Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

“Stop Doing” # 3: Stop Investing Without a Plan

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Steve Lowrie

By Steve Lowrie, Lowrie Financial 

Special to the Financial Independence Hub

We’re on a roll with our “STOP Doing” ideas. In prior posts, we advised you to STOP feeding on junk media and STOP reacting to market noise.

Today, we’ll cover a great way to stop doing nearly every other bad investment idea out there: STOP trying to invest without a plan. Typically, this plan should come in the form of a detailed Investment Policy Statement (IPS) – a written agreement that you and anyone else who is helping you manage your money signs off on initially, and whenever you make changes to it.

Why be so formal about it? As a financial advisor, I often field questions from family, friends or acquaintances, asking me what I think about some current hot investment tip. The specific “opportunity” changes each time, but the reason I’m being asked about it does not. It’s almost always after strong past performance has captured everyone’s attention. A recent example: I was golfing with a friend last Sunday who proceeded to tell me about the great recent returns from Apple and Google. “If I had only had the guts to buy Apple at $6,” he bemoaned, “I would be really rich now.”

I think he was hoping I could name the next big Apple for him so, this time, he could get in on the action. Instead, I concentrated on my golf game – and mulled over how some things never change and some lessons are rarely learned.

The importance of a formal Investment Policy Statement

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Weekly Wrap: ORPP gets flak, investors watch weights, the worst form of debt

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Ontario premier Kathleen Wynne (Twitter.com)

First an apology that there was no weekly wrap last weekend because of a long weekend I took up in cottage country. Summer is fast fading!

This week the big macroeconomic story was China’s devaluation and the consequent negative impact on global markets. Probably the least confusing and most insightful analysis of this story was in The Economist, titled The Devaluation of the Yuan: The Battle of Midpoint.

On the retirement front in this country, the controversial story was the Ontario Government’s unveiling of the details of the much-loathed ORPP, or Ontario Retirement Pension Plan. This appears to becoming an election issue as the animosity between Stephen Harper and Ontario premier Kathleen Wynne heats up. We did weigh in with a recap on the Hub, which you can find here.

Note the references to two studies that came out hours before the official ORPP announcement, providing a little grist for the mill for both fans and foes of the plan. My own take on this will be in an upcoming Motley Fool blog but the main critiques of the ORPP — and there were many — are summarized below.

10 reasons ORPP should be T-ORPP-EDOED

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How RRSP meltdown strategies could jeopardize your retirement

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Patrick McKeough, TSInetwork.ca

By Patrick McKeough, TSInetwork.ca

Special to the Financial Independence Hub

Investment tip: “RRSP meltdown strategies promise to ease your tax burden on withdrawals, but these complicated manouvres are usually more lucrative for brokers than for investors.”

Investors sometimes ask us what we think of the so-called “RRSP meltdown.” This is a strategy that would let them make withdrawals from their RRSPs without paying income tax.

How the RRSP meltdown works

When you take money out of your RRSP, you have to pay tax on your withdrawal at the same rate as ordinary income in the year you make the withdrawal. However, under an RRSP meltdown strategy, you would offset the additional tax by taking out an investment loan and making the interest payments from funds you withdraw from your RRSP (the withdrawals must be equal to the interest payment).

Since the interest on the loan is tax deductible, the tax on the RRSP withdrawal is cancelled out. This, in theory, results in zero tax owing on your withdrawal.

You can then use the investment loan to buy dividend-paying stocks, which you would use to provide income during retirement. Dividend-paying stocks also have the advantage of being very tax efficient.

RRSP meltdown by the numbers

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Ontario Retirement Pension Plan to roll out from 2017 to 2020

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Minister Robb with Ontario Premier Kathleen Wynne, Northern Development and Mines Minister Michael Gravelle, HOM Tony Negus and Consul General/Senior Trade and Investment Commissioner Portia Maier.
Ontario premier Kathleen Wynne (Wikipedia)

The National Post today reports the Ontario Government has revealed more detail today about its oft-criticized Ontario Retirement Pension Plan or ORPP. As it reported in a later update, staff at the province’s bigger employers will have to start paying into the plan by 2017, with a full rollout by 2020.

Employers will be exempt only if they already offer a mandatory Registered Pension Plan that Ontario deems comparable to the ORPP.

In 2022, Ontario residents who are 65 or older can start drawing benefits from the ORPP. Full-time or part-time workers  can  start contributing at 18 and continue until they turn 70.

While Premier Wynne has not released cost estimates of the program, the Post reported the plan will collect 1.9% of a workers’ income up to $90,000 from both employers and employees to a total of 3.8%, or a combined total of $3,420 a year

Meanwhile, proponents and critics of the plan got a little more ammunition from two different retirement reports produced by the Fraser Institute and the Mowat Centre.

Released Tuesday, the Fraser Institute report is titled Lessons for Ontario and Canada from Forced Retirement Savings Mandates in Australia. It suggests that if Canada really needs more “forced” retirement savings, Ontario should look for global examples that could be alternatives to its current plans for the ORPP. For example, it should look at Australia’s “superannuation” program, a contribution-based scheme to which both employers and employees must contribute. Australia’s system of “individual accounts” provide more flexibility and choice than, for example, the Canada Pension Plan (CPP.)

Like the CPP, the ORPP is a “collective” pension plan that pay out defined benefits over a lifetime. The paper by the Mowat Centre (titled Lower Risk, Higher Reward: Renewing Canada’s Retirement Income System) says the Australian plan has had “mixed” success because as a Defined Contribution plan it doesn’t guarantee a set income for life, as does the CPP and DB pensions in general.

Middle-to-upper income earners may need more help

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“Stop Doing” #2: Stop Reacting to Market Noise

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Steve Lowrie

By Steve Lowrie, Lowrie Financial

Special to the Financial Independence Hub

In recently revisiting Jim Collins’ classic, bestselling business book “Good to Great,” I was reminded of this timeless tip:

Successful business owners make as much use of “stop doing” lists as they do of “to do” lists.

“Most of us lead busy but undisciplined lives,” says Collins. “We have ever-expanding ‘to do’ lists, trying to build momentum by doing, doing, doing – and doing more. And it rarely works.”  In his related piece, “Pulling the Plug,” He adds: “One key decision about what to stop doing might have as much impact as five new initiatives.”

Stop Reacting to Market Noise

Having a “stop doing” list seems like a fantastic idea – in business, in life and especially in your financial management. So often, I see investors who would probably be doing fine if they would just form a plan that reflects their personal goals, build a low-cost, globally diversified portfolio that complements those plans … then STOP reacting to near-term market noise that distracts them from their focus.

And Stop Reacting to Others Who React to Market Noise

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