Irrelevant Investor Michael Batnick says there is one thing that trumps everything else when it comes to how you feel about money – it’s how you grew up around money.
Alexandra Macqueen expertly shares a guide that will help you understand what inflation is, how it’s calculated, and what it means for your personal finances.
I’ve been thinking about this too when it comes to inflation – what if the persistent inflation will be felt in time and inconvenience?
Travel expert Barry Choi looks at how a Canadian can apply for a US credit card. US rewards cards are known for being much more lucrative than Canadian cards.
Finally, the Prince of Travel blog explains the new challenges of international travel with kids. Ugh.
Have a great weekend, everyone!