Category: Personal Finance

You know you are a financial keener if you set up a new TFSA and after 2 months, are thinking about transferring to a different financial institution.  Reader Kim commented on a recent TFSA post that he is thinking of doing exactly that.
Here is his comment:

Great information…and I have $5000 in an ING TFSA.
I was wondering if there are consequences of taking some of the money out of my ING TFSA and opening another TFSA at a different institution that allows Stock purchases in the account rather than just cash? As I understand it, any increase in the value of the stock is tax free which COULD be quite substantial.

This brings up a number of very interesting issues and a couple of possible strategies for transferring TFSA money from one institution to another.

First of all he mentions having $5,000 in his TFSA – since that the annual contribution limit and the TFSA program is in its first year – obviously he doesn’t have any contribution room left for 2009.

TFSA transfer to new financial institution

TFSAs are similar to any other kind of account such as an RRSP – you can do a transfer to a new institution without having to withdraw from the TFSA.  You can either transfer-in-kind which means that any investments in the TFSA get moved over to the new institution – for example if you own shares in the TFSA, they will be moved without having to be sold and then bought again.  Transfer-in-cash means that the investments are sold and only the cash amount is moved to the new institution.

In this case the transfer will be in cash.   As a result of this transfer there will be no withdrawal or contribution to the TFSA.  One thing to be aware of is the transfer fee.  Most institutions charge this fee which is generally $100 to $150.  If you are transferring to a discount brokerage and have sufficient assets then you might be able to get them to cover this transfer fee.  Given that the TFSA only has $5,000 of contribution room, it is unlikely that anyone has enough in their TFSA to get a free transfer (unless of course they have made some incredible trades).  Of course you should check if your institution charges this fee and how much it is.

TFSA withdrawal and contribution strategy – aka “The December Strategy”

Another strategy to think about if you are looking at a steep transfer fee is to just withdraw the TFSA money from the existing account and then contribute it to the new TFSA account.  The TFSA rules state that any withdrawal will result in an increase of the available contribution room by the same amount in the following calendar year.  Assuming that withdrawals are not charged fees (or less fees than the transfer) then someone could do this strategy with the only problem being that they can’t recontribute the money in the same calendar year unless they have enough unused TFSA room which is not the situation in Kim’s case.  This is a valid strategy in December (preferably the end of December) because then you can take the money out, wait a couple of weeks and then recontribute it at the new company.

In a few years, most Canadians will probably end up with a lot of unused TFSA contribution room.  Let’s face it – between mortgages and the RRSP – there is only so much money available for the TFSA.   For those people, there won’t be an issue if they want to move their TFSA – they will be able to just withdraw and recontribute in the same year by using their unused contribution room.

What kind of investments are suitable for the TFSA?

And finally on to the point that I think Kim was actually asking about – should he invest in stocks vs high-interest savings account in a TFSA account for tax reasons?

First of all – the tax considerations should not be the driver of your asset allocation.  The first step should be determining what type of investment (cash, stocks, bonds) you want this money to be in.  The next step is to figure out what type of account (TFSA, open, RRSP) it should be in.

As far as the potential tax savings – it’s hard to estimate without being able to predict the future but here are a couple things to think about:

• You can’t claim a loss inside a TFSA.
• 3% interest on $5k at 40% marginal rate will save $60 of income tax per year.  To have an equivalent capital gains tax benefit you would need a 6% return.  Because capital gains tax applies to half of the profit – the rate of return has to be twice the interest rate to break even.  6% stock appreciation is not unreasonable over the long term but will interest rates stay at 3%?
• Transaction fees for the stocks.  I didn’t include these in my break-even analysis but they would be a factor.  Kim mentioned buying stocks with “some” of the TFSA money – less than $5k is not a lot of money to buy individual stocks with so maybe an index mutual fund would be better.  He should look into TD e-funds for that.

If you are looking for more information on mutual funds, index funds and ETFs then sign up for a Morningstar free account.  Morningstar is the industry leader in investment information.

Recently I outlined the details of the proposed American homeowner stimulus package otherwise known as the homeowner affordability and stability plan.  This plan will cost about $75 billion and I really have to say that it is a complete waste of money.

What is the package exactly?

Basically this bill will help homeowners who are having trouble paying their mortgage.  There are two groups of homeowners that might qualify:

1. Mortgage payments and interest rate are too high but can’t refinance to take advantage of lower rates because their house value is too low (ie mortgage is greater than 80% of house value).
2. Someone who was able to make their mortgage payments but because of a job loss or the payments have increased, they are about to default.

Read about the Making Home Affordable Refinance and Loan Modification Program.

The first group of homeowners will be helped by the government to refinance their mortgages so the monthly payments are lower.  The second group will be helped by having their monthly payments reduced.

Both groups will be eligible for an incentive if they stay current on their mortgage to the tune of $1,000 per year for 5 years.

What is wrong with this?

I have no problem with Keynesian spending which says that you should spend your way out of a recession – but that spending should be applied in ways that make economic sense.  In my mind – helping a homeowner who can’t afford their house is the same as giving bailout money to a car company and telling them they can’t cut any jobs.  It’s also the same as bailing out someone who bought an expensive car when they were working and after losing their job they can’t keep up the payments.  You can’t keep what you can’t afford – some companies have to lay off employees, some homeowners have to sell their houses and some car owners have to get more intimate with public transportation.

The US government is just going to end up paying the mortgage for a lot of people.  I realize that not everyone of those homeowners bought a 6 bedroom house on a $30k salary but even if they have legitimate reasons for defaulting on the mortgage (job loss, medical issues) the principal remains the same.   Stimulus money should go to businesses and people that can use that money to survive and thrive – it shouldn’t go to anybody who “deserves it” just because they have a heart-breaking story.  That money is intended to help the economy and it should only be used for that purpose.

Foreclosures lower property values

One of the justifications (or selling points) for this bill is that foreclosures can lower the property values in a neighbourhood.  That fact is supposed to make people who can afford their house feel better about their tax dollars bailing out their neighbours.  This is a bit silly – if you can afford your house then does it really matter if the value goes down?  Sure, nobody wants to see one of their largest assets go down in value but it’s not exactly a crisis.

What’s with the incentive?

The section of this bill I found most amazing was the part where the homeowner can get $1,000 taken off their mortgage principal each year for 5 years if they stay current on the mortgage after participating in this program.  I don’t get it – the government is already helping them in a big way – if the program is successful and the homeowner stays current then the government gives them even more money?  That makes very little sense – if the program is successful and the homeowner keeps the house then use the incentive money to help someone else.

No accountability

On the surface this bill does make some sense – it will apply to homeowners that for whatever reason are about to start defaulting on their mortgage.  The idea is that if you can help a person who is about to default (vs a person who has already defaulted) you can prevent some foreclosures.  One of the issues which I assume will play a bigger part as time goes on is the circumstances which have lead to the homeowner’s financial problems.

From what I can tell – most of the qualification criteria has to do with whether a refinance or restructure of the mortgage will make the mortgage affordable for the homeowner.  The reasons leading to the financial problems are not an issue.

My question is – if someone is… about the miss a mortgage payment and has 2 new cars in the driveway, 3 flat screen tvs in the house with full cable packages, has a great looking kitchen because they just spent $50k renovating it (or remodeling it as the Yanks say), has a stay-at-home spouse, kids in private school, a house keeper and they use brand name shampoo – should they still be eligible for this assistance?

My conclusions

If I was an American tax payer and didn’t qualify for this program, I would be furious.  As a Canadian, I really hope we don’t see any of this kind of nonsense up here anytime soon.

About the Author: Mike writes at The Oblivious Investor, where he regularly reminds readers to ignore the noise of the market. If you like this post, subscribe to his blog to read more. I’m a regular reader.

Imagine that you run a business making a physical product. For example, let’s imagine that you’re in the construction industry, and your business makes concrete.

And by some manner of genius, you invent a new formula that allows your concrete be just as strong as the best concrete on the market, while weighing significantly less per cubic foot. And the best part: your concrete even cost a bit less than that made by your competitors.

What would you do to protect your competitive advantage? Probably something like:

• Get a patent for your new formula, and
• Do everything in your power to prevent your competitors from getting their hands on the new formula.

How long do you think your competitive advantage will last? I’d guess it’s a few years at most before a competitor comes along with a new invention to make your formula obsolete.

Now, imagine instead that you aren’t allowed to file for a patent. Also, imagine that you aren’t even allowed to keep the formula secret. Instead, industry regulators require that every 6 months, you publish the precise formula for every product your company makes.

In that scenario, how long could your competitive advantage possibly last?

That’s what it’s like in the mutual fund industry.

If a fund manager is sure that a given stock is going to outperform over the next period, there’s nothing he can do to keep other fund managers from buying that same stock. The idea of patenting “owning shares of Coca Cola” is ludicrous.

Similarly, fund managers can’t keep their holdings a secret. They’re literally required to publish them on a regular basis.  (Quick note: I’m not saying this is a bad thing.) And with as much competition as there is in the mutual fund industry, you can bet that each of the major players is closely watching what the others are doing.

In that kind of environment, even if a fund manager does come up with a legitimate strategy for outperforming his peers, how long could he possibly hope to maintain his advantage before everybody else figures out what he’s doing?

Is it any surprise, then, that it’s so rare for managers to be able to consistently outperform for sustained periods of time?

Similarly, what does all this seem to indicate about the prospects of a fund manager who has just beaten the market for the past few years in a row?

About the Author: Mike writes at The Oblivious Investor, where he regularly reminds readers to ignore the noise of the market. If you like this post, subscribe to his blog to read more. I’m a regular reader.

I’ve written before on my opinion of experts.  I definitely think there are times when we need to seek out someone who knows more than us about a subject, but that certain professions cultivate this to a degree that’s detrimental to their clients.  Beyond this, there are people who go even further and try to set themselves up as the guru on the mountain.

Gurus are particularly attracted to real estate, but you come across them in a number of areas.  As well as writing up reviews of particular gurus, John T. Reed also provides general bullshit warning signs (most of which are applicable to gurus in any area).

I come across the occasional blog or website where the author is clearly trying to lay the groundwork to set themselves up as a guru.  Sometime they provide tidbits of worthwhile information, but there seem to be a few glaring warning signs that I think should warn people off.

One of Reed’s points that has shown up in the early information in scams I’ve looked into is #44: Saying they only do it for the love of teaching and sharing their secrets.  It’s amazing to me that people will describe how passionate they are about teaching others then charge a ridiculous premium for what they’re selling.  Books, called courses, will sell for hundreds of dollars.  Courses, called boot camps, will sell for thousands.  Expensive monthly memberships provide a wonderful “passive income” FOR THE GURU.

If someone’s actions are so contradictory to their claims, it’s time to move carefully towards the door.  Why would you trust the information being provided by someone is proving themselves to be dishonest with you from the start?

I was reminded recently of #1: Emphasis on luxurious lifestyle when I was on a woman’s site where she was selling her guru services.  Her site talked about how wonderful it was to be rolling in dough, and showed pictures from around the world of her and her kids and their luxurious vacations.  When I looked her up on Rip-Off Reports there was a litany of complaints about her (claiming she was charming and helpful until she got your check or credit card number).  Digging further she has a criminal record of repeatedly defrauding friends and family.

Anyone can say they’re a millionaire.  Anyone can post pictures of themselves next to fancy cars or in front of a mansion.  I’ve never signed up with any guru (I see enough warning signs that scare me off well before I give them any money), but I imagine it gets harder to as you get deeper in with them.  You have to realize you’ve made a mistake giving them cash, which makes it harder to see the ever more obvious warning signs.

If you are considering switching from one discount brokerage to another – you should try to get the new broker to pay for the transfer-out fees.  Most brokerages in Canada will pay these fees as long as you have enough assets to make it worth their while.  I believe in most cases $25k in assets would be enough but check with your new institution to find out the exact deal.

Follow through with the transfer fees

Recently I switched from Questrade to RBC Direct to take advantage of their 1% deal (no longer active). Part of the offer was to pay for any transfer fees that are normally charged by the relinquishing institution.  I had assumed this would be taken care of automatically and had forgotten about it until I recently was looking at my Questrade statements for tax purposes and noticed the $125 transfer fees. I decided to check my RBC account for any credit for the fees and sure enough – there wasn’t anything.

I phoned RBC and they told me I had to fax a copy of the statement showing the transfer fee before crediting my account. I wouldn’t be surprised if this is normally the case for where transfer fees are being covered.  For anyone else who did the RBC deal then the fax number is 1-888-722-238.  Indicate your rbc account numbers on the fax.

Summary

1. Get the new brokerage to pay for any transfer fees.
2. Follow up and make sure they pay the fees – send documentation if necessary.

If you are planning to move back to Questrade then read about the Returning to Questrade deal on transfer fees.

I’ve been using Mint for about 3 months now.  For those who haven’t used it, it’s basically a website that consolidates all your accounts at other financial websites into one.  You can see your mortgage, investment portfolio, credit cards and checking account all at a glance.

Read the Mint.com Canadian review

The Good

• I’m a huge fan of measurement, and its role in enacting change in our lives.  Its really great that they’re able to show you all the info in one place, derive trends from it automatically, and prevent us from fooling ourselves (by “not counting” that one credit card that keeps growing or the stock account that’s dropped recently)
• I liked that it tries its best to organize spending, but then you can override it and mark things as the appropriate category (such as “Income”, “Food and Dining’ or “Investment”)
• The set-up is pretty impressive.  Given the variety of banks in the US, for them to have screen-scrappers set up for each (which is how I assume they get the info) as well as login sequences is something that I’d guess would have been a big pain to create and maintain.  It works well though.  My only problem setting things up was I forgot which “secret questions” I’d used at various sites, so I had to redo them all (so I’d know which to use at Mint).
• They have notifications for worrisome situations  (an unpaid credit card, a checking account that’s low on funds, etc.) which are very handy, and make you wonder why the financial institutes themselves aren’t doing a better job offering similar services.

The Bad

• A data breach for Mint would be disastrous.  I was nervous about trusting them with my financial info when they first debuted, but after months went by and no one reported any problems, I figured that I wasn’t in danger from the Mint crew themselves.  If their security ever fails them and their customers’ info falls into the wrong hands, its going to be very bad for both the company and their customers.  This is the exact info bad guys would love to get their hands on (all in one place).
• While I get that it’s probably the revenue portion of their business plan, I found their “Ways To Save” section kinda lame.  Basically they show sponsored offers that will “save you money” (although the suggestions for me are all worse deals than what I already have.  It’s easy enough to ignore this section though.

Conclusion

Mint.com is a very convenient way to track your finances.  It’s an online service that will download your financial data automatically, which is the main difference between Mint and other financial software.

If you are looking for a different budgeting program, check out You Need A Budget Review.

When a parent is describing a toy/item they bought for the child and they say it is “essential” or a “life saver” – what they really mean is that it worked well for them and their child.  While it’s good to hear positive reviews, don’t assume you will get the same results.

Another item to consider is real estate – a lot of these baby devices take up a lot of space, so if you live in a smaller house with smaller rooms, you have to make hard choices about what stuff to get.

On with the list

Swing – This is one of the items that is often most highly praised by new parents – I know several who said it was best thing they had for keeping the kid occupied/quiet for a while.  However – not all kids like the swing.  Our son for example, wasn’t that keen on it – we had borrowed one from friends and tried him out on it several times, but in the end we decided to give it back.

Playpen/Pack’n’Play – I would say these are essential for travel, assuming your child can sleep on their own.  They fold up into a relatively small package and are easy to set up.  Some people use them to keep the kid contained, but we found the exersaucer was a better device for that purpose.

Baby carrier – This is another item where different baby carriers and different babies can make all the difference.  Our son liked being carried as a newborn, but his parents were never that comfortable with using a carrier, so he mostly rode in a stroller.  Our second child refused to be in a stroller for the first 4 months, so she got carried in a Snugli carrier which worked out well.  We also tried a baby Buddha carrier, but our daughter didn’t like it very much.

Playmat – I’m not too keen on these at all.  We purchased one for $70 for our son and  he didn’t really like it.  The fact is that a newborn is happy just looking at normal items and doesn’t need a “special” learning mat for development.  We have a small living room and the mat takes up a lot of space.  Another problem now is that it is hard to use the mat with our daughter because my son (2) is running around a lot and is a danger to anyone (ie my daughter) on the playmat.

Jolly Jumper – We had one of these, but never even bothered to set it up.  I’ve seen babies use them and it can be very entertaining!

Exersaucer – We found this quite useful for our kids since they were both entertained by it.  It’s great for containing the child if the parent is busy for a few minutes.  This device has a limited time period – you can’t put the kid in if they are too young and once they start crawling around/walking they will be a lot less interested in being trapped in the exersaucer.

Bumbo – This is the biggest ripoff since pet rocks.  $65 for a piece of shaped foam?  We bought one of course and although we did get some use out of it – I would recommend not buying one unless you can get a used one very cheap.  We were able to sell it for $30, so it wasn’t a total loss.

Booster seat – This is the seat you strap onto a chair and the baby sits in it.   We found these to be awesome because they take up a lot less space than a high-chair.  The baby needs to able to hold their head up by themselves before using.

Check out my baby expense section for more baby articles.

Do you have any “must have” or “must not have” baby items you’d like to share?

I recently received a copy of “New Rules of Retirement” written by investment advisors Warren MacKenzie and Ken Hawkins.  Now if you’re wondering why I would even bother looking at a book written by a couple of investment advisors, I should clarify that these guys are not the normal “mutual fund/used car salesman” type of advisors.  MacKenzie runs the investment company called “Second Opinion Investor Services” which offers unbiased investment advice.  As it says on their web page, they don’t sell any financial products – only advice so they really are unbiased.  Ok, nobody is truly unbiased but these guys are close enough.  They are big believers in passive or index investing, ETFs and index funds – so they are ok in my books!

On with the book review…

What it is about

The book is a fairly complete retirement planning book.  A good portion of the book deals with investing but there is also a lot of discussion about lifestyle factors such as health, housing needs and how you are going to spend your time in retirement.  The investing section lays out some planning strategies and also suggests that lower costs and passive investing is the way to go.

Any good?

Yes, it is very good.  I would say that most people (even readers of this blog) would gain from reading this book, it is a wealth of facts and figures and they talk about many, many different aspects of retirement that most books don’t cover.  If you have already read 4 million financial books and don’t feel you would gain from this one then consider giving it to a friend who perhaps needs a little nudge in their retirement planning.

A couple of chapters I found very interesting were:

Health

This book covers various retirement topics like the odds of being independent at different ages, various age-related spending factors and happiness.  They say that most seniors are not dependent on external care and that the fear of huge medical bills in retirement is a bit exaggerated – especially for the earlier stages of retirement.

They included some interesting stats from a study done by Statistics Canada which show that not all seniors end up dependent.  One stat is percentage of seniors who are “independent in activites of daily living” – in other words they are completely independent.

age 65-74  88%
age 75-84  70%
age  85+  41%

Keep in mind that just because someone is not complete independent doesn’t mean they are completely dependent – there are a lot of non-independent seniors who will use some home care but not necessarily a lot of it.

Another statistic they looked at was a measure of independence – Activities of daily living (ADL) which includes tasks considered vital to retaining personal independence, such as bathing, dressing, eating, taking medication and moving around the house.  The report found that only 6 percent of males and 7 percent of females between age 65 and 84 were ADL-dependent which means they couldn’t do the basic tasks on their own.  For over 85 years of age – the rate of ADL is much higher at 20% plus.  Regardless, even for the 85 year old plus crowd – close to 80% were still ADL independent which is pretty high. Of course most people are dead by this age, but still… 🙂

Annuities

I haven’t done much research in annuities but I have to say that after reading this book, I may try to incorporate them into my retirement planning.  Annuities are basically contracts where you give a big chunk of cash to an insurance company (say $100k) and they will guarantee a certain payment each year.  This is similar to a defined benefit pension except that you have to save up the money to buy in.

For those of us without a good pension, we have to live on OAS, CPP and our savings.  If the stock market crashes then this can cause a bit of stress if your nest egg loses some of it’s value.  MacKenzie and Hawkins suggest that perhaps older retirees can consider buying annuities to reduce their stress.

If someone needs a minimum of $25k per year to live on and their CPP and OAS only add up to $14k then if they bought an annuity (or several at different times) that pays them $11k per year then they could guarantee they will always have enough to get by.  Of course with the rest of their portfolio they can withdraw a moderate amount (ie 4% rule) to give them a good standard of living.

Annuities are cheaper as you get older (ie the payouts get higher) so they say to wait until you get older – and even then – just buy what you need, when you need it.

Stay tuned for the great Canadian book giveaway – coming soon!