Quotations by Frederick Vettese
Making a mortgage payment is more or less the same as putting money into your RRSP. In both cases, you're building up the value of an asset and improving your financial security later in life. The combination of mortgage payments (or rent) and retirement savings plus extraordinary, short-term, necessary expenses (like daycare) should equal 30% of your gross pay until you get into your mid-50s. After that, you should be using something like PERC (perc.ecm.lifeworks.com) to provide ongoing guidance as to how much you should be saving. [2021] - Frederick Vettese
There are two big reasons why people retire earlier than planed. The first is that their employer pushes them out. The other reason is health. Once you lose your regular full-time job, you're very unlikely to find another one, or at least one that pays nearly as well. In most cases, the best you can hope for is to work freelance or on a contract basis, and even then, you'll probably make less money. [2021] - Frederick Vettese
The average real return for US stocks over the two hundred year period ending in 2001 was 6.7% a year. For Canadian stocks, the average real return from 1924 to 2019 has been 6.6% (the lowest real return on Canadian stocks over any 30-year period since 1924 was 3.6% a year and that happened from 1965 to 1994). Stocks have done well pretty much everywhere, at least in developed countries (with the possible exception of Japan). From 1924 to 2019, the average compound return on bonds in real terms has been 3.1%. It's a near-certainty that bonds will not produce anywhere close to a 3% real return over the next 30 years. [2021] - Frederick Vettese
My recommendation is a little more heavily weighted toward equities than the average target date fund (TDF). It's based on the fact that interest rates are so low right now that the prospects of a decent return on bonds are very slim. If bond yields make a strong upward move in the coming years, then it should make sense to increase your weighting in bonds, but only after that upward move has happened. [2021] - Frederick Vettese
Many investment firms and insurance companies offer something known as target data funds, or TDFs for short. These funds start with a heavy weighting in equities and then slowly increase the weighting in bonds over a period of many years. For instance, a TDF based on retirement in 2055 might have an 85-15 asset mix today. As you get closer to 2055, that mix will slowly change to something like 50-50. The main disadvantage is that TDFs tend to be more expensive than if you try to manage the asset mix yourself using low-cost ETFs. The other disadvantage is that you might think the asset mix in a particular TDF is too conservative. [2021] - Frederick Vettese
If I was in a high-income bracket and had maxed out on my contributions to RRSPs and TFSAs, but I still wanted to invest more, real estate might be the way to do it. It's more tax-effective than some types of investment. Also, it would be a good way to take advantage of low interest rates. [2021] - Frederick Vettese
What has been happening in the Toronto and Vancouver housing markets literally cannot go on forever. Home prices in these cities might remain high, but future increase in those prices will eventually moderate. [2021] - Frederick Vettese
A reserve mortgage is a way to borrow against the equity in your home without having to pay it back, at least not in your lifetime. The institutional lender would give you a lump sum, or better still, a series of payments over a period like 10 or 15 years. The interest they charge for a reserve mortgage is a little higher than the interest you would normally pay on a first mortgage or a home equity loan. If you ever decide to move, you would have to repay the loan immediately. For that reason, you probably shouldn't think about getting a reveres mortgage until you're 75 or so. If you were 75 and needed income, a reverse mortgage is recommended. [2021] - Frederick Vettese
We're getting older as a population, which means fewer borrowers and more savers. That's why interest rates are so low and why they're going to stay low. On the other hand, whatever is causing the low interest rates may also cause company earnings to grow more slowly in the future. As a result, the dividends on those stocks might grow more slowly too. If so, stocks may be overvalued after all. I'm inclined to go with a real return on equities of 3.5-4% over the next 30 to 40 years. [2021] - Frederick Vettese
Ideally, your marginal tax rate at the time you contribute to an RRSP should be higher than it will be when you start drawing an income from those savings. To measure the impact with precision, you would need sophisticated tax-optimization software, the type that is being developed by a firm called mygoals. Tax efficiency is the main reason for splitting contributions between an RRSP and a TFSA. Another reason is that you never know when you may have to dig a little deeper for some emergency spending in retirement. If you withdraw a large lump sum from your RRSP, it could catapult you into a higher-income tax bracket. You can avoid that by withdrawing the necessary funds from a TFSA instead. [2021] - Frederick Vettese
You should contribute the maximum optional contributions (say 4% of pay) matched by the employer. By contributing the full 4% optional contribution, you are effectively getting a 4% raise. Better still, the company's 4% matching contribution isn't taxed in your hands. At least not until you retire and start drawing an income from your savings. Another way to look at it is that your 4% contribution earns an instant 100% return. [2021] - Frederick Vettese
How much to save for retirement? If I absolutely had to provide a one-size-fits-all flat percentage of pay, I would make it 12% with the caveat that you might have to change that percentage as you get closer to retirement. If I could express it differently, I would suggest saving 5% of pay in your 30s, 15% in your 40s and 25% in your 50s. This alternative represents a rough approximation of the Rule of 30. [2021] - Frederick Vettese
As of January 1, 2021, the maximum OAS pension for an individual who started payments at age 65 is $615.37 a month. One needs to have been resident in Canada for 40 years after age 18 to receive the maximum, otherwise the pension is pro-rated. OAS pension rises quarterly in step with increases in the Consumer Price Index. If you were 65 in 2021 and had income over $79,845 in that year, you would have to pay back some of the OAS pension you were receiving. OAS income is essentially "clawed back" at the rate of 15% of your income that is in excess of $79,845. You would receive no benefit at all from OAS pensions if your earnings were over $129,000 in 2021. [2021] - Frederick Vettese
There are several reasons why future stock market returns will be lower than we are used to seeing. One is that inflation will probably be closer to 2% rather than the average of nearly 4% that has prevailed since 1960. Another is that pension fund managers invest about 60% in equities rather than 50%. A third reason is that the bond portion of portfolios will not do as well in the future because interest rates are so low. Long-term bonds can achieve high returns when interest rates go from high to low because they are producing capital gains as well as regular interests. For this reason, it's practically impossible to obtain high returns on bonds when the starting point is low interest rates. [2020] - Frederick Vettese
The best hope for decent returns in the years to come - by which I mean a return of 5% a year, not 8% - is to invest in stocks, risky as they are. I would recommend a 60-40 asset mix over 50-50 in the case of a recently retired couple, provided they have some tolerance for risk. [2020] - Frederick Vettese
The Canadian Institute of Actuaries (CIA) confirms the benefits of rebalancing the asset mix on a regular basis (such as once a quarter). Over the long run, this practice can add up to 50 basis points to the annual return. [2020] - Frederick Vettese
Age 65 is the age when (a) you pay less to get into the movie theatre or take public transit, (b) your prescription drugs are paid for by the government, and (c) you can start to receive OAS pension. [2020] - Frederick Vettese
Deferring CPP pension to age 70 forces you to draw down your RRIF assets (or other assets) more quickly before age 70, but those same assets last longer because the CPP pension from age 70 and on is so much bigger. This strategy is only for people with significant savings. For a couple, the threshold is about $400,000. For a single person aged 65 at retirement, it would be about half that. You probably will not want to defer your OAS pension unless your income after 65 is high enough to be subject to the OAS clawback rules. In the case of OAS, the pension at age 70 is only 36% higher than at age 65, not 42%. [2020] - Frederick Vettese
Bond yields more likely stay extremely low for a long time to come, and possibly go even lower I believe that low interest rates are mainly the result of an aging population, not the Great Recession and not COVID-19. Having more people who are over age 50 changes the balance of supply and demand for money, since older people tend to be savers rather than borrowers. Our ratio of older to younger people now is very similar to what it was in Japan 20 years ago. Interest rates there 20 years ago were about the same as ours are today, and their rates have hovered near zero ever sine. [2020] - Frederick Vettese
You should be earmarking about 20% of your tax-sheltered assets for the purchase of an annuity at the point of retirement. Buying an annuity is not as effective a strategy as it used to be now that interest rates are so low. That can change, though. Don't even think about buying an indexed annuity. [2020] - Frederick Vettese