Yesterday we presented clinical evidence some people are nuts. They buy too much. They borrow excessively. They live beyond their means. Then they moan about it. The numbers show too many follow that pattern. Then they expect ‘the government’ to fix it, like creating houses that are ‘affordable.’
But wait. Rich people are vexed, too. Lots of assets or a big income doesn’t mean anxiety is gone. Today the Doctor has a clinic full of 1%ers and overachievers to prove it.
Like Stew. Let’s clear the exam room of GenZs and commies before he begins.
“Thank you for your years of dedication on the blog,” he says. “I remember as a teenager meeting you many years ago in Chatham at an investment lecture,” he continues, ensuring that I feel fossilized.
Would you be willing to consider a blog article on how much ONE needs to retire with in the upcoming financial environment?
* I purchased a home for $1.4m
* I have $2.3m in investments (TFSA, RRSP)
* No debt
* Approx $300k per year income
* Age: 49 yrs old (married)
* (2) children with educations paid in full
* No company pension – just CPP and OAS
….but I still feel I could run out of money in retirement – people think I am crazy. Many sites say $2m is plenty assuming work departure at age 60. Is it possible to retire with too much in RRSP or retirement money?
Okay, so $3.7 million in net worth at age 49 with over 60% in liquid assets and an income of $300,000. It sounds like Stew’s divorced, no mention of support payments, kids looked after and, like most people now, no corporate pension in the future.
So this puts him in the top 5% of all Canadians in terms of income, and in the rarified 2% bracket for net worth. Still, he worries. It’s typical of most millionaires I have ever met – they fret about running out of money far more than people who actually don’t have enough.
So is he okay?
Of course. The assumption is he’s not retiring yet, will continue to earn big bucks, stay unattached and not do anything stupid, like listening to Kevin O’Leary, Ravi Batra, Robert Prechter or anyone flogging crypto. Stay invested. Be in high-liquidity ETFs. Stay B&D. Ignore market swings. And – with more than two mill in a portfolio – get a trusted advisor and a pithy accountant.
The only downside? Having way too much in an RRSP – and it sounds like $2 million could be there. Every withdrawal in retirement will, of course, be counted as taxable income. Plus, at age 72 and beyond, a minimum amount of income must be sucked out of a RRIF. It starts at just over 5% of the account and escalates with age (about 7% at age 80, for example, and 12% at ninety). The TFSA, as stated here often, can be as fat as you want since the income it generates is invisible to the CRA and won’t result in a bigger clawback of government benefits.
So, stop with the RRSP. Set up a non-registered account now, and spend the years until retirement feeding it. Income flowing from that is lightly taxed, since it’s mostly in the form of dividends and capital gains. Plus, you can take lump sums of cash out whenever you want without any withholding tax at source.
The big question: can you live in retirement on, say, $250,000? Fine. Just don’t tell the kiddos.
Now, here’s a blogger calling himself ‘NotLegalAdvice’ – an untypical early-30-year-old.
“Just shooting my shot at getting your opinion on what my wife and I should be doing. We make a combined income of just over $250,000 a year, and are able to save about $50,000 a year after all expenses and vacations are paid.”
“We purchased a house back in 2020 for under $800,000 and locked in an interest rate of under 2 percent on a 5 year fixed (thanks to your advice on that).
We have been investing our money into a balanced portfolio of ETFs (we have over $200k invested and we earn 7 to 8 percent annually on that). Just debating if we should be dumping some money toward our principal as our mortgage comes up for renewal in December of next year. Or should we just continue to pay the bank more interest on our mortgage?”
Stay the course. The loan isn’t up for renewal until December of 2025 and between now and then we could see multiple interest rate cuts (CIBC is forecasting four in the next six months alone). Your mortgage renewal will not be at 2%, but something with a 3-handle isn’t out of the question. In other words, the increase should be very digestible for people with your income and savings rate.
Having said that, there’s never anything wrong with trashing the home loan principal. One way is using some of your investment gains or (better) arrange a weekly-pay mortgage when you renew. By making the equivalent of one extra monthly payment a year that will seriously reduce your payback period, and save a bundle in interest. Meanwhile you keep the liquid portfolio in place, avoid concentration risk by having too much net worth in one asset and stay on the path to achieving a consistent lifelong income stream.
A paid-off house is sweet. But a honking big pot of financial assets throwing off income is sweeter still. Too few realize this. The sheep will learn.
About the picture: “These are my daughter’s sheep feasting on a huge variety of leaves to keep them balanced and diversified,” writes Donna. “Our daughter and her husband have an 18 acre farm in Harrow in southwestern Ontario (40 minutes from Windsor). She loves animals and has two Angora rabbits, Silkie chickens, Muskovy ducks and a dog along with her sheep. Also, two ponds with Bluegill and Bass fish on the farm. Appreciate your daily blog, we read it daily and recommend it to anyone who will listen.”
To be in touch or send a picture of your herd, email to ‘[email protected]’.
Allan and Bethany look good from the curb.
The house in a respected Calgary hood is upscale. There’s a late-model car in the driveway. Mom and toddler walk the safe suburban streets. Al’s gainfully employed.
Alas, looks deceive. “This situation,” he tells me, “is quite concerning.” Actually, I think he’s terrified. He sees what’s coming. “We need your expertise,” he says. ‘We need guidance.”
The Millennials are both 34. The kid is two. He makes $85,000 a year. She earns almost as much. But, sadly, Bethany was laid off three months ago, which came far too soon after that extended mat leave. “She took that time off to care for our son, and that contributed to our accumulating some debt. Now our financial circumstances have become increasingly challenging.”
Not challenging. A creeping disaster. An invisible, middle-class, Canadian fail.
While pregnant two years ago they bought the house for $675,000. The downpayment was 5%, leverage was 20x, and at a cheap mortgage rate of 3% the monthly was $3,000, plus taxes, insurance, heat and utilities. The mortgage now sits at $621,000 and the odds are high it won’t be 3% when renewal rolls around.
Meanwhile, they haven’t been able to live within their means. Saved nothing. A bank line of credit has increased to $55,000, at 11%. They’re now carrying $35,000 on credit cards (at almost 30%). And the car loan sits at $17,000 – at 8% interest.
“Given my wife’s job loss,” says Al, “we are considering several options to manage our situation, including:
“Selling our house, which could potentially sell for $750,000, to help alleviate our debts, though it would mean returning to renting.
Borrowing money from friends and family to delay selling the house in the hope that my wife can secure a new job soon, and then we could manage things.
Selling our cars and purchasing cheaper alternatives to eliminate the car loan.
Getting the basement renovated and renting it out, for additional income.
Renting out our house (it should rent for $2500 per month), while we rent a cheaper place elsewhere.”
“We are uncertain which course of action would be the most prudent and sustainable in the long term. We aim to stabilize our finances while also ensuring we can provide a secure and comfortable life for our son. Can you help?”
Of course. These Mills may have made bad choices – like thinking having a kid necessitated having a house then reaching for what they could not afford – but there’s always a path forward. The trick is to ensure more crappy choices do not follow the original ones.
So, Allan and Bethany, borrowing more money is off the table. It’s a gamble. You’ll put relationships at risk. Your finances will become darker as debt grows. This is a fast-track to failure. Selling the cars? Sure, that will trim some debt, but make zero difference overall. You’re still sinking – and will now be walking. Harder for B to get any job that needs a workplace presence.
Rent the basement? An option, but it will cost money to fit it out. Renos could jeopardize part of your PR cap gains exemption and you’ll end up with a stranger in the basement. The cash flow would help defray house costs, but it won’t pay off any of that debt. Moving out, renting the house and leasing an apartment elsewhere is the worst idea. That changes nothing, except you now have an unsaleable property (once tenants are ensconced they might refuse to vacate) plus you’ll be in negative cash flow every single month.
Nope, you gotta sell. But even that is no slam-dunk. Realtor commish in AB would be $27,000. Legals two or three grand. The mortgage break fee at least nine thousand (three months) and the home loan repayment is $621,000. So of a $750,000 sale price (should you be so lucky) the net would be $90,000 (of which $38,000 was your downpayment) – not enough to retire expensive debt of $107,000.
However, owing $17,000 and paying $3,000 in rent is a helluva lot better than owing $728,000 and forking over $3,800 monthly for mortgage, insurance and taxes. This will allow you to get out of negative net worth faster, and your young child won’t care (or know) that you rent instead of own. Now you can do what responsible parents should – stop feeding an unrepayable bank mortgage and start chunking money away in the child’s RESP plus for you own future financial security. You can also take advantage of Cowtown’s crazy current real estate boom to sell fast, for the most.
The lessons are simple. Starting a family does not mean panic-buying a house. Kids don’t care. It’s irresponsible.
Purchasing with 5% down and 95% financing is ridiculous. If that’s all the cash you’ve got, you can’t afford real estate. Shame on the lender who told you otherwise.
Not planning ahead is lethal. Surely you knew Bethany’s income wouldn’t be topped-up during mat leave, yet your expenses would swell. You went into that maelstrom without enough resources and a surfeit of hormones. This is the result.
The siren song of real estate has brought you to this point – even in the midst of the country’s frothiest housing market. Rather than yielding stability and giving your child a head start, it has weakened your family, stressed your marriage and saddled you with obligation and worry.
Throw off the shackles. Walk away towards freedom.
About the picture: “Meet Pearl, a recent addition to our family as she ponders which book to read next,” writes Greg (who has an awesome library). “We’ve been reading your blog (and books) since pretty much the beginning and can never thank you enough for all your sage advice. You and your team are a daily source of information, inspiration and humour which we will continue to reap the benefit of for the rest of our lives. Thank you so much!”
To be in touch or send a picture of your beast, email to ‘[email protected]’.
