Aug 142015
 

Time – A Nonrenewable Resource

Is $700,000 enough to last you for an entire lifetime? Imagine you were given $700,000 and can spend it any way you like. The catch is you can’t invest or make any more money for the rest of your life. If you were forced into such a scenario would you spend your days differently?

Everyone already experiences this in the form of time. Most people are given about 700,000 hours in this world, plus or minus maybe 5% depending on gender, class, and geography. I’ve already used up about 250,000 hours of mine. That was valuable time I can never get back.

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We are all humbled by time. Wealth is the ability to fully experience all that life has to offer. Money will only get us so far, but the rest is up to our internal discourse about how to spend our time. It doesn’t matter if we’re financially rich or poor. Everyone is ultimately limited by that 700,000 hours. Time is the ultimate equalizer.

All we have to decide is what to do with the time that is given us.” Gandalf

The important thing is to enjoy the things you’re doing right now. Time you enjoy wasting is not wasted time. 🙂 Unless you enjoy attaching all your watches together to make a belt. Then that would be a waist of time. 😀

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Jun 192015
 

People retire for different reasons. A skier might retire because he’s going downhill, or an elderly chef could retire because his sage is showing. 😀 But no matter what the circumstances may be we all have to be financially repaired for retirement. This means preparing an adequately sized retirement fund.

But what is retirement savings? Some believe it’s what you have in an 401(k), IRA, or RRSP. But due to the fungible nature of money almost anything can be a part of retirement savings. There’s no need for separation. For me, the definition of a retirement fund is all the financial assets I have at the time when I decide to quit working.

This simplifies life greatly. I don’t have to choose between contributing money to my TFSA or put it towards my RRSP because both vehicles will eventually become part of my retirement fund. The only implication would be for taxes. So retirement savings is more than a 401(k) or a pension. It includes Traditional IRAs, Roth IRAs, SEPs, savings accounts, mutual funds, stocks, and annuities. This gives us a more complete picture of what we have instead of just what’s in our registered retirement savings plan. 🙂

The financial world is constantly changing and retirement is part of it. A few decades ago the retirement plan for most people was based on 3 supporting legs; work pension, personal savings, and government pension such as social security.

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Fast forward to 2015 and the grim reality for most workers now is we can’t count on generous work pensions anymore. A defined benefit pension plan is as rare as a Canadian who doesn’t watch hockey. With only 2 legs to stand on the retirement stool will become very unstable. The job participation rate is at decade lows. Many jobs are either going overseas or being replaced by automation. Who knows what kind of new retirement challenges our children’s generation of workers will face?

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Apr 222015
 

Finance Minister, Joe Oliver introduced the government’s 2015 Federal Budget yesterday. The big takeaway is that there will be tax breaks for everyone. Yay! 😀 The proposed budget is expected to get passed as the Tories hold a majority government.

It’s nice to finally see some welcomed changes in fiscal policy to address the economy rather than rely on monetary policy alone. 🙂 Federal budgets are important because it shapes the way we plan our personal finances.

Increased TFSA Contribution Room

The annual contribution limit for the Tax Free Savings Account rises to $10,000 effective immediately. This means Canadians who have already maxed out their TFSA for 2015 will now have another $4,500 of contribution room to use. The TFSA is a holding account where we can buy investments and not pay taxes on the gains.

Some people believe this change will only benefit the upper class who are already wealthy. Here’s my poor attempt at humour on Twitter from yesterday.

However, Ottawa says that individuals with annual incomes of less than $80,000 accounted for more than 80% of all TFSA holders at the end of 2013. And about half of TFSA holders had annual incomes less than $42,000, meaning the TFSA is mostly being used by the middle class. Personally I think the new TFSA policy benefits serious savers, not necessarily the wealthy.

RRSP delays taxation to a future date when we’ll likely be in a lower income tax bracket than today. Gains in a TFSA are made from after tax contributions and are not taxed, for the most part. So between the RRSP and TFSA average Canadians now have a lot more freedom and room to save and invest with preferential tax treatments.

Here’s a table showing how much someone would need to save to max out both accounts. The maximum RRSP contribution limit assumes the person earned the same income in the previous year.

Combined Tax Sheltered Savings Table 2015

Annual Gross IncomeMax TFSA RoomMax RRSP RoomCombined TFSA/RRSP Limit% of Income
$20,000$10,000$3,600$13,60068%
$30,000$10,000$5,400$15,40051%
$40,000$10,000$7,200$17,20043%
$50,000$10,000$9,000$19,00038%
$60,000$10,000$10,800$20,80035%
$70,000$10,000$12,600$22,60032%
$80,000$10,000$14,400$24,40031%
$90,000$10,000$16,200$26,20029%
$100,000$10,000$18,000$28,00028%

 

As we can see people who make $50,000 a year will have to save more than 38% of their incomes before running out of space in tax advantaged accounts. There is no point in buying GICs, bonds, stocks, mutual funds, and other investments in a regular cash account anymore, unless you’re like me and trade derivatives or buy securities on margin. 😉

Decreased Minimum RIF Withdrawal Rate

The new federal budget also gives seniors more options. When an RRSP is converted into a Registered Retirement Income Fund (RRIF) retirees will be able to leave more money in their tax sheltered account each year to help their savings last longer and can also lower their overall tax burden. The proposed new RIF minimum withdrawal rate will decrease from the current 7.38% at the age of 71, to 5.28% starting at the age of 71, and gradually increase to 20% by age 95. 😄

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In general lower income, and younger folks should prioritize saving in a TFSA before considering RRSP, and vice-versa for high income earners. I like to put bonds in my RRSP, and the more volatile, higher potential investments in my TFSA. For most Canadians I believe the TFSA has a more important role in our financial lives than the RRSP. However, both are important as the RRSP can save us money today by delaying the tax liability to future years, while the TFSA can save us money in the future. Holding the right amount of each can minimize the overall taxes we pay over time.

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Mar 252015
 

I was browsing CanadianMoneyForum.com recently and came across the following thread.

I saw some commercials saying if you contribute to your TFSA (Roth IRA) every year, in 30 years you will have over one million dollars assuming a ROR in the 4-5% range. One million dollars should churn out $40-50k in tax free income.

Now thinking about this further, does anyone know of someone who got rich this way? I mean start investing a few hundred a week at age 25 and come out with millions at age 60? I personally do not. People who made a fortune got it other ways, by owning a business, getting stock options, or by making a lucky stock or real estate purchase.” ~tygrus

There are many ways to retire wealthy. Owning a business or hitting a home run on a single stock can increase the probability of becoming a millionaire. But to address the question, yes, I do know of someone who became rich simply by investing small amounts of money over many humbling decades. Well, I don’t know him personally. But I know his story. 🙂

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Ronald Read, from Brattleboro in Vermont, had $8 million to his name when he died last year at the age of 92. Most of his fortune was donated to a local hospital. After graduating from high school he worked at a gas station for many years. He also served in the military during WWII. Most recently he worked as a janitor for the department store chain JC Penny for 17 years. The secret to his financial success can be attributed to his thrift and his financial acumen.

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Dec 232014
 

In January of this year I wrote down 3 goals for myself to accomplish this year. Here’s a recap of those 2014 financial goals.

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1) Increase net worth by $55,000
Pass!
From the end of December 2013 to now my net worth has increased by more than $110,000. I never expected to exceed my target by twice as much, so that’s a pleasant surprise. Here’s a rough breakdown of the $110,000 gain.

  • About $50K is from property appreciation. Hurray for Vancouver real estate and Saskatchewan farmland! 🙂
  • Another $15K is simply due to debt reduction. Every time I make a mortgage payment, for example, my total debt amount shrinks and my wealth increases! Hurray for easy forced savings.
  • Another $30K comes from stock portfolio appreciation, dividends, interest, and rent. The U.S. stock markets are up double-digits year to date. Hurray for loose monetary policy! My $50K+ margin loan at 4.25% interest rate is kind of a drag though. Oh well, gotta spend money to make money right? 😉
  • And the remaining amount of my net worth increase this year comes from good old fashioned savings.

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