Last week felt like a year. It began Monday with one of the largest one-day stock market declines in history (S&P500 -7.6%) before Thursday said, “hold my beer”, and stocks fell an incredible -9.51% that day. Then markets rallied on Friday with one of the largest one-day gains in history (S&P500 +9.29%) to cap-off a roller coaster of a week in the markets.
How are you all feeling? Are you comfortable with your asset allocation? Have you used this market crash as an opportunity to rebalance? To add new money to your portfolio?
I’ll admit to having a lot of anxiety after the markets closed on Thursday. Can you blame me? My all-equity RRSP portfolio was down 30% in one month(!). With no bonds to sell, and no unused RRSP contribution room, I’m left to ride out the roller coaster and take whatever the market gives me.
It’s a different story in my TFSA, where I still have $30,000 in unused contribution room. I played out a number of scenarios in my mind, one which would have me tap into my line of credit to immediately max out my TFSA. In hindsight, had I pulled it off before markets opened Friday, that might have been a great move. But here’s what I did instead:
Nothing.
That’s right. I didn’t panic. I didn’t engage in market timing. I didn’t change my strategy.
I have a plan to contribute $1,000 per month to my TFSA this year, and increase that to $2,000 per month next year until I’ve used up all that contribution room. I don’t plan to touch my RRSP for 20 years. This is a long game.
That said, investors in their accumulation years can certainly view these types of corrections as tremendous buying opportunities. Stocks are on sale and since you’ll hopefully be a net purchaser of stocks for the next several decades, now is a great time to put some money to work in the market (but only if you have the money to invest).
Related: This game will show you just how foolish it is to sell stocks right now
What about those of you who are retired, or soon-to-be retired? You likely viewed this crash through a different lens than me.
Falling stock markets cause serious damage to retirement savings and can significantly impact your ability to retire, or your ability to meet your desired spending in retirement.
Hopefully you have a plan that separates your long-term savings (stocks and bonds) from your short-to-medium term savings (cash and GICs). If you don’t, here’s an approach to consider:
- Cash – Put one year’s worth of spending in a high interest savings account
- GICs – Put three-to-five years’ worth of spending in a GIC ladder
- Stocks/Bonds – Put the remainder of your retirement savings in a risk appropriate portfolio of stocks and bonds (preferably in low cost ETFs). Each year you’d replace your spending cash with the cash from a maturing GIC. Then you’d replace the maturing GIC by selling bonds, and you’d replace the bonds by selling stocks (but only in years when stocks are up)
Long-time (and newly retired) blogger Michael James shares a similar approach to his asset allocation in retirement.
This Week’s Recap
On Monday I opened up the Money Bag to answer reader questions about RRIF withdrawals, in-kind vs in-cash transfers, group RESPs, and how early retirement affects CPP benefits.
Many thanks to Sophia Harris at CBC for interviewing me for her piece on how the coronavirus is affecting your investment portfolio.
And to Erica Alini of Global News for interviewing me for her piece on how to prepare for a recession amid coronavirus.
We’ve officially cancelled our travel plans to Italy this April (obviously) and I’m happy to report that we’ve managed to get most of our money back. Aeroplan refunded our points balance, fees & taxes, and waived the cancellation fee of $75 per ticket ($600).
All of our Airbnbs had 24 hour cancellation policies and so we were able to cancel and get full refunds.
The only outstanding items are about $400 worth of train tickets booked via Italiarail – who claims to be putting together a new refund policy next week that will help affected travellers – and a Vatican tour we booked through Expedia that has proven to be impossible to cancel online (error message). I will persist.
That should just leave me out of pocket $45 for a now useless international driver’s permit. Not bad.
No money to buy stocks but I am now sitting on 500k rewards points waiting to buy the travel dip.
— Boomer and Echo (@BoomerandEcho) March 12, 2020
Still need to cancel or rebook your vacation? Here’s a useful guide to every major airline and hotel’s cancellation policy.
Weekend Reading
A must-read for travellers, our friends at Credit Card Genius take a deep dive into travel insurance, credit card trip cancellations, and how major Canadian airlines and rewards programs are responding to this pandemic.
A Wealth of Common Sense blogger Ben Carlson with a look at how long it takes to make your money back after a bear market.
Is financial independence and early retirement really achievable for most people? Here’s why semi-retirement may be more desirable.
Here’s a very technical but useful look at various investing strategies, from “normal” dollar cost averaging, to lump sum investing, to market timing. This post actually helped snap me back to reality and carry on with my “normal” investing strategy.
The Bank of Canada slashed rates again by 0.50% in an emergency measure to support the economy. Expect once again for the big banks to pass along the full rate cut to their prime lending rates, meaning my mortgage rate is about to go to 1.95% and line of credit to 3.55%.
On the flip side, the rate cut is bad news for savers. Already we’ve seen rates on high interest savings accounts plummet as the major players have adapted to the new rate environment. Expect GIC rates to fall as well.
Could we possibly see negative interest rates in Canada? RateSpy explores the increasing probability.
Preet Banerjee’s latest video explains the differences between the major types of life insurance like Term Life Insurance, Whole Life Insurance, and Universal Life Insurance:
Here’s Gen Y Money on group, pooled, and scholarship trust RESPs and why you should avoid them.
Trust Morgan Housel to deliver the perspective we all so desperately need with a look at different kinds of decline.
Mr. Housel also wrote some useful tips to get through the Corona Panic.
More sobering thoughts from Michael Batnick on falling markets and dealing with internal and external pressure to “do something.”
Michael James shares a simple guide to when to buy and sell stocks.
Finally, Bryan Borzykowksi has been working from home for a decade and shares his top tips for productivity.
Have a great weekend, everyone!
Today I’m answering reader mail for a feature I call the Money Bag. I’ll 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 all the money things you’re dying to know.
This edition of the money bag answers your questions about tax-free RRIF withdrawals, transferring investment accounts in-kind or in-cash, getting out of a group RESP contract, and how early retirement affects your CPP benefits.
First up is Bert, who heard about a way to withdraw $2,000 from his RRIF tax-free and wants to know how to do it. Take it away, Bert:
Tax-free RRIF Withdrawals
“Hi Robb, I understand that I can withdraw about $2,000 almost tax free from a RRIF. Does “tax-free” mean no withholding tax, or does it truly mean “no tax”, as in it’s not counted as income?”
Hi Bert, thanks for your email. You’re referring to the pension income tax credit, or pension income amount. It allows those age 65 or older to claim a federal non-refundable tax credit on up to $2,000 of eligible pension income (including RRIF withdrawals).
Note that you’ll have income tax withheld on your RRIF withdrawal, but then at tax time you’ll be able to claim the Pension Income Tax Credit, which eliminates 15 percent in federal tax.
Regardless of your tax bracket, the maximum federal tax savings available is $300 ($2,000 × 15 percent).
Transferring Funds In Cash or In Kind?
Here’s Harrison, who wants to know how to transfer his existing investments to the robo-advisor Wealthsimple.
“Hi Robb, I read your article about transferring an RRSP to WealthSimple. I was planning to do the same but I have some questions. I have a mutual fund RRSP account with TD and was wondering if i should transfer it to WealthSimple ‘in cash’ or ‘in kind’.”
Hi Harrison, great question! You’ve correctly identified the two ways to transfer your investments from one institution to another.
An in-kind transfer means that the transferring institution sends your existing investments (mutual funds, ETFs, individual stocks) over to the receiving institution exactly as is.
An in-cash transfer means the transferring institution will liquidate your existing holdings and then send the entire amount to the receiving institution in cash.
You can also do a partial in-kind or in-cash transfer. How to choose really depends on four factors:
- Your current holdings and whether you want to retain all or a portion of them
- The receiving institution’s ability to manage the incoming holdings (for example, a proprietary fund like Tangerine Investment Funds can only be bought, sold, and managed in a Tangerine account)
- The tax implications of liquidating investments in a non-registered account
- Whether or not you’ll be charged fees (deferred sales charges) for selling the mutual funds
Note there are no tax implications for transferring funds within an RRSP or TFSA, whether in cash or in kind. The funds stay in the same tax-sheltered cupboard, they just move to someone else’s kitchen.
Harrison, in your case you’d most likely want to make the transfer “in cash”, meaning TD will sell the mutual funds and send over the funds in cash. Wealthsimple will then implement your portfolio.
One final note about Wealthsimple. When you create your in-kind transfer request, you’ll have the option to not sell your holdings and schedule a conversation with a portfolio manager to explain know how to manage your holdings. Wealthsimple will hold any assets with a Deferred Sales Charge or a significant Capital Gain or Loss (in a taxable account ONLY) you’ve asked them not to sell, however, they will not monitor or trade these assets with the rest of your portfolio.
Group RESPs
Melissa wants to know how to get out of a group RESP plan without penalty.
“Hi Robb, my daughter and her husband recently bought a group RESP plan through CST (Canadian Scholarship Foundation). She received the prospectus about a month ago. I see from an article you wrote that if she is under the 60 day point, she can get out of the plan. How can she go about doing this?”
Hi Melissa, she’ll need to contact CST directly and cancel the contract. I’d advise that she do so immediately to avoid any chance that she’s reached the 60 day period. View the prospectus and find the ‘cancellation within 60 days’ clause. Find out if she’ll need to do this in writing, or if a phone call is sufficient. Assume nothing, other than that CST will likely look for any way to keep her in the plan.
There’s a very interesting study on Group RESP subscribers and how these plans are sold. I’d advise her to open an account instead at a bank and contribute only what she can afford. That’s the biggest knock against group RESP plans or scholarship trusts is that they lock you into a pre-determined monthly contribution and the subscriber has no flexibility to reduce or cancel their payments without penalty. With a bank, she can contribute as much or as little as she’d like.
How Early Retirement Affects CPP
Wayne is retiring early but delay taking CPP. He wants to know how his zero-contribution years affect his CPP benefit.
“Hi Robb. I’ve been a faithful follower of your advice and articles. I read with interest Taking CPP at Age 60. I’m planning to retire this year (I’ll be 61), with 41 years service with the provincial government. Here’s my question. I plan to take CPP at 65, but naturally I will stop making contributions this year. Will I get CPP at 65 without a reduction, even though I will not contribute from ages 61 to 65?”
Hi Wayne, thanks for your email. Here’s how I understand it:
You will not lose anything by waiting until 65 and having the last four years of zero earnings, provided that you have at least 39 years of max earnings (which sounds like the case for you).
If you have fewer than 39 years of max earnings, then your “calculated retirement pension” will decrease with the four extra years of zero earnings. This means that you’ll get a larger slice of a smaller pie by waiting until 65.
Check out this free CPP calculator to run your own accurate CPP calculations, or if your situation is more nuanced or complicated then I’d highly recommend getting in touch with Doug Runchey, who, for a small fee, will run some calculations for you.
The Bank of Canada cut its key interest rate by 0.50 percent on Wednesday in a response to a global economic threat caused by the COVID-19 outbreak. The decision followed the U.S. Federal Reserve’s emergency rate cut on Tuesday. It’s the first interest rate cut in four years. Here’s what it means for Canadians:
Interest rates on variable rate mortgages and lines of credit tied to the prime lending rate should also fall by 0.50 percent. I can confirm that the interest rate on my five-year variable rate mortgage fell from 2.95 percent to 2.45 percent, while the interest rate on my prime + 0.60 percent home equity line of credit fell from 4.55 percent to 4.05 percent.
That’s a mild surprise from the big banks, given that they did not pass on the full rate cut on previous occasions when the Bank of Canada lowered its key lending rate.
Related: What the Bank of Canada rate cut means for mortgages
Now for the bad news. Interest rate cuts hurt savers. Immediately following the Bank of Canada announcement, Wealthsimple said it would be lowering the interest rate on its new Wealthsimple Cash account from 2.4 percent to 1.9 percent.
As of this writing, LBC Digital still offers a 2.8 percent interest rate, EQ Bank still offers a 2.45 percent interest rate, and Motive Financial still offers a 2.4 percent interest rate on savings deposits.
Of bigger concern to the overall economy is Canada’s 10-year bond yields, which are in a free-fall. Canada’s five-year government bonds are also near record lows. Lower yields in the bond market can be a strong indicator of economic trouble ahead.
As for the stock market, the TSX had an up-and-down week but ended up slightly lower than where it started the week. The S&P 500 also had a roller-coaster of a week, but ended the five-day period flat.
I added $1,000 to VEQT inside my TFSA (regular monthly contributions) and that portfolio finished the week up by 0.19 percent. On the year it is down about 9.3 percent.
I haven’t made any changes to my RRSP (also invested in VEQT), and this all-equity portfolio is down 9.38 percent on the year.
As I’ve said before, this is well within the range of potential short-term outcomes. Nothing to get excited about. Stick to your plan, and this too shall pass.
This Week’s Recap:
A busy week of financial planning meant no new posts from me on Boomer & Echo last week. I did manage to recap our February vacation on Rewards Cards Canada and looked at how much it costs to go to Maui.
From the archives: Here’s a sensible RRSP vs TFSA comparison.
For Globe and Mail subscribers: Travel expert Barry Choi interviewed me for his latest piece on travelling to Italy.
I’m excited to announce a new partnership with Scotiabank where I will be using the Scotia Momentum Visa Infinite Card over the course of the year to earn cash back on my spending. This includes an incredible 10 percent cash back for the first three months:
#Ad The Scotia Momentum Visa Infinite Card is the king of cash back rewards in Canada. I am beyond thrilled to use this @Scotiabank card again and take advantage of the limited time 10% cash back bonus for the first 3 months (up to $2k in total purchases). Conditions apply. (1/3) pic.twitter.com/n4rwO829Wy
— Boomer and Echo (@BoomerandEcho) March 4, 2020
Promo of the Week:
Travel might be the furthest thing from your mind these days with the coronavirus spreading around the world. Still, it might be a great time to catch some deals on trips for the summer or fall.
We’re big fans of Airbnb when we travel with our family. We like having an entire place to ourselves, along with a kitchen to prepare our own meals.
When you sign up for Airbnb with a referral link, you’ll get up to $62 off your first trip. How it works is you’ll get $45 off your home booking, and then another $17 to use towards an Airbnb experience worth $63 or more. An “experience” is an activity hosted be a local expert.
Weekend Reading:
Our friends at Credit Card Genius share the latest TD credit card offers to earn Aeroplan miles, flexible travel points, and cash back.
Topical today – Money We Have blogger Barry Choi explains how trip cancellation insurance actually works.
Hannah Logan shares the best budget-friendly winter getaways for Canadians.
Here’s a truly ridiculous news segment that claims failed Democratic candidate Michael Bloomberg could have given every American $1M instead of spending $500M on his political campaign. Math is hard.
PWL Capital’s Ben Felix digs into the incredible story of Renaissance Technologies’ Medallion Fund, which has returned 66 percent per year for 30 years:
Morgan Housel says he doesn’t know anything about coronaviruses, but he does share some excellent thoughts about how people view risk.
Rob Carrick shares eight dos and don’ts to protect your finances in these uncertain times.
Fiscally fit at 40? Author Bryan Borzykowski shares what he’s learned about life and investing in the past decade.
Jason Pereira and Alexandra Macqueen explain a unique tax planning opportunity involving the use of a dead spouse’s unused TFSA room. Interesting.
Alexandra Macqueen again, this time on Morningstar, explaining why a life annuity could help close the retirement income gap.
Here’s an absolutely epic post on the Million Dollar Journey blog about withdrawing from your RRSP, TFSA, and non-registered accounts. Must read.
Jason Heath explains how to ensure your inheritance goes to your children and not the taxman.
Anxious about the markets? Robin Powell explains why worrying about the coronavirus is a waste of time and energy:
“You have no control over the coronavirus or the markets. Unless you’re a professor of epidemiology, don’t kid yourself that you have any unique insight into how the virus might develop. Moreover, from here, markets could go sharply up or down for reasons totally unrelated to COVID-19.”
Nick Maggiulli offers three compelling reasons why you should own bonds in your portfolio.
Another terrific story by Andrew Hallam, who wonders if these are the toughest conversations John Bogle’s son has?
Finally, the great Morgan Housel again on death, taxes, and three other inevitable things.
Have a great weekend, everyone!