Category: Personal Finance

CARP for those of you who don’t know is a Canadian organization of retirees which pushes for various government policy changes on behalf of Canadian retirees.  One of their recent public campaigns has been a call to the Canadian government to reduce or eliminate mandatory withdrawals from RRIF (registered retirement income fund) accounts on the basis that:

1. The mandatory withdrawal amounts are too high and retirees will outlive their money.
2. Cashing in their retirement investments when the market has crashed will result in very poor portfolio performance and…you guessed it – retirees outliving their money.

According to their spokesperson Susan Eng, it is an “It’s become an absolute emergency“.

First of all – a brief primer on RRIF accounts:

RRIF accounts – what are they?

RRIF accounts are the things that your RRSP will turn into when you turn 71.  RRIFs are tax-sheltered accounts but unlike RRSPs, once you turn 72 there is a RRIF mandatory withdrawal amount each year.  The amounts start at about 7% and go up from there.  The withdrawal amounts are added to your taxable income in the year of the withdrawal.

The issue that some people have is that they sometimes don’t want to take the minimum amount out each year because they don’t need it or they want it to be part of their estate.

Why CARP is full of CRAP

The first argument CARP has had for a while (mandatory withdrawal amounts are too high).  They say that the 7%+ withdrawal is higher than what retirees can earn on fixed income investments.   The second argument which kind of contradicts the first is that seniors shouldn’t be forced to sell equities in a down market.

My response is as follows:

1. Regardless of how much money retirees are “forced” to withdraw from their RRIF accounts – they don’t have to spend any of it.  Yes, the withdrawal is taxed (like a withdrawal from an RRSP) but the retiree is perfectly capable of putting the money into a TFSA or a taxable account for a rainy day or to leave in an estate.
2. Equities do not have to be sold when withdrawing from a RRIF account.  If you have investments (mutual funds, stocks etc) in a registered account such as a RRIF or RRSP and you want to move them to a TFSA or taxable account – you can do this with an ‘in-kind’ transfer which means that the securities just move from one account to another.  If you have 5 shares of Bank of Montreal in your RRIF account then you can transfer the 5 shares to your open account and you don’t have to sell anything.  You are still making a withdrawal which is taxable but you haven’t sold a thing.
3. RRIF accounts weren’t born yesterday.  When you put money into an RRSP – you defer income taxes.  When you take the money out of the RRSP you pay taxes.  If you leave your RRSP money long enough then eventually it will have to be converted to a RRIF account which is subject to mandatory withdrawals at age 72.  Those are the rules – if you don’t feel the RRSP/RRIF combination is “fair” then don’t use them.

Conclusions

CARP seems to able to spend a lot of money putting the word out that RRIF minimum withdrawals are an ’emergency’ when it is quite obvious to me that most retirees have a lot more things to worry about then being forced to withdraw retirement funds that they don’t need.  If I was a member of CARP then I would be questioning why they aren’t putting their resources into helping the majority of retirees rather than the very few who have RRIF money they don’t need.

The Canadian dollar has been plunging recently.  I’m not into Forex trading (its a zero-sum game, so with transaction fees and other savvy people in the marketplace, I don’t see it as a reliable investment), but currency exchange rates affect many Canadians.

Years ago I lived in the US and the Canadian dollar was worth about $0.60 US.  Things seemed much cheaper whenever I’d visit Canada (I remember being shocked at how much more DVDs cost up here after I’d factored in the exchange rate).  When we briefly had the dollar worth more than the American dollar (and while it was around parity), it was a strange feeling being able to purchase more for a Canadian dollar (or to be able to convert equally).  I think a lot of ex-pat Canadian tech workers were shocked at their American salaries, in part because they were very nice after being exchanged into Canadian dollars.

For importers, they now have to pay a lot more when they buy abroad.  This will eventually start translating into higher prices on goods brought into Canada (books, most manufactured goods, etc).  With the lower Canadian dollar, exporters will now be able to make more for everything they sell abroad, so this is good news for Canadian manufacturers and anyone selling resources outside of Canada.

Tourism will get more expensive when we travel outside of Canada, but tourists COMING to Canada will get a better deal (so hopefully this segment of the economy will improve).

Those of us who own American stocks: we’ve just got a nice boost to our portfolio value.  From both the new, higher exchange rate if we sell and on any dividends paid (in American currency).  Telly is going to laughing more than any of us, as she lives in Canada but works in the US (good trick right now if you can manage it).

For purchases WITHIN Canada (say buying a meal at a restaurant that uses locally produced ingredients or buying a Canadian newspaper), nothing should really change.

Has the drop in the Canadian dollar affected you?  Are you going to be living life any differently, within the next 6 months say, because of the change?

I recently had an unsettling experience. My landlord seems like a bit of a scatterbrain (I sent my rent check the first month, and she CLAIMED she didn’t receive it until 2 weeks later). Not wanting to have a repeat of this situation, I sent my next letter registered. It was recorded at Canada Post that they attempted to deliver it and she wasn’t home they left a notice. On the 3rd of the next month, she sends me a nasty e-mail claiming my rent is late.

After I sent her the information to track the parcel (and walked her through how to look it up), she calls me back and says that she never got the notice and the post office is telling her they lost the package.

I called Canada Post up myself, they said that the local office shouldn’t have said that, that they need to launch an investigation to try to track down the package before they declare it lost and would call me back within 5 business days. The woman assured me that if they lost it they’d refund my postage and refund what it cost me to cancel the check (I told her the package contained a check and a lease). I was a little put out that that’s the only compensation they were offering.

They never called back.

I called, talked to an unpleasant man who says they declared the package missing the day after I called and that their records showed they had called and left a message (they hadn’t). He said a check had been sent to refund my postage and that they wouldn’t refund my canceled check fee ($12.50). He didn’t even apologize for Canada Post losing the letter.

TD Canada Trust, my main bank for checking, happily charged me the $12.50, but warned me that they don’t guarantee that it will actually be canceled (huh?). Instead, they’ll try their best, but if someone cashes the canceled check, I’m on the hook for it. Nice business idea, charge people money and tell them that they MAY get what they paid for. I’m glad to be a bank owner so I benefit from some of their crookedness!

I find it shocking that Canada Post is losing REGISTERED mail, and couldn’t care less. This is the first time its happened to me, but from their attitude it seems like this is a regular occurance and they don’t really care.

To pay my rent I e-mailed my landlord money and scanned and e-mailed the lease document. My landlord wanted post dated checks for the remainder of the lease, but I’m hesitant to lose a bunch of checks (and have to pay $12.50 each to MAYBE cancel them).

How do you ship important things that you need to get to their destination? Has Canada Post / US Postal Service lost your mail? Has FedEx or any of the other commercial carriers lost mail on you? How did they handle it when the mail was lost?

My wife, who is an ING customer, received an email last week with a new promotion for the TFSA account which becomes effective in January.  The rules for the TFSA are that you can open up a TFSA account with a financial institution starting December 1, 2008 but you can’t transfer any money to the new account until Jan 1, 2009 – or more likely Jan 2 since Jan 1 is a holiday.  This is kind of an odd situation since there isn’t much motivation for a person to open up an account early and then have to wait a month to put money in it.  Of course there is a lot of motivation for the financial institutions to get you to open up an account so that they can get your money!

The deal is that if you open up a TFSA account with ING right now – they will pay you 3% (their current rate) and then on Dec 31, 2008 they will pay you another 3% interest.  Keep in mind the 3% is annual so you will only get a small fraction of that.  The idea is that for someone in a high tax bracket who pays almost 50% tax – by doubling the interest payment, they are essentially paying the income tax and creating an effective TFSA starting right now.  Of course, for someone in a lower tax bracket, this bonus is that much better.  According to my rough calculations the “extra” bonus should work out to about $35 on a $5,000 deposit.  Not a huge amount but it seems like a pretty good little bonus to me.  ING isn’t really putting your money in a TFSA account but rather an open account (taxable) and paying for your taxes (and then some).

We’re planning to put $5,000 into a TFSA for next year and this offer sounds pretty good to us.  I haven’t been too big on emergency funds in the past because of the tax drag but the TFSA certainly takes care of that concern.

Is anyone else going to take advantage of this offer?  Are you going to wait until the new year to worry about it?

More information on the TFSA

Benefits of the Canadian tax free savings account

Tax Free Savings Account (TFSA) Basic information for Canadians

Comparison between Canadian TFSA and American Roth IRA

Tax Free Savings Account refresher for Canada

ING offers TFSA refresher for Canadians

Is the RRSP still worthwhile because of TFSA accounts?

Using the Tax Free Savings Account (TFSA) for Canadians as an emergency fund

Miss Manners once wrote that there’s a fundamental conflict in customer service in Western countries. We like the maxim “The Customer is Always Right” (at least when we’re the customer), but our society is built on the idea that all citizens are equal. How can one person always be in the wrong if they’re equal to everyone else?

Like most of us, I’ve been on both sides of the issue (receiving and providing customer service). Probably like most other people, I’ve been the irate customer, and I’ve dealt with irate customers. Of course, I was always in the right (I was justified in being angry, but none of my customers were).

I have never lived or done business under the motto “the customer is always right”. The brother of a friend of mine had a funny saying to unreasonable customers: “this isn’t Burger King: your way all the way!” I don’t think that’s even Burger King’s motto but it made me laugh.

There’s been a backlash in recent years where people have started “firing their clients”, meaning they stop doing business with customers who are more trouble then they’re worth. I’ve definitely done this. The more rational (and business-savvy) approach is to just charge difficult customers more until they leave on their own, or pay you enough to make it worth dealing with them. There’s a dangerous element to this in that if you get too much on your high horse and become a prima donna to do business with, you may drive away customers (and drive yourself out of business).

I found what I’m fairly sure is Violent Acres‘ old blog, and she used to work at Taco Bell (which it’s interesting how she got from there to the independently wealthy woman she claims to be now). She makes the comment in one post that she couldn’t care less when people got angry at her and said they were never going to eat at Taco Bell again (why would she care? She didn’t get paid on a per-customer basis, and if that store went under she’d be able to get a similar job pretty easily).

I definitely think all people providing services at any business deserve to be treated with dignity and respect. That being said, its quite frustrating when you’re the customer and they’re rude to you just because they’re having a bad day (and there’s not much you can do about it).

In some ways, rather than a “customer is always right” environment, I think this is a healthier way to do business (when both sides stand up for themselves and either can refuse to do business with the other). Unreasonable people are rejected, whether they’re the customer or the provider. In most situations (other than fast food), after they’ve lost enough businesses partners, they’ll eventually realize that its worthwhile being civil to people they want to do business with.

While visiting the parental units for Thanksgiving, my dad told an intersting story about what happened to their van when he went to get an oil change.

There was a young man (my dad said he looked about 16) who was driving the vehicles into the bay for the oil change.  My dad thought he was acting kind of nervous when he took the keys.  After the oil change, my dad went to start the van and the key wouldn’t turn in the ignition.  After trying for a minute or two, he got out of the van and the young guy ran over and asked what the problem was.  After my dad said the key wasn’t turning in the ignition, the guy said “I’ve seen that before!”, ran off and got a can of WD-40, sprayed some in the ignition and it started.

My dad said he was doing everything but holding his hand out, clearly expecting some sort of reward for getting the car started.  My dad was suspicious about the whole situation (he hadn’t been having any problems with the ignition before this, found the guy’s behaviour quite odd, and was skeptical that the guy would have known EXACTLY what the problem was, and been able to fix it immediately).  Since then ignition has locked up again repeatedly, and each time it requires WD-40 to get it to turn (and start).

My dad’s theory is that the young guy sprayed something in the ignition to make it seize up (and WD-40 fixes the problem temporarily).  He figured the guy hits a few people each day, and tries to make a bit of money getting a “reward” when he gets their vehicle going again.

I’ve done a Google search and haven’t come across a scam like this.  For anyone who knows much about cars, do you think the guy did something to my dad’s van, or do you think he’s being needlessly suspicious (and maybe should have given the guy $20 for fixing the problem on the spot and saving him from having to call a tow truck)?

I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind.
-Lord Kelvin

One of the most important first step before making any change in your life is to figure out how to measure it. Its so easy to delude ourselves. I’ve found coming up with an objective measure, then referring to it in order to gauge progress, is the right way to move forward with most goals in life. Logging, measuring something regularly and recording it, is an excellent way to do this.

When I was first losing weight, I would weigh myself every day. Some weight-loss approaches caution against this, as your weight will fluctuate because of things like how much water is in your system, when in the day you weigh yourself or how recently you’ve eaten. In The Hacker’s Diet, John Walker acknowledges this difficulty, but instead of giving up on measurement, he proposes a useful correction, namely to use a 10 day moving average. This is a known approach for removing the jitter (small erratic movements in mostly random directions) from data and seeing what the trend is (some people use a similar technique for “predicting” if the stock market or an individual stock is moving up or down).

Calorie count does the math for you and lets you enter your weight every day. Then they’ll provide the trend line (I used it before it was bought by about.com, no idea if its still good or not).

I credit my daily weighings and being able to constantly evaluate whether I was losing weight (and how quickly I was losing it) as being key to my weight loss. I tried the same approach when I wanted to reduce my living expenses, and was able to drop them from about $2,300 / month to around $1,300 / month.

I’m currently tracking my networth, and every month I can see how I’m doing at general wealth accumulation. I also track my passive income every month, and am looking forward to the day when it matches my living expenses.

I sometimes wonder if I’d had more metrics when I was starting my company if I might have done better. If I’d committed to trying to connect with X new customers each week, or grow billable revenue by Y% each month, it might have kept me focused on the more important aspects of the business.

Any changes in your life that you can’t think of how to log (I’m happy to make suggestions)? Have you ever used logging to enact change in your life?

Enter in the Giant Book Giveaway if you haven’t already!

Recently I wrote about the 4% withdrawal rule which is a guide for safe portfolio withdrawals in retirement. To reiterate, the basic rule is that you withdraw 4% of the portfolio in the first year of retirement and then every year afterwards you withdraw the amount you took out the previous year plus inflation.

Bill Bengen who was the “creator” of the 4% rule no longer uses it in his financial advisory practice. The problem with the 4% rule (actually the 4.2%) rule is that while it does accomplish the goal of ensuring that an investor who follows the rule will not likely outlive their money – if the portfolio performance is better than expected, then the calculated withdrawals will be too conservative and might end up almost guaranteeing that the investor dies (at an old age) with a large amount of money remaining which might not be what was intended.

Bengen’s new strategy is as follows:

Flexibility is factored into Bengen’s revised approach, which permits withdrawals to fluctuate within guidelines. His “floor-and-ceiling strategy” suggests that an initial withdrawal rate of 5.16% would be appropriate if a retiree pares back subsequent withdrawals by as much as 10% of the initial withdrawal during hard times (the floor). On the other hand, a retiree could withdraw extra cash equaling up to 25% of the first-year withdrawal (the ceiling) when the market is strong. The starting rate would vary depending on how much volatility a retiree could stomach. (More details on his research are at billbengen.com.)

He does add that there is no “absolute solution” and that “In general, I think you are better off planning conservatively initially because you can always make adjustments later.”

William J. Bernstein who is a big fan of the 4% rule, also talks about withdrawing a fixed percentage of the portfolio each year instead of a fixed amount based on the first year withdrawal plus inflation. This is the ultimate in flexible withdrawals but the problem as he notes is that the withdrawal amounts can vary by a large amount each year due to market fluctuations. As Bernstein aptly puts it “Keep a few cans of Alpo in the cupboard if you decide to go this route.”

I’ve always been a fan of being flexible with withdrawal rates so I like the idea that maybe the rigid 4% rule is a bit too rigid. I’m thinking of having a retirement plan where I start with a withdrawal rate of 5% and be flexible depending on the markets. One way to be able to do this is to have a fair bit of “extra” money built into your retirement scenario. For example if you are planning to retire with $50k per year (in today’s dollars) but $15k of that is for traveling and “extra spending” then if the markets tank, you could potentially cut your withdrawals down to $35k and maintain your basic standard of living. On the flip side, if the markets have a sustained rally in the beginning of your retirement then you can probably spend a bit extra. I think the key to handle that situation is to spend the bonus money on one time only costs such as vacations, renos, gifts etc. If you start buying more expensive houses or cars then those items will leave you with higher costs for a long time.