The Huddle – Open Forum

Most people have burning questions about their money. The most common are:

  • Worrying about cash flow being tight.
  • Worrying about paying debts.
  • Worrying about outside forces that could hurt you, such as unemployment (if the economy goes into recession) or the risk of losing money with your investments.
  • Worrying that you are not getting ahead.
  • Wanting to buy something, such as a nicer home or car.
  • How to pay less tax.
  • How should you invest?
  • When will I be able to retire?
  • Worrying about how to pay for your kids’ education.
  • What happens if something happens to my spouse/partner?
  • Which of my worried and wants is priority?

This is where you can get answers to these important questions on your mind.

The Huddle is an open forum. Ask your question – any financial question or question about your life that has financial implications. Your money and your life are intertwined.

I will try to give you my wisdom from experience. Other readers may give their views. I may point you to articles to read. This will also be a source for me for future articles.

This is a safe place and constructive forum. The only rules are:

  • No personal attacks.
  • No specific investments.
  • No sales pitches.

What is your burning question?

22 Comments

  1. Penelope cumas

    I have no private or work (except for $125 monthly) pension. 1 have about $320,000 in investments and cash through a bank investment officer (clerk?). I am in good health (fingers crossed) and don’t know how to handle my money so that I can live decently without raising money. Right now, my rent is $850 but the landlord is planning on selling and I may be facing a $1000 monthly. I live alone.

    I’m giving too much information, but I hope,this just a beginning towards financial sanity? What do I do?

  2. Penelope cumas

    I have no private or work (except for $125 monthly) pension. 1 have about $320,000 in investments and cash through a bank investment officer (clerk?). I am in good health (fingers crossed) and don’t know how to handle my money so that I can live decently without raising money. Right now, my rent is $850 but the landlord is planning on selling and I may be facing a $1000 monthly. I live alone.

    I’m giving too much information, but I hope, this is just a beginning towards financial sanity? What do I do?

  3. Penelope Cumas

    I am truly confused. I thought the comment was above. Just don’t know how to use this site.

  4. Ed Rempel

    Hi Penelope.

    I can feel your worry. Why don’t we talk privately to see how I can help? I’m concerned about your privacy, since this is a public page intended for general discussions.

    Without knowing your situation, here are some general comments.

    Based on many other seniors I have worked with, there are some common strategies that often help.

    Many seniors have a very low income because they invest too conservatively. For example, they might have mainly GICs or bond mutual funds. Their investments don’t make enough money. Often, this is due to lack of understanding about investments. With some education about investments, it is possible that you will feel comfortable with different investments that can better support your lifestyle.

    Sometimes guarantees can help invest more effectively. Some seniors feel more comfortable with investments that offer more growth if they have guarantees.

    There are 2 main types of of guaranteed investments:
    1. Investments with principal guarantees.
    2. Investments that pay a guaranteed income for life.

    Many seniors also have much of their government benefits “clawed back”. In your case, you may qualify for GIS, which is clawed back by 50% of taxable income. If you can invest more tax-efficiently, you may qualify for significantly more government benefits.

    If you go to “Contact” on my site and give me a phone #, I’ll call you to see if I can help you figure out what to do, Penelope.

    Ed

  5. CaroleQuestions

    Hi, I would like some clarification on your Million Dollar Journey comment (May 21, 2013, 9:18 pm): “… Converting the tax deductible credit line back to a mortgage portion once the mortgage is gone or nearly gone sometimes makes sense anyway. The interest rate is lower on a mortgage and a small increase in the payment will actually pay off everything over time. The downside is that your tax deduction is smaller.”

    My questions is specifically related to that last sentence.

    I have paid off my mortgage and am using the maximum of HELOC that I had negotiated at the time. I would now like to increase it the HELOC as my home has increase in value but have run into to the HELOC rules. The banks have generously offered to create a new mortgage on my house but I am hesitating… If I understand Mr. Rempel’s statement correctly only 65% of the value of my home would be a true HELOC where the interest would be tax deductible. The additional 15% would be regular mortgage payment consisting of principal (not tax deductible?) and interest (maybe tax deductible???).

    Am I understanding this correctly?

    Thanks, CaroleQuestions

  6. Ed Rempel

    Hi Carole,

    I’m not completely clear on what you are asking, Carole.

    Are you using the HELOC and the additional amount you want to borrow all for investment purposes?

    To be clear, it is the use of the money that determines whether the interest is tax deductible, not whether you have a mortgage or HELOC.

    If you are borrowing 80% of your home value for investment purposes, you can only have 65% as a HELOC. The remaining 15% must be a mortgage with principal plus interest payments.

    In this case, the interest on the mortgage should still be deductible. The principal portion of the payment is not deductible. It is not an expense. You are paying down the mortgage.

    Does this answer your question?

    Ed

  7. Carole

    Hi Ed,

    thanks for the quick response and you understood my question perfectly. I was concerned about being able to deduct the principle and you have clarified that that portion would NOT be tax deductible. That is what I feared and I will need to work the numbers to see if it makes sense to go that route.

    Thanks again,

    Carole.

  8. Ed Rempel

    Hi Carole,

    Glad to help.

    With a mortgage, you get a lower interest rate than theh HELOC, which saves you money but is also a smaller tax deduction. Saving money is good, though.

    However, your overall payment is higher, because you also pay some principal.

    If you are investing 80% of your home value, you have to have at least 15% as a mortgage.

    It can be worth having more as a mortgage, because you can get the lower interest rate and borrow back the extra principal amount to invest. That gives you the best of both worlds – lower interest rates and the extra cash flow is invested.

    Without knowing details and your goals, it’s not a all clear to me what is best for you, but you have some interesting options, Carole.

    Ed

  9. Etta

    The post has actually peaks my interest. I will bookmark your site and keep checking for new info.

  10. Tim

    Hello Ed,

    Can you tell me how Flow Through Shares and Super Flow Through Shares work. Do you ever use these? What are the advantages and disadvantages. Under what conditions would you want to use them.

    Tim

  11. Mark Lennox

    When you are diversifying your investments in retirement and look at the different categories, utilities is always stated as one that is conservative. What percent of your total portfolio would be appropriate in utilities – right now the yield on utilities is very enticing.
    Also, besides power generation, would pipeline companies such as Enbridge be considered a utility or more in the resource sector?
    Thanks very much for your help.

    Best Regards

    Mark

  12. Ed Rempel

    Hi Mark,

    Whether or not to include utitlies and how much to own would be different for different people. There isn’t a correct answer.

    I leave this decision to my portfolio managers. I work with All Star Fund Managers and an Index Plus portfolio manager that are much smarter, more knowledgeable and more experienced at stock selection than I.

    High dividend stocks, such as utilities, are often called “bond equivalents”, because they typically are purchased for their dividend, not growth. Yes, Utilities can include pipeline companies and some large infrastrucure companies.

    In general, I don’t see them as safer than a broad equity portfolio for providing for a 30-40 year retirement. You can suffer a permanent loss of capital during periods of rising interest rates or high inflation. Broad equity markets have more reliably provided returns over long, 25-year or more periods of time in the last 150 years.

    You are correct in that utilities tend to be more conservative. Then tend to be less volatile in short or medium-term periods of time, although more volatile than bonds. They make sense for people with a lower risk tolerance and/or shorter time horizon that would not be able to stay invested for the long-term with a broader equity portfolio.

    Ed

  13. Hiren

    Hi Ed,

    I was wondering if Smith Manoeuver can be used with TFSA. We have $80,000 of equity and HELOC is available at Prime + 0.2% (3.65% as of today). Annual interest cost to borrow all of equity ($80,000) would be $2920. I am in 36% marginal tax bracket, so tax refund would be $1051. Let’s assume 8% return on borrowed money of $80,000. So annual return is $6400. Half of that is taxable. $3200 will be taxed at 36% costing me $1152. So taxes on investment ($1152) exceed tax break on borrowed money ($1051) in this case. I think this will be even more pronounced as difference between return on borrowed money and tax break on borrowed money increases.

    I am wondering if it is better to deposit the borrowed money from HELOC into TFSA and invest inside TFSA account. Yes, I won’t get the tax break on interest but I won’t have to pay taxes on return generated from borrowed money either. Since the taxes on return works out to be larger than tax break on interest, isn’t it better to go down this road?

    I am very curious to know your thoughts. Thanks you so much for your help.

    Best Regards,

    Hiren

  14. Ed Rempel

    Hi Hiren,

    Good question.

    If you invest tax-efficiently, the Smith Manoeuvre should be able to give you a tax refund most years. This is because the capital gain from the investments can mostly be deferred for many years until you eventually sell the investments. Meanwhile, the interest is fully tax deductible every year.

    The Smith Manoeuvre is most effective if it is part of your retirement plan. That means you can plan to trigger the capital gains after you retire and are in a lower tax bracket.

    The key to tax-efficient investing is deferred capital gains. They are are the lowest taxed type of investment income. This article is helpful to understand this: https://edrempel.com/lowest-taxed-type-investment-income-6-ways-invest-deferred-capital-gains/ .

    Ed

  15. Mat

    Hi Ed, does it always make sense to capitalize the interest on a HELOC (used to create income)? If I have a HELOC interest payment of $300/m @ 4.25% (2.84% after tax) I’m assuming it would always be better to capitalize that $300 and put it towards something with a higher return like my 3.19% principal mortgage or invest it at +5%?
    Thank you

  16. Ed Rempel

    Hi Mat,

    In general, I agree with you. If you can borrow at 4.25% and that is 2.84% after tax in your case, then using that to either pay down a higher interest rate debt or invest for a higher return over time is probably an obviously good idea.

    You need to keep in mind that you are increasing a debt by capitalizing. From month-to-month, this may not be much, but over many years you could add up to quite a bit. As long as you are comfortable with the higher debt, will be able to make the payments in the future, and have a long-term plan on what to do with the debt, then it should be fine.

    Ed

  17. Jason

    Dear Sir

    Grateful if you could kindly let me know if, in principle, a stock outside an RRSP can be transferred into an RRSP account and have it count as an RRSP contribution? Thank you.

  18. Ed Rempel

    Hi Jason,

    Yes, it can count as an RRSP contribution. However, it is not a good idea to do it that way.

    If you contribute “in kind” to your RRSP an investment that has gone down, you will be denied claiming the capital loss. You would get the RRSP contribution, but can’t claim the loss.

    I better idea is to sell the investment, contribute the cash to your RRSP, wait 30 days, and then buy the investment back inside your RRSP. This way, you can both claim the capital loss and the RRSP contribution.

    You need to wait 30 days because of the “superficial loss rules”. If you sell an investment to claim a loss, you need to wait 30 days before buying it back. This is necessary, even if you are buying it back inside your RRSP.

    Ed

  19. John

    Hi Ed,

    Just wondering what you thoughts are regarding a “Cash Cushion” for retirees.

    Should they keep a portion of cash in a savings or money market account in case of emergency’s, or keep the money invested and rely on a line of credit to fall back on?

    Thanks,
    John.

  20. Ed Rempel

    Hi John,

    The “cash buffer” is rule of thumb #5 that I tested here: https://edrempel.com/is-typical-retirement-advice-good-advice-testing-retirement-rules-of-thumb-as-seen-in-canadian-moneysaver/ .

    It seems to make some sense, because you can live off the cash whenever your investments are down, giving them time to recover. You can avoid selling when prices are low, right?

    Sorry. History does not support the Cash Buffer at all. “No cash” has consistently been the safest.

    In fact, I have been unable to find even a single example where holding any amount of cash was safer than no cash. I found studies using global stocks and UK stocks with many different strategies of how to use the cash. No study I found had even a single example of a benefit of cash.

    The drag on your returns from holding cash sometimes caused you to run out of money, but holding cash never protected you from running out of money.

    In addition, if you held cash, you died with a significantly smaller estate to pass on to your loved ones.

    This might be counter-intuitive. The reason is that retirement is long – say 30 years. Stocks usually recover from declines. Holding cash for 30 years means you lose out on a lot of income, plus the loss of purchasing power due to inflation.

    Many advisors use a cash buffer for retired clients, but there is no actual benefit. The only possible benefit is emotional. If it makes you feel safer and you are okay with a significantly lower return on your investments during your retirement, then it can be fine.

    Ed

  21. Tim

    Hello Ed,
    Can you tell me what the approval process is for 3:1 no margin call loans. Is it the same as a regular margin account where it is easy to get approved as the securities act as your collateral. With the no margin call loan how is the loan protected. Do they look at the persons income or ability to pay back the loan?
    Thanks,
    Tim

  22. Ed Rempel

    Hi Tim,

    Avoiding any risk of margin calls is critical for effectively borrowing to invest. Margin calls can force you to sell at a low. If that happens even once in the next 20 years, you can wipe out most of the benefits. You should be very careful with any use of margin accounts.

    No Margin Call loans will hold your investment as collateral, but are based on your credit, income & ability to pay the loan (TDSR), and your net worth.

    They are harder to qualify for than a margin account, but far more valuable.

    For example, you pledge $100,000 and borrow $300,000 for a total of $400,000 of investments. You pay interest only. If there is a big market crash, you just continue to pay interest-only.

    No risk of a margin call means it is truly a long-term investment.

    Ed

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