Author: Mike Holman

Categories
Real Estate

House Buyers – Is 20% Down Payment Always Better?

In Canada, if you buy a house and have less than a 20% down payment, you have to pay a CMHC (Canada Mortgage and Housing Corporation) fee to insure the mortgage.  It should be the goal of all home buyers to have a larger down payment, but it’s not always possible.

One scenario is where someone has enough money to make a 20% down payment and is wondering if they should use all the money for the down payment or put down a smaller down payment and use the extra cash for other things.  Another scenario is where a buyer is close to reaching 20% down payment and only has to borrow a small amount of money to reach 20%.  Should they do it?

Related:  Zero down payment on a house is just fine

I can think of three examples where a person bought a house with a smaller down payment, even though they had enough money or means (via borrowing) to reach the 20% necessary in order to avoid the CMHC fee.  One blogger shall remain nameless, the other person was me (12 years ago) and the third person is a blogger at Moneyville, which is owned by the Toronto Star.  I’m going to use Madhavi (the Moneyville blogger) as my example, only because she is the most recent.

Madhavi and her family owned a condo, which they sold and bought a family house.  They netted $115,000 from the condo sale and bought a house for $560,000.  20% of $560,000 is $112,000, which means she could have put down a 20% down payment and avoided the CMHC fee.

Instead she decided to use roughly half of the money to pay down debts ( a worthy use ) and only put down a 10% down payment.

The problem with only paying a 10% down payment is that you have to pay the CMHC fee.  Does that mean she paid a big fee just to consolidate some unsecured debts?

She mentioned in the article that the CMHC fee was $12,000 including tax.  Had she put down $115,000 down, the CMHC fee would have been zero since mortgages with a 20% down payment or higher do not require insurance.

Related:  How to win a house bidding war

By using a smaller down payment, Madhavi was able to reduce the interest rate on $59,000 of debt.  If we’re going to analyze the wisdom of paying a $12,000 fee, we have to include the interest cost benefits as well.

The average interest rate of the unsecured debt that was paid down was not mentioned, but she did say that $45,000 of it had interest rates from 6% to 10%.  For argument sake, let’s assume that the average interest rate of all the $59,000 debt she paid off was 4% higher than her mortgage rate.

In other words, she paid $12,000 to decrease the interest rate of $59,000 of debt by 4%.

As to whether this was a good move or not – we have to consider how long she would have taken to pay off the $59,000 of unsecured debt, had she not used part of her down payment money to pay it off.

4% interest on $59,000 for one year is $2,360.   If she doesn’t pay the principal down at all – it will take five years for the interest saved to equal the CMCH fee.  After that, she will have saved money by using a smaller down payment.

If she would have paid down the $59,000 quick enough to keep the total excess interest (4%) cost below $12,000, then she would have been better using 20% down and avoiding the CMHC fee.

Related:  Why you can’t trust real estate agents when buying a house

Of course, it’s impossible to know what the future holds, but I would suggest that in Madhavi’s case, it’s likely that paying a smaller down payment and paying the CMCH will have a neutral or positive outcome.

The reason I say that is because if you buy a house when you have a lot of unsecured debt (at least $59,000 in Madhavi’s case) and it appears that the house cost itself is a stretch – I don’t think it’s likely that they would be in a position to pay off extra debt very quickly.

Had they put 20% down and saved the CMHC fee, they would have had higher monthly payments, probably would have taken quite a while to pay down the unsecured debt and would have paid more in extra interest than the CMCH fee cost.

What if I don’t have any or much unsecured debt and have to borrow to reach 20%?

Madhavi bought a house with a huge amount of unsecured debt.  I suspect it is more common for people to buy houses who have little or no debt (other than an existing mortgage).  For this scenario, the numbers change quite a bit and it is a lot more likely that if you can borrow enough money at a reasonable rate to make the 20% down payment, you will come out ahead.

Related:  11 things to think about when buying a house

What if I have the 20% down payment, no debt, but need some money for other things?

If you have the cash for 20% down payment already and little or no debts – it’s a no brainer.  You must use the cash for the down payment and then just borrow any money you need for closing costs, furniture etc.

Categories
RESP

RESP Question – How To Distribute Contributions And EAPs In Family RESP Account

Reader Lloyd had an RESP withdrawal question about how contribution money and non-contribution money can be distributed to different beneficiaries:

Hello Mike, I’m trying to find information about how RESP withdrawals work.

Can a family plan pay all contributions to one beneficiary and all the EAP to another beneficiary?

I’ve tried searching all over different government sites, none of which explicitly say whether this is allowed or not. Is it?

Thank you!

Good question, Lloyd. The contribution portion of an RESP account can be paid out to any beneficiary or the subscriber without any penalties or limits. To answer the first part of your question – yes, you can pay all the contributions to one beneficiary.

Related Article: 8 Things You Need To Know About Withdrawing Money From Your RESP Account

The EAP or payment of the non-contribution amount is a different matter. The non-contribution amount is made up of RESP grants plus any growth or income from the contributions. The portion of the non-contribution amount that is not RESP grant money can be shared without limit. The RESP grants can be shared, but the lifetime limit of $7,200 of grants per beneficiary must be respected.

So if you have a family account where there is $7,200 of grants or less, then all the EAP can be given to one beneficiary without any issues. If there are more than $7,200 in grants in the account, you can still pay out all the non-contribution amount to one beneficiary, but any grants in excess of $7,200 will be given back to the government.

In the latter scenario, the best strategy would be to pay out a combination of contributions and non-contributions to each beneficiary in order to avoid any loss of grants.

Related Article: Family Plan RESP Withdrawals – Don’t Overpay Grants To A Beneficiary

Categories
Investing

Why The Facebook IPO Was A Success

Last weeks much anticipated Facebook IPO ( Initial Public Offering – otherwise known as the day Facebook sold part of the company to the public) ended up being a crushing disappointment.  Or so it would seem to anyone reading the negative business media. 

I’m of the opinion however, that the IPO was a huge success.

To understand why I thought the IPO was sucessful, you have to understand how IPOs work.

When an investor buys shares of a company which trade on a stock exchange, they buy them from another investor (not from the company). 

When the owners of a company decide to go public, it means they will sell a certain percentage of the company to the public in the form of shares.  If you can buy shares of an IPO, you essentially buy the shares right from the company (instead of from another investor). 

Typically a company that wants to do an IPO will hire at least one investment bank to facilitate the deal.  For a generous fee, this investment company will figure out the valuation of the company, gauge interest in the stock and will help determine the IPO share price and will line up buyers for the IPO shares.

To put this in a common analogy – imagine if you want to sell your house.  You might hire a real estate agent, they will do some analysis on the house value and will work to sell the house for you.  It’s possible they might even have some potential buyers lined up.

I’ve written too many articles about the huge conflicts of interest that real estate agents face, and investment banks that are handling an IPO have the exact same conflicts.

The seller of a business wants to get the highest price.  That is typically their one and only concern.  The problem with investment banks is that they play both ends of the field – they want to get the IPO business, but they also want to underprice it as much as possible so that they can sell it more easily and so their clients will make a guaranteed profit when the stock jumps up to the true market value.  These clients will be lining up to participate in more IPOs and this works out really well for the investment banks and their favoured clients who can profit from the IPO shares.

But it doesn’t work for the company that is selling.  There have been many examples in the past where a company was valued by the investment banks (and presumeably the company owners) at a certain price, but then the market has priced it higher.  This means that the selling owners have left money on the table.  It also means that most private investors who can’t get in on the favourable IPO price, miss out on the ‘great deal’ which was only available to richer investors.

As it turns out, the big short term winners of the Facebook IPO were the owners of the company who sold their shares for more than the market valued them and the small investors who now have the opportunity to buy the shares for a price lower than the IPO.

Investment returns aren’t supposed to be guaranteed, so in this case the IPO process worked just fine.

 

Categories
Real Estate

Should You Sell Your House And Avoid The Market Crash?

Rob Carrick wrote about a Vancouver couple who sold their house recently with the idea that they would rent for a while and then buy back into the real estate market after the coming crash.

I know a couple who did this same move in Toronto.  They might make out like bandits in the end, but the fact that they are on year seven of their plan makes me wonder.

After being a home owner for most of the last 12 years, I’ve gotten tired of it.  I hate the costs and all the hassle that houses bring.  However, I’m not planning to sell, since I’d probably find just as many things to complain about with a rental.

One thing I’m definitely not contemplating is trying to time the real estate market by selling my house now and buying again in the future at a lower price.

It’s easy to think that if you sell your house for high price and buy it back again at a discount, it’s a worthwhile thing to do.  And it very well might be.  But can you do it?

Let’s look at what kind of real estate drops would make this move worthwhile and then analyze some different outcomes to see what kind of benefit or loss a home owner might face if they try to time the market.

I’m going to assume a transactional cost of 10% of the selling house price.  This could vary greatly, but I’m talking about all costs – real estate agent fees, moving costs, incidentals etc.  If you don’t agree with this number, then just substitute your own. 

I’m also going ignore a whole pile of other factors like money earned on house equity while renting as well as the fact that someone renting might rent the same house or they might downsize to save cash.

First off – I’m going to use a fictional house in downtown Toronto which is currently valued at $650,000.  I’m going to pretend this is my house and I want to figure out what kind of market drop I need to make it worthwhile to sell and wait out the crash.

10% house price drop

Well considering I’ve said the transactional cost is 10%, clearly a 10% drop doesn’t do anything for me.  I would end up buying back into the market for net gain of zero.  That’s a small reward for moving twice.

Related:  Things to think about when buying a house

15% house price drop

This results in a net gain of $32,500.  Forget it – this isn’t close to making it wortwhile for me.

20% house price drop

Net gain of $65,000.  Not bad, but still not enough to get me to do this.

25% house price drop

Net gain of $97,500.  Ok, now I’m interested.  Almost $100,000 of after-tax money is pretty appealing.

How’s your sense of timing?

One problem with my scenarios so far is that I’m assuming I sell my house at the exact peak of the market and then buy again at the exact bottom of the market.  Obviously, this isn’t going to happen.

I suspect that to take advantage of a 25% house price drop, I would need the market to drop a lot more.  30% at a minimum and a 40% drop would be much better.  That way I don’t have to time the market perfectly.

So in other words, I would need a house market drop of around 40% and be able to time things reasonably well in order to profit enough to make the whole exercise worthwhile.

Not a small order.  Even if you think the market is going to fall, do you know the timing of the that fall?  Will it drop enough to make it worthwhile for you?  How long will the market drop take?

In my case, it’s very, very unlikely that the market will fall enough and my timing be good enough to do something like this.

Downside – What if you are wrong?

The big downside of this strategy is if you are wrong, you could end up with an insignificant profit which won’t compensate you for all the hassle involved.  Or worse, you lose money.  Maybe a lot of money.

Let’s look at some non-rosy scenarios:

You buy back in at a price that is 15% lower

In this case, I’ve packed up the house, rented for a certain amount of time and then decided to buy again.  I’ll make about $32,000 which is not horrible, but not that great.

Housing market remains flat for a long time and you decide to get back in

In that case, the $650,000 house is still $650,000, but you have paid 10% in transaction/moving costs, so to buy the same house means you are $65,000 poorer and you’ve gone through the hassle of moving twice.

Market continues to climb and you (or your spouse) panic and want back in

If the market has gone up 15%, the $650,000 house is now $747,000, you’ve paid the transaction costs and are back in your old house and you’ve lost a total of $162,000 for your troubles.

Related:  How to win a house bidding war

Conclusion

If you can forecast a big enough drop in house prices and you can time it well enough to benefit from most of the drop, selling and renting for a while could be quite profitable.

The way I look it, there is too much downside risk for most people.  Yes, you could make a good chunk of change if things work out, but you can easily lose just as much money.  If you want to play roulette – go to Vegas. 

Real estate cycles can be incredibly long.  Think of the timing – what if you had done this five years ago – how would you feel now?  Would you still be married?

Categories
Real Estate

How To Win A House Bidding War

There are some hot real estate markets in Canada, namely Toronto and Vancouver.  One of the results of a hot market is a tendency for sellers to underprice their houses in order to create a bidding war.  This benefits the seller because it speeds up the selling process and they might get an above-market sale price if the bidders get carried away.

Some buyers feel that sellers are behaving inappropriately or even unethically by underpricing their house.  My opinion is that buyers have to deal with the real estate environment as it is and need to figure out how compete effectively for a house, rather than worry about ethics or the fact that bidding wars are “not the way it’s supposed to be”.

Asking price is meaningless

The first thing to realize is that the asking price for a deliberately underpriced house is meaningless.  Just ignore it, except as a very general guide.

You are “negotiating” against the other bidders, not the seller

Traditional house purchasing negotiation is between one buyer and one seller – the asking price sets the intent of the seller and negotiations start from there.

In a bidding war, the seller may control the process, but they take themselves out of the negotiation process.  The auction is between the potential buyers, who don’t directly negotiate against each other, but are competing amongst themselves to buy the house.

A bidding war (intentional or not) effectly removes the relevance of the asking price and allows the bidders to determine the selling price of the house.  By pricing the house too low, the sellers might as well set an asking price of zero and let the potential buyers figure out what the house is worth.

On a related note, a friend of mine successfully sold his house recently using the 5-day method which requires the seller to set the “asking” price to 50% of the estimated market value and then let the bidders determine the fair market value.

To compete effectly against your competitors in a house bidding war, the best things you can do are:

  1. Be able to walk away.
  2. Know your housing market.
  3. Ignore the other bidders

Related: Real estate appreciation

Be able to walk away from the house

As I mentioned here in Things to think about when buying a house, don’t fall in love with a house before you own it.  There are other houses for sale and if the price goes too high – don’t be the idiot who overpays.  Walk away if you have to.  Your agent won’t be pleased, since as I wrote about in why you can’t trust your real estate agent when buying a house, at the point when you are bidding for a house, your agent is your enemy – not your friend.

Learn how much houses are worth

Knowing the market means looking at enough houses in your target area and their eventual sale prices (ignore the asking prices) to be able to determine how much a house might sell for.

Related: How to value real estate

Consider your appraisal value as the “asking” price for that house and go from there.   Ignore the seller’s asking price.  Ideally you should determine beforehand what your upper limit is and stick to it.  I’m not sure how realistic that is.  If you are in a hot bidding war, I would figure out your upper limit and make that your first bid.  If necessary, just do small increases after that, but don’t exceed your upper limit by much.

The two biggest mistakes you can make with a bidding war are:

  1. Paying more than you can afford.   Solving this take discipline.
  2. Winning the auction by a large margin.   This means you overpaid.

Ignore the other bidders

It can be intimidating to go up against a lot of bidders for a house, but don’t assume that all of them are rational bidders.  There were 14 bidders when I sold my first house and I can tell you out of that group – only three were really in the running.  There was another group of about four that had reasonable bids, but not good enough.  The remaining seven bidders were all under market.  The house was very comparable to a few recent sales and any good agent should have known that those bids were a waste of time.  Ironically, one of the lowest bids was from a real estate agent.

Some bidders are irrational on the other extreme – they will pay whatever it takes to get a house.  Whatever you do, don’t be this person and don’t compete against them.  There aren’t a lot of fools with a lot of money (for obvious reasons), so rest assured that if you are bidding against one of these crazies – just move on to the next house if things go too far past your limit.

I’ve heard friends claim “I’ll never get into a bidding war“.  This doesn’t make sense to me.  It doesn’t matter if a $500,000 house has an asking price of $450,000 or $550,000 – it’s still a $500,000 house and the asking price is wrong.  In either case, just ignore the posted price and proceed with a proper bid.

You can remove the auction element of the buying process by knowing how much the house is worth and just bidding that amount.  If the bid isn’t accepted, move on.  If you lose out on a lot of houses,  clearly your appraisal method needs some revising.

My wife and I were involved in a bidding war when we purchased our current house.  Because of the research I had done, it was clear that the market value of the house was about 8% above the asking price.  We bid that amount and bought the house.  Now, to be clear, we didn’t ‘win’ the auction because of my research, but knowing the true house value allowed us to make a rational offer and not feel like we were overpaying.

Interestingly enough, the seller turned down a higher offer because that bidder wanted to knock down the house.  We were planning to fix it up (it was a wreck) and since the seller had grown up in the house, he took our offer instead.

To sum things up…

The winner of a house auction is not necessarily the person who buys the house.

More real estate buying resources

Categories
Announcements

Carnival of Financial Planning 04-06-2012

Best Personal Financial Planning and Personal Investment

Articles this Week from Personal Finance Blogs

Carnival of Financial Planning – Edition #231 – April
6, 2012

Welcome to the April 6, 2012 Edition #231 of the Carnival
of Financial Planning.

The Carnival of Financial Planning
takes a long-term view of personal financial planning for individuals
and families. We focus on efficient and sustainable personal financial
planning practices that can lead to lifetime financial
security.

This edition is arranged by subject heading, so that you can
browse efficiently.

Enjoy!

The Skilled
Investor, Editor

Budgeting
and Economics


Miss T. presents How to Ditch Your Expensive Cable Bill without Losing All of Your TV Shows posted at Prairie Eco Thrifter,
saying, “When you are weighing the following alternatives to cable, you
want to think about how much you really watch television. For example,
if you watch television two hours a day (fourteen hours a week), and
your cable bill is $100 per month, then you are paying about $1.75 per
hour of television. Also, consider someone who watches about four hours
a week (sixteen hours a month). Theyre paying $6.25 per hour of
television. This person pays much more because he watches television
less often. So, it might make sense for him to ditch his cable bill. By
doing this little exercise, you will have a better idea of how
expensive your television habits really are.

Janet
presents Expense
budget tracking posted at Fee Only
Financial Planner , saying, ”
Many people do not track their living expenses and do not understand
the magnitude of their consumption. Failure to monitor your consumption
expenditures means that they are flying blindly regarding their future
finances. ”

krantcents presents Why Did I Start My Business? posted at KrantCents,
saying, “Why did I start my business? I wanted to know if my reasons
matched theirs. I wanted to know if I was like Warren Buffett, Steve
Jobs, or Bill Gates.

Financial Planning

Suba presents Perfectionism On The Job: What It’s Costing You posted at Broke Professionals,
saying, “I was a perfectionist – until the world’s worst day at work
made me realize what I once considered my greatest strength on the job
was actually my biggest weakness.

Aloysa presents Five Lessons on How To Survive in a Ghetto Apartment posted at My Broken Coin,
saying, “From day one I slowly started to learn what was appropriate
and what was not in my hood. Over time I acquired a set of certain
survival skills that came in handy for a single girl who found herself
living alone in a ghetto apartment.

Frank presents Passive Index
Fund posted at Individual Investor Strategies,
saying, “Short-term mutual fund trading is a zero sum game played
against other very well informed mutual fund traders and other
securities market traders. On average, higher mutual fund turnover is
far more likely to result in lower investment fund performance —
instead of superior risk-adjusted performance.”

SFB presents Size Doesn’t Matter: Why Bigger Isn’t Always Better posted at Simple Finance Blog,
saying, “American culture seems to suggest that bigger is better – but
I’ve found three cases where size doesn’t matter when it comes to your
family’s finances


101 Centavos presents A Labor Shortage? Surely You Can’t be Serious… posted at 101 Centavos,
saying, “China running short of people? But they’ve got a billion and a
half people over there. Surely you can’t be serious… I am serious,
and don’t call…

John
presents
Learning about finance and investing posted at
Personal Financial Planning , saying, ”
I have reached the conclusion that 99+% of the financial information
that is easily available through the media and the Internet is:
self-interested and biased, superficial and non-implementable,
historical in nature or just current “noise” reporting without any
actionable utility, and/or poorly researched, just plain wrong or
unmitigated rubbish.
”

Madison presents How I Earned $1175 Chase Cash Back Last Month posted at My Dollar Plan, saying, “A great read for those of you looking to plan out some purchases around big “cash back savings!


Kathryn @ Financial Highway presents Interview Questions posted at Financial Highway,
saying, “This guide not only tells you what the interview questions are
but also provides insight into what the interviewer is really asking
and what types of answers will help you get the job.

Daniel presents Why I Already Won The Lottery posted at Sweating the Big Stuff, saying, “I did not win the lottery over the weekend, but, I feel pretty lucky anyway.

PFP
presents
Financial planning reading posted at Best
Financial Planner , saying, ”
When I work with clients to develop their customized lifetime financial
and investment plans, they often ask what they should read to improve
their financial literacy.
”

Don presents The End of Buy and Hold? posted at MoneySmartGuides,
saying, “I received a free one year subscription to Money Magazine for
buying something I cant for the life of me remember what it was. In any
case, there is an article that interviews Andrew Lo from M.I.T.

John presents Have Free Banking Accounts Gone the Way of the Dinosaur? posted at Married with Debt,
saying, “Its over. The days of free checking have gone the way of the
free check under your hood and wash your windshield at the service
station.

Dave
presents Active
Investing – Alpha Returns posted
at
Wall Street Nerds , saying, ”
The Old Testament of indexing is Burton Malkiel’s classic A Random Walk
Down Wall Street, first published in 1973 by W.W. Norton and now in its
ninth edition. For typical individual investors, without special access
to information, it offers what is likely the best financial advice they
will ever get: It is hard to consistently beat the market, especially
after fees. A passive strategy will do better in the long run.
”

Steve presents Living Like a King in Bangkok posted at Money Infant,
saying, “I thought that before I give you some insight into my own
Bangkok budget I would put to rest the rumors of living like a king on
$5000 a month in Bangkok.

Income

Jeremy presents Outsourcing Online Business Tasks To Earn More Money posted at Modest Money,
saying, “Do you run one of the many online business that could benefit
tremendously from outsourcing? Read about how a seasoned internet
marketing professional learned how to use outsourcing to earn more
money.


Super Saver presents Three Signs of Being on the Fast Track posted at My Wealth Builder,
saying, “Career advancement is one of the best ways to increase income.
Being on the fast track is a way to increase income even faster. Here
are some of the signs I’ve noticed when people are on the fast track.

Mike presents Would You Declare Your Income? posted at The Financial Blogger, saying, “How transparent are you?

Insurance and Risk

MMD presents Which is Better ? Term or Permanent Life Insurance ? Part 2 posted at MyMoneyDesign,
saying, “Should you buy cheaper Term insurance that will expire or the
more expensive Permanent insurance that is guaranteed for life? Let me
share with you two real quotes I received, and well crunch the numbers
to figure out which one is the better alternative.

Larry presents ID
theft protection posted at Objective Financial
Planner,
saying, “As a threat to your financial security, you should take the
potential for identity theft very seriously. Identity theft sometimes
entails a loss of your money, but whether or not you lose money, it can
take a very large amount of your time to rectify.”

Investing


Dividend Growth Investor presents The Lost Decade: Opportunity of a Lifetime for Dividend Investors posted at Dividend Growth Investor,
saying, “After two severe stock market declines due to the tech and
financial sector implosions, investors are again projecting the past
onto the future. This time however, investors are forecasting doom and
gloom. Currently, stock valuations are at their lowest levels in years.

Pierre presents How The 4% Retirement Rule Converts To Dividend Investing posted at Intelligent Speculator, saying, “We apply this rule here.

Frank Pinter presents No Load Bond
Mutual Funds
posted at Cheapest Bond Funds,
saying, “Investment research overwhelmingly shows that lower
cost fixed income funds tend to yield higher bond investing returns.”

Paul presents What Goes Up, Must Come Downs posted at Make Money Make Cents, saying, “Heres a little insight to the current bull market and why it may be smart to be a little cautious.

TSI
presents Should
you pick investments according to the
Morningstars? posted at
The Skilled Investor , saying, ”
Individual investors and their advisors appear to make investment
decisions that are heavily influenced by the Morningstar Rating system.
Because the stars are very widely used and often misunderstood, these
are articles to help investors make more rational decisions about the
stars.
”

DJL
presents Global
Markets in Distress
posted at
Nerds on Wall Street , saying, ”
Stock markets are almost perfectly transparent, with full information
available to all, and the best electronic clearing and settlement in
history. These technologies were omitted in building the skyscraper of
cards (“house of cards” seems too mild) out of collateralized debt
obligations (CDOs), credit default swaps (CDSs), synthetic
collateralized debt obligations (SCDOs), and the rest.
”

Managing Debt

John presents Do You Know What Your Bank is Charging For? posted at Wallet Blog,
saying, “Make sure you read your statements carefully every month. If
it doesn’t look right, it probabaly isn’t. Don’t get charged more than
you should.

Liana presents Payment Allocation posted at Card Hub,
saying, “When you’re paying off credit card debt, It’s good to know
what best to do. Understanding “payment allocation may help you get
that debt down faster!

Ashley presents Skipping the Mortgage Payment to Pay the Car Loan? posted at Money Talks Coaching,
saying, “I read this article the other day about the order in which
people pay their bills, or rather, the order in which they do not pay
their bills.

KT presents 5 Ways to Save on Interest on Student Loans posted at Personal Finance Journey,
saying, “The average college student graduates with $25,000 in student
loan debt. Many more students have higher balances than this. If you
are repaying your student loans, there are several strategies you can
utilize to pay less in student loan interest. Consider the following:
Automate your payments.

Real Estate

Crystal presents House Hunting on Pause posted at Budgeting in the Fun Stuff,
saying, “It was a short daydream, wasn’t it? Just last week I was
talking about house hunting and now I am back to my original thought,
no way.

Ryan presents Demand for Rental Property and Residential Contracting is Expanding posted at Early Retirement Investments,
saying, “Lately, it seems like the demand for rental property and
residential property are on the rise! Read how these areas are expanding

Retirement

Tushar presents Filing for Bankruptcy – How Retirement Accounts Are Affected posted at Start Investing Money,
saying, “Bankruptcy is a horrible thing to endure, but in these
uncertain economic times, it is becoming an all too common occurrence.


Miranda Marquit presents When You Should Consider a Roth IRA posted at Best Rates In,
saying, “The Roth IRA provides a way to help you take advantage of the
power of compound interest while at the same time enjoying some tax
benefits. And, even if you cant contribute to a Roth IRA, you can still
convert a Traditional IRA to a Roth later but you do have to be careful
of the tax consequences, which can be quite severe if you convert a
large amount


J.P. presents The Roth IRA: The Piece To Your Retirement Puzzle? posted at Novel Investor,
saying, “The popularity of the Roth IRA has brought a myriad of
questions about which IRA is best for retirement savings. The answer
is, it depends.

Frank Knowles presents S&P
500 Index Funds posted at Large Cap Funds,
saying, “The no load index fund strategy of the Schwab S & P
500
Index Fund tracks the S and P 500 stock index. This no load index fund
was listed as one of the top 25 lowest cost index mutual funds in a
research study.”

Tim presents What is a Roth IRA and How Does it Work? posted at Faith and Finance,
saying, “A Roth IRA is one of the best ways to save for your
retirement. Start it early and youll see the power of compound interest
in action.


Div Guy presents You Are Thinking About Retiring? You Must Read This Article posted at The Dividend Guy Blog, saying, “A must read while planning for retirement.

Kevin presents The First Step to $1 Million of Net Worth posted at Thousandaire,
saying, “A 20 year old reader sent me an email asking me how to
approach his finances. Get rid of debt and start a Roth IRA are the two
first steps.

Brock presents Best
Retirement Software posted at IRA Account
Investment,
saying, “Whether or not to make investments into “traditional”
tax-advantaged employer accounts and IRAs versus investing in “Roth”
tax-advantaged employer accounts and personal IRAs is never a
straightforward nor simple financial planning decision.”

FMF presents What the heck is early semi retirement posted at Free Money Finance.com,
saying, “Everyone knows what traditional retirement entails right? You
work for 40 years, save diligently and are rewarded with lunch and a
gold watch and you ride off into the sunset to play golf, garden,
travel or whatever else gives you pleasure. Early retirement is pretty
much the same, but is reserved for those who either live quite frugally
and can afford to ditch the rat race early or have amassed a
considerable fortune. But what is the blazes is early semi retirement?

Savings


Philip Taylor presents 7 Savings Habits to Begin Now posted at PT Money Personal Finance, saying, “For those who currently have NO savings account, ideas to help kick start a savings account.

Financial Freedom
presents
Savings Rates posted at
My Financial Freedom Plan , saying, ”
Understand how your current savings rate and retirement withdrawal rate
would affect all of your lifetime personal financial planning goals
”

Taxes


Jon the Saver presents Six Questions About the Federal Income Tax posted at Free Money Wisdom,
saying, “These are six questions you should ask yourself when it comes
to the federal income tax. Make sure you’re not overpaying the
government!

Steve presents Maryland Senate Votes To Increase Tax Rates For High Income Earners posted at 2011 Tax,
saying, “The proposal dubbed the millionaires tax was approved after
liberal-leaning Senators refused to approve a smaller tax rate for all
taxpayers unless the rich took a special hit.

Paul Tabbet presents Retirement
Planning Software
posted at Tax Planning Software,
saying, “Retirement planning software should automate the development
of lifetime projections that incorporate tax laws and rules associated
with tax-advantaged retirement investment incentive programs such as
traditional IRA, Roth, 401k, 403b, SEP, Keogh, and other retirement
plans.”

That concludes this edition. Submit your blog article
to the next edition of Carnival of Financial Planning
using our carnival submission form. Past
posts and future hosts can be found on our blog carnival index page.

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Categories
Announcements

LinkStuff – Model Train Show Edition

Recently, I took my family to the Model Railroad Club of Toronto show.  If you ever get a chance to attend this show or something similar in your city, I strongly urge you to do so.

I’m not really into model trains myself, but the club has been working on their display since 1938 and it is quite impressive.  The kids enjoyed it as well.  I kept a sharp eye out for the Swayze Express, but unfortunately did not see it.

Of course, part of me was wondering what amazing things this group could accomplish if they spent their time doing something useful.  😉  I’m kidding of course – it was amazing.

Here’s an article with pictures and a review from the show.

On with the links

David Olive from the Star wrote an interesting article stating that Warren Buffet is irrelevant.

I think Frugal Trader is pondering a Tim Horton’s franchise.  Some interesting franchise information in the post and comments.

Financial Highway looks at six fun jobs that pay well. Some great ideas if you’re looking for a career change!

A rather amusing description of a librarians’ union rally.  I’m staying clear of all picket lines – you never know what will set off those librarian goons.  😉

Today is the last day to get a free Kindle version of Mike Piper’s Investing Made Simple.  The paper book is only $5.  And no, you don’t need a Kindle to read it on your PC.  You can see my review of Mike’s book (the first edition).

Categories
Investing

How To Find A Lost Locked-In Retirement Account

I received a very interesting email from Sandra recently [edited for privacy and to combine several emails] who is trying to locate a locked-in retirement account from 20 years ago:

Hi Mike…How can I find a lost vested pension when I don’t know who the RRSP account was with?

I worked at Company A until 1993 and my pension was vested after 5 years. Company A was 51% owned by Company B, who have not been much help, and has since been sold to Company C, who has also not been much help.  I have left messages with no call backs.

When I left the company in 1993, payroll handed me ( a very much younger, stupider version of me) a big envelope full of documents and told me my pension was invested in an RRSP until I turn 65 and I didn’t have to “move it” then. I could leave it with them and “move it” when I wanted to.

The years have flown by, I’ve moved a few times, and now I’m in my 50’s, the company is no more, and I have tried a few avenues to find this without much luck. I have tried the Bank of Canada, the Securities Commission of Ontario and the insurance carrier I remember dealing with then, who also has no record. I didn’t think this task would be so difficult. Any wonderful suggestions I haven’t thought of, or phone numbers, web sites, etc. you can think of?

What kind of retirement account is she talking about?

Sandra worked for an employer that provided a defined benefit (DB) pension plan.  This is the type of pension where usually both the employee and employer make regular contributions to the pension plan on behalf of the worker.  Once the employee reaches retirement age, the pension plan will start making regular pension payments to the retired worker until they die.

If an employee contributes to a defined benefit pension plan for a short time and then leaves the company, at a minimum they will have their “pension credits” or the value of the contributions transferred to a locked-in retirement account, otherwise known as a LIRA.

It’s also possible that they could leave the money in the pension plan and then collect a reduced pension once they reach retirement age.

How to find a locked-in retirement account

Every defined benefit pension plan and locked-in retirement account is regulated according to either a provincial or a federal pension standard regulator.  In Sandra’s case, she worked in Ontario and the pension plan was regulated by the Ontario regulator.

The Financial Services Commission of Ontario (FSCO) is the government body that looks after pensions in Ontario.  They have records of every pension regulated by Ontario, even if the pension plan no longer exists, as was the case with Sandra’s.  If you have any information about the original company, they should be able to tell you who was responsible for that pension plan and can provide contact information for the pension administrator or custodian.

I called the FSCO at 1-800-668-0128 and asked if they knew who the pension administrators for Company A (the company Sandra worked for) were.  They were able to tell me the company name of the current administrators of the pension (which turned out to be Company C) and gave me the name and phone number of the administrator.

I called the pension administrator’s number and left a message which was returned the same day.  The pension administrator I talked to was able to confirm that Sandra was in their system and gave me the name and phone number of the financial institution where her LIRA was being held.

I gave the financial institution information to Sandra and she was able to call and regain access to the retirement account which had a value of approximately $24,000.

 

 

Here are the pension regulators for all the provinces and federal pensions:

Other suggestions to locate a lost investment account

At this point in the article, you might think I’m some kind of lost retirement account expert and was able to find Sandra’s account without any difficulty.  In actual fact, there were a number of other things I tried as well.

  1. Call around – In one of her emails, Sandra had asked if the CRA would be able to help.  I wasn’t sure if they would help, but my first phone call was to the CRA tax line 1-800-959-5525.  I knew they wouldn’t know where the missing account was located, but I hoped they would point in the right direction.  They transferred me to the CRA RRSP division and the person there told me to call the FSCO.  THE FSCO ended up being the correct starting point for this mission.
  2. Call the pension administrators of all the companies involved – Before I heard back from the pension admin from Company C, I also called the pension administrators from Company B.  They couldn’t tell me anything due to privacy concerns, but had Company C not come through with the correct information, I would have had Sandra call the Company B pension admin to see if they knew anything.
  3. Google the company/industry – This might help find related companies or in the case where you only know the industry, you might get some ideas about companies to try.
  4. Call every financial institution – A last-ditch suggestion is to start calling financial companies that might have the missing retirement account and hope for the best.  Start with the big insurance companies and big banks and see what happens.  Make sure you tell the whole story to whoever will listen and you might pick up some good advice along the way.  The Office of the Superintendent of Financials Institutions Canada (OFSI) financial institutions list is a good place to start.

What if I don’t know the company name?

If you are involved with an estate and you don’t even know the name of the company that the deceased person worked for, I would suggest calling the CRA and pension standard regulators anyway and see if they come up with any ideas.  If you know where the person lived or what type of industry they worked in – that information might be used to narrow down the search a little bit.

Financial institution client privacy rules

Note that financial institutions cannot give any kind of information about a client to anyone who is not the client.  If you are trying to locate an account as part of an estate, get ready for a whole pile of hassle because of this.

The pension administrators of Company C shouldn’t have verified with me that Sandra was in their pension system because of these privacy rules.  Had they not told me where her retirement account was located, I would have just given the contact information to Sandra and she could have still gotten the information.

Use the right terminology or tell the whole story

One of the problems with trying to find a financial account is that if you aren’t using the right terminology, the people who can help you might not realize what you are talking about.  There isn’t much you can do about your financial lingo, but one suggestion is to tell the person the whole story.

In Sandra’s case, her first email was fairly short and just talked about a lost vested pension and a RRSP account.  I have no idea what a “vested pension” is and as it turns out, there never was an RRSP account.  However, I had a suspicion that she might be talking about DB pension that was transferred to a LIRA.  I asked for more details and when she explained the whole story, it was very clear she was looking for a LIRA.

At that point, I wasn’t sure where to start looking, but at least I knew what I was looking for.  🙂

Brief primer on locked-in retirement accounts (LIRAs)

A LIRA is similar to an RRSP account in that it is tax sheltered.  However, no contributions can be made to the account and withdrawals aren’t normally allowed either.

For information on how to access money in a LIRA – please read How to Unlock An Ontario Locked-In Retirement account.  The article is still relevant for LIRAs not regulated by Ontario and has links to further information regardless of where the account is regulated.