It's Your Money  

You can be a millionaire

How hard is it to save $1 million for retirement?

To answer that question, we must look at a number of variables such as interest rates, number of years to retirement, etc.

But the net result is that it may be easier than you think.

No matter what rate of return you earn on your investments, the real key to reaching your goals is starting to save as early as possible.

Let’s assume that your goal is to have $1 million in your portfolio when you reach age 65; you increase the amount you put in each year based on inflation (we’ll call it two per cent per year) and that your investments grow at six per cent per year.

The amount you will need to put away will depend entirely on your age:

  • An 18-year-old would need to invest $56 per week or $2,919 per year
  • A 25-year-old would need to invest $90 per week or $4,672 per year
  • A 35-year-old would need to invest $185 per week or $9,597 per year
  • A 40-year-old would need to invest $274 per week or $14,233 per year
  • A 50-year-old would need to invest $691 per week or $35,915 per year

Younger Canadians certainly find putting money aside for retirement hard with entry-level wages, student loans and the high cost of living but the numbers don’t lie.

It is substantially easier to reach your retirement goals when you start saving at an earlier age. Even when money is tight, if you stick to a budget and setup an automatic weekly or monthly withdrawal, you likely won’t even miss the money being set aside.

Although you may feel like your budget is tight, the majority of 25-year-olds can put away $90 each week if they make that goal a priority.

Ideally, those with moderate incomes will put this money away in their TFSA account so that the $1-million nest egg they amass will be completely tax free. For some, a mixture of TFSA and RRSP contributions might be best.

There is no doubt that there are lots of people out there not earning six per cent per year on their investments, but it’s really not that hard to do.

If you put the money into a well-diversified (i.e. not predominantly Canadian bank and oil stocks) portfolio with a moderate risk profile and don’t touch it or make any changes, you should very easily reach or beat your six per cent annual goal. 

In fact, a portfolio like the one mentioned above will quite likely earn a higher average rate of return over the long term. If you were to take the above example of a 25-year-old who needs to put $4,672 away per year to reach $1 million and had them earning eight per cent per year instead of six, they could have a nest egg of $1.6 million by the time they are ready to retire. 

So yes, in addition to starting early the quality of investment management you select is also very important.

There you have it, saving $1 million is not that hard to do if you invest it properly and start early.

Even if you can’t put away the full amount required each week to hit your goal right now, starting with any amount today will get you closer to being on track for the stress-free retirement you deserve.


Mortgage stress rising

Qualifying for a mortgage just got even harder.

Following rate hikes from the big six banks over the past few weeks, the Bank of Canada elected to raise its benchmark mortgage rate as well. 

The BoC’s benchmark rate is one of the key components of the stress test used for mortgage qualification purposes and every time that rate goes up, it decreases the amount of mortgage that someone can qualify for. 

The mortgage stress test came into effect at the beginning of 2018 and is the latest in several rounds of increased qualification standards for Canadian mortgages.

The new stress test makes it harder for many Canadians to qualify for a mortgage and has some serious design flaws.

For example, we heard almost no pushback from the big six banks on this new rule since they still hold most mortgages here in Canada and any one renewing an existing mortgage does not need to qualify with this new test.

That means many people will be forced to stay with their existing lender, even if their renewal rates are not very competitive.

On the flip side, the new rules will help keep people from buying more house and taking on more debt than they can realistically afford.

My column last week talked about the serious debt crisis and housing bubble that exists in Canada right now and these rules will help (although likely not enough) to curb that somewhat.

Homebuyers with less than a 20 per cent down payment seeking an insured mortgage must qualify at the BoC benchmark rate, even though their actual contract rate with their lender will likely be lower.

Those with more than 20 per cent down (who don’t require CMHC insurance) will need to qualify at the greater of the BoC benchmark rate or two per cent higher than their contract mortgage rate.

The rate increase by the BoC last week took the benchmark from 5.14 per cent to 5.34 per cent.

This may not sound like a big jump, but it does have a big impact.

Let’s compare a $380,000 condo purchase using five per cent down and a 25-year amortization schedule mortgage.

The minimum income required to qualify for the above mortgage would have been $83,999 before this stress test came into effect.

Now, the same homebuyer would need $100,255 of income (assuming no other debts) to qualify. 

The homebuyer with $85,000 of annual income would need to either find a lower priced condo or wait until they save up a larger down payment. 

At current benchmark rates, that same person with $85,000 of income would need to save up a full 20 per cent down payment, or $76,000 instead of $19,000, in order to qualify.    

In some ways, the new stress test and the latest BoC benchmark increase is a good thing as it helps curb Canadian’s unquenchable appetite for debt. But many hard-working Canadians struggling to buy their first home will certainly disagree.

Either way, it is very important to know all the facts before buying your first home or renewing a mortgage

And make sure to not take on more debt than you can reasonably handle. 

Don't join this club

Are you part of Canada’s special club?

The club involves the almost 10 per cent of Canadian households that owe 350 per cent or more of their gross annual income in debts.  

In other words, for every $1 they earn of gross income, they owe at least $3.50 in loans and other debts.

This group is carrying about a fifth of all Canadian household debt and is one of several reasons why the Canadian economy and markets are in a lot worse shape than many are led to believe. 

In a speech last week, Bank of Canada Governor Poloz stated:

  • “We are closely watching the vulnerability represented by this group and the debt they carry, and how it poses a risk to both the financial system and the economy.” 

The thing is, he’s pretty much stuck between a rock and a hard place. 

If the BoC raises rates too quickly, they risk choking off growth and putting significantly more pressure on Canada’s debt bubble. But if they don’t raise interest rates, the risk of inflation buildup and people continuing to spend money they don’t have is equally problematic. 

After Governor Poloz’s speech, several key economists were quick to point out that there really wasn’t much that the BoC can do since the problem has already become too big.

There is simply no good course of action that they can take to help our nation out of this mess without some level of pain.

Just think what would happen if half of the “special club” with too much debt were to file for bankruptcy when interest rate increases make their debt loads unmanageable. What would that do to our housing markets and economy as a whole?    

Canada’s household debt concerns are just another layer of pressure to our economy that also includes:

  • the ongoing threat to NAFTA
  • diverging tax strategies with the U.S.
  • out of control federal debt
  • a lack of a national energy policy that is scaring away the few investors that remain.  

Former Bank of Canada governor David Dodge commented last week that Canada is doing a number of things to “shoot ourselves in the foot” when it comes to economic competitiveness.

That view seems to be shared by virtually every economist, analyst and investment professional that can comment freely and doesn’t have a political stake to lose by being honest. 

The reason for repeating all of this information that most people have already heard?

Somehow, the message still isn’t sinking in with a good majority of our population.

Many people are willfully ignoring their debt and overall financial situation and unfortunately, choosing to ignore a problem will not make it go away. 

A recent report conducted by Oxford University showed that perceived financial well-being holds the key to your overall well-being.

But an updated survey released today by the Financial Planning Standards Council showed that 51 per cent of Canadians were embarrassed by their lack of control over their own financial situation (up from the 44 per cent figure found in the same survey run in 2014).

his just further illustrates that the finances of Canadians are getting worse and not better. 

So, what should we do?

First, we need to stop spending so much money.

  • Thinking of buying a bigger house right now?
  • Is it time for a new car?
  • Planning a big family vacation?

This may just not be the right time for any big purchases or anything that will add to your debt load. 

Step two is to build or update your financial plan.

Your plan should include steps to pay down any debt that you have, ensure you build up enough money for retirement and consider the rising interest rates that we know are coming.

Your level of exposure to Canadian equities should also be reviewed.

Most economists are predicting a rough patch for the Canadian economy in the near future and the best thing you can do is to make sure your own finances are as well prepared as possible.

While I hope that we’re all wrong, we probably won’t be, so you should be prepared.     


Don't blow your tax refund

You may soon find yourself with a big tax refund burning a hole in your pocket.

The deadline to file your 2017 taxes is today and according to the CRA, the average Canadian is entitled to a refund and the average refund seems to be around $2,000.  

Before you splurge on a vacation to Las Vegas or go out on a shopping spree, take a minute to consider what you’re giving up.

It’s important to stop treating this like found money and remember that it’s actually just part of the money you earned for work last year and the CRA is simply returning the interest free loan that you gave them.

If you have any outstanding bills or high interest debt on credit cards, you should look to pay these down or off before considering anything else.

Instead of paying a little bit against each debt, allocate 100 per cent of the money to the loan with the highest interest rate first.

But what if you don’t have any debt besides a mortgage with a locked-in low interest rate?

And let’s assume you’ve already been doing an excellent job of saving for retirement as well and are on track to reach the goals laid out in your customized financial plan.

Are you free to go blow the tax refund then?

I would suggest considering what use of this money would bring you the most joy. A new television or a weekend in Vegas would be nice, but the joy from either expense would pass fairly soon.     

Instead, consider putting the money into a separate investment account, ideally a TFSA if you have available room. This may not be the most exciting or satisfying option at the start but can become more appealing if you also create a long-term goal for this money. 

If you get a $2,000 refund each year and you work for 20 more years, this small amount will quickly snowball into something much bigger with the wonders of compounding.

Let’s also assume an annual interest rate of six per cent in this TFSA and we’ll ignore inflation to keep things simple. Your side pot of “play money” will have grown to $81,532 when you’re ready to retire.

In addition to building up a nice “emergency fund” for unexpected road bumps in your future finances, the money will be there if it’s not otherwise needed to do a much bigger splurge on yourself or your family when you retire.

Consider what you would be able to do with an extra $81,532 of mad money.

The funds could be used to buy a nice BMW convertible to enjoy the Okanagan summers. It would be more than enough to fully fund a trip of a lifetime around the world for you and your family. Or you may even elect to use the money as a down payment for a first home for your kids.

Whatever you decide to do with it, I have little doubt that it’s use will be a memory that you’ll never forget. 

For those that absolutely must have some instant gratification by spending money now, consider taking just five per cent of your refund amount and blowing that.

You will get the same instant joy with a nice dinner out or a new outfit, but the remaining 95 per cent will be there to grow into something so much bigger.

Your future self will thank you.     

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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