Rempel Maximum – 5 Steps to Becoming a Multi-Millionaire
Remember the show “Who wants to be a millionaire?” Are you the kind of person that wants to build some serious wealth? Live an exceptional life? Be financially free?
I don’t mean just a comfortable amount. I mean a lot – like being a multi-millionaire.
The truth is, average people can become very wealthy just by managing their money for maximum growth.
Prefer an overview? Like videos? Check out our whiteboard video, or read the full post below!
The chart is based on “The Story of Joe & Rich”. This story is an extreme version of the life of an ordinary person managing his money exceptionally.
I’m not talking about a “get rich quick scheme”. I’m talking about a solid, reliable way to become wealthy over time.
The “Rempel Maximum” is a process to build as much wealth as you can in a solid, reliable way. There is a list of strategies that could potentially be part of it. You can choose which of these tools make sense for you and how big or small to go.
The Rempel Maximum is the quest to find the methods most likely to build wealth reliably. It is best to think of the it as a concept – a set of tools, not a recipe. Do none of it, a bit, or the amount you are comfortable with and that will give you the life you want.
Important things to know first:
- Doing these ideas to the maximum is probably not for you. It is only for the perhaps 3-5% of people that are aggressive wealth-builders, have a high risk tolerance and are highly motivated to become wealthy. Even these wealth-builders should probably not push it to the maximum.
- Why become wealthy? You may think that is a strange question, but motivation is important.
It’s not about the money. It’s about your life.
I have been working with a select group of wealth-builders for quite a few years. They each have their own personal motivation, but mainly:
- Wanting more out of life. They are not satisfied with a typical, middle class life. They want to do something exceptional or live life to the fullest.
- Knowing they will be able to do whatever they want. This could include retiring early, extensive travel or “fun money”, supporting their family, or becoming a philanthropist. They want to know they could afford to do anything.
- Security (with a huge buffer). A large nest egg means they do not have to worry about money.
- Being financially independent creates a great feeling of self-confidence.
What is your motivation?
- What does Ed know?
I decided 25 years ago that I wanted to live an exceptional life. I want to build a large portfolio to be financially free.
For me, it’s not having just enough that, if I am super-frugal, I can live without a job. It’s not just a round number like $1 million. For me, it’s about feeling self-confident and being able to make the biggest difference in the world.
I started my quest 25 years ago to figure out the best way to achieve this.
- Being a Fee-For-Service Financial Planner (CFP), a tax accountant (CPA) and reading hundreds of financial books gave me the background knowledge. I learned an “unconventional wisdom” – much of what most people believe about finance is wrong or not optimal.
- Being a motivated & creative math guy, I love developing strategies.
- Writing nearly 1,000 professional financial plans, including quite a few for wealth-builders.
Here are the Rempel Maximum 5 steps to building maximum wealth:
- Financial plan – Without a plan, a goal is just a dream. Specific written goals and the strategies to get there. These are big, risky strategies and you need to think them through. There is a reason that people with a financial plan on average have 4.2 times more wealth (CIRANO study).
- “Stocks for the long run” – The investing “bible” by Prof. Jeremy Seigel showed that stocks are the highest return asset class. They are risky short and medium term, but what most people don’t realize is that growth is reliable over the long term (25+ years). The process can be done with real estate, but stocks have much higher long term growth.
- Leverage – All wealthy people borrowed to invest. The bigger the leverage, the more wealth you can build – assuming you can stick with it long term. The main mistake is not thinking big enough.
Leverage is risky, but the risks are reasonable if you invest reliably for the long term and take steps to make sure you never sell after a decline – for financial or emotional reasons.
You have to qualify for any investment loan or credit line. When you are young and have a low income and net worth, your loans may be small. With a good credit rating, as your wealth builds, you should be able to qualify for much larger loans or credit lines.
- Tax-efficiency – Minimize and defer tax. Invest tax-efficiently. The tax rules provide many creative opportunities that make a huge difference.
- Faith, Patience & Discipline – The mindset necessary to build wealth. The biggest risk in the Rempel Maximum is your behaviour. Major declines are buying opportunities. Your mind must be in the right place – always focused on long term growth.
Why does this work? The Rempel Maximum is based on 5 power principles:
- The power of the plan – It’s hard to over-state the importance of a plan. Decide what you want to accomplish, how big or small to go, and what tools make sense for you. Don’t get side-tracked. Know your next step. Visualize your ultimate goal.
- The power of compounding – The “snowball effect”. “Compound interest is the eighth wonder of the world.” (Albert Einstein) Building wealth means having the largest amount invested for the longest time.
- The power of leverage – Borrowing to invest magnifies your gains and your losses. Investing effectively for the long term means you are highly likely to get magnified gains. Borrowing to invest should be for a minimum of 25 years to be most confident of success.
- The power of free enterprise – Be an owner, not a loaner. Invest in great businesses. The worst 25-year period in the stock market (S&P500) has been:
- Last 150 years – 5%/year.
- Last 80 years – 8%/year.
- The power of the mind – “What you focus on grows, what you think about expands, and what you dwell upon determines your destiny.” (Robin Sharma)
What are the risks:
- Your behaviour – Avoid the 2 big mistakes:
- Big mistake #1 – Selling after a market decline. This is the main risk of borrowing to invest. If you might sell even once in the next 30 years after a big market crash, don’t borrow to invest.
- Big mistake #2 – Chasing performance. The Dalbar study has shown over the years that the average investor loses 3-6%/year because they buy popular investments that have performed well recently and then sell when they become unpopular. Think of your portfolio as a bar of soap – the more you touch it, the smaller it gets. Invest with a solid, proven strategy/style and stick with it.
- Too far/too fast or over-confidence – Your growth needs to be sustainable. Make sure you can always make your payments. Investment loans should never be subject to a margin call. Have a buffer for emergencies.
The Rempel Maximum is a process, not a recipe. You can go big or small. It can include any of these tax and investment strategies (tools):
- Automatic investing – Pay yourself first. Be frugal, so you can invest 20-50% of your income.
- 100% equity investing – “Stocks for the Long Run”. Invest for long term growth, not income.
- Smith Manoeuvre – Use your home equity to build wealth without using your cash flow. Convert your mortgage to tax deductible interest over time.
- Lifecycle Investing – The ultimate strategy for Millennials and renters. Avoid “last decade” risk. Slowly building wealth the traditional way leaves you at risk of one bad decade just before you retire. Reduce risk by diversifying across time.
- Leveraged investing – Borrow to invest with an investment loan. Can be an enhancement of the Smith Manoeuvre or Lifecycle Investing.
Here are some possible examples to illustrate the concept of Rempel Maximum vs. conventional wisdom:
- Conventional methods – Save 10% of your income and keep a large amount for emergencies.
Rempel Maximum – Be frugal. Save 20-50% of your income. Invest mainly for long-term growth.
- Conventional methods – Save down payment for home. Pay off mortgage. Then save for retirement.
Rempel Maximum – Save 20% down, possibly using an RRSP loan. Do Smith Manoeuvre, possibly with additional investment loan. Focus cash flow on maximizing RRSP & TFSA.
- Conventional methods – Invest to “sleep at night” in a diversified portfolio of stocks, bonds & cash.
Rempel Maximum – Invest 100% in “stocks for the long run”.
- Conventional methods – Save & invest $10,000 per year.
Rempel Maximum 1 – Save $10,000 per year. Take 3:1 loan every year. Invest $40,000 per year.
Rempel Maximum 2 – Take a $250,000 investment loan with interest payments of $10,000/year.
- Conventional methods – Retire debt-free and invest conservatively to protect capital. Senior on a “fixed income”.
Rempel Maximum – Retire with a rising income, not a fixed income. Invest focused on equities to make more than inflation and have the maximum sustainable income. Keep your investment credit line right through retirement until you sell your home.
The “Rempel Maximum” is a process to build as much wealth as you can in a solid, reliable way. It is best to think of the Rempel Maximum as a concept – a set of tools, not a recipe. Do none of it, a bit, or the amount you are comfortable with that will give you the life you want.
It can include a variety of tax and investment strategies (tools). You can choose which of these tools make sense for you and how big or small to go.
There are 5 steps. Always start with a written plan to decide exactly what you want to accomplish and why, what tools make sense for you, and how big or small to go. Don’t start on the road until you know where it leads for you.
Be frugal. Save and invest 20-50% of your income. Invest the highest portion of equities that you are comfortable with. Borrow to invest as high as you can tolerate. This could be part of the Lifecycle Investing strategy or the Smith Manoeuvre strategy. Make sure you can stick with it during market crashes.
Then have faith in equities, discipline to stick with it, and patience to be a good investor.
It works because of the 5 power principles.
Doing these ideas to the maximum is probably not for you. There is nothing wrong with a conventional life.
It’s not about the money. It’s about your life.
The benefits of being wealthy are hard to put into words until you get there. There is the obvious great lifestyle, but the emotional benefits are most important.
Security. Freedom. Self-confidence. These are priceless.
Read “The Story of Joe & Rich”. This story in one example of these principles. It is an extreme version of the life of an ordinary person managing his money exceptionally.
Planning With Ed
Ed Rempel has helped thousands of Canadians become financially secure. He is a fee-for-service financial planner, tax accountant, expert in many tax & investment strategies, and a popular and passionate blogger.
Ed has a unique understanding of how to be successful financially based on extensive real-life experience, having written nearly 1,000 comprehensive personal financial plans.
The “Planning with Ed” experience is about your life, not just money. Your Financial Plan is the GPS for your life.
Get your plan! Become financially secure and free to live the life you want.
Yes, TDSR can be a limiting factor for the Rempel Maximum.
With time there are a few ways to increase it:
– Your income hopefully rises by inflation or a lot more.
– With a strong credit rating, banks can stretch the TDSR to 42 or 45 or even 50, with mitigation comments, if you have a good banking person.
– Your home may grow in value or you may buy a more expensive home. Having a home as collateral for a larger HELOC is helpful.
– The criteria are generally more flexible with 3:1 investment loans. You can pledge existing investments or cash for a 3:1 loan, which is often necessary to maximize the Rempel Maximum.
It can take some creativity to get the maximum into the Rempel Maximum.
You made a comment earlier (quoted below). I’m wondering, wouldn’t your 35% TDSR eventually cap you from getting more investment loans? Especially if you are investing in a tax deferred vehicle (i.e. no dividends being paid)? How would you be able to continually get investment loans, if you have a stable salary that only increases similar to inflation over the years.
“Don’t be too disapointed if you cannot borrow as much as you would like while you are young. Many younger people can only qualify for $30-50,000 at first, but the maximum they can qualify for may rise by 30-50% per year. It’s a long term strategy. After 10 years of pushing it, you can get to higher figures. After 20 years, you can get into seriously high figures, if you can stomach that.”
thanks for the reply Ed, makes a lot of sense.
Before I answer your question, I just want to say I find predicting future longer-term stock market returns using CAPE or interest rates is highly inaccurate and of no value.
For example, CAPE is based on the stock market P/E ratio over the last 10 years. The actual P/E ratio has been between 14-18 essentially all of the last 15 years, except for 2009 when it was over 120. Profits temporarily collapsed after the financial crisis causing a super-inflated CAPE ratio for the next 10 years. CAPE was 29 in 2017, but predictably plunged to 21 now. We all knew for the last 10 years that CAPE would plunge to around 20 or lower as soon as 2009 dropped off the 10-year window for CAPE. All predictions based on this highly-inflated CAPE for the last 10 years were useless.
Using bonds for a stock market prediction is equally useless. If you look at the 100-year graphs here: https://edrempel.com/high-risk-of-bonds/ , you see that long-term stock market returns after inflation are far more predictable than bond market returns after inflation. The 100-year graph here https://milliondollarjourney.com/death-of-equities-%E2%80%93-again.htm shows stocks follow a long-term after-inflation trend line, but bonds don’t. Bonds had a 10-year period where they lost 50% of their purchasing power, followed by a 40-year period with good gains. Why use unpredictable after-inflation bond returns to try to predict far-more-predicatable after-inflation stock market returns?
More reliable predictions are the 100-year graph here: https://milliondollarjourney.com/death-of-equities-%E2%80%93-again.htm showing long-term stock market returns have reliably been close to inflaiton + 6.6%. Inflation is about 2%, so perhaps 8.6%?
Another more reliable method is looking at 25-year returns here: https://edrempel.com/can-confident-stock-market/ . The worst 25-year calendar return of the S&P500 in the last 90 years was 8%/year (actually 7.9%), so it’s reasonable to expect at least 8%/year – even if the next 25 years are a low-return period. The long-term returns have been about 11% and inflation is about 2% lower than the average since 1950, so perhaps 9%/year going forward?
These last 3 years should be far more accurate than using CAPE or bonds to try to predict stocks.
Now to answer your question, Nicolas, the general rule is that your investments need to average about 2/3 of the credit line interest rate over time for you to be ahead. This is because of the tax differences being compounded, with the interest fully deductible every year, while the investment returns are mostly capital gains taxed at preferred rates and mostly deferred years into the future.
I reviewed Talbot’s Steven’s book on “Conservative Leverage” about 25 years ago. He used 9% interest rates at that time for his examples. He showed that with investments averaging 6%/year for 10 years and paying 9%/year on an investment credit line, you breakeven.
Today, secured credit lines are about 3%, so a long-term investment return above 2%/year will probably give you a net gain after tax.
Great article Ed, thank you for all the information you provided. I’m curious to know your opinion on the fact that many people believe the stock market will provide lesser returns in the future, would borrowing at 4% to make a possible 6% still be interesting?
Great question! It comes up in every Financial Plan I write.
You have a choice between TFSA, RRSP and a non-registered leveraged investment. Which is better?
You can have identical investments with the 3 options, so the differences come from tax and amounts invested.
As a general rule, if you invest effectively, a leveraged investment is normally be far the most effective. You have to understand the risk and commit for the long-term and it is not for everyone, but strictly from the math, a leveraged investment gives you the highest long-term growth.
For example, if you borrow $100,000 to invest at 4%, you pay $4,000/year in tax-deductible interest payments. You could use that $4,000 to contribute to an RRSP and get the same tax deduction. The difference is that with the leveraged investment, you have $100,000 invested vs. $4,000 in an RRSP.
If your investment makes a long-term equity return of 8%/year, you are up 4%/year or $4,000/year. In the RRSP, you make $320/year. No comparison.
Of course, you have to invest so that your long-term return is higher than the 4%/year interest cost. With leverage, it is very common to invest 100% equities, since it is not really smart to borrow to invest in bonds. Borrow at 4% and invest at 2% with no tax-deferral?
In short, leveraged investing has far higher long-term growth potential than RRSPs or TFSAs.
Looking only at the tax differences between RRSP, TFSA and leveraged investing, the first factor is your marginal tax bracket today vs. when you withdraw from your investment.
In most cases, you invest while you are in your working career and you withdraw decades later when you are retired and probably in a lower tax bracket.
Here are the general priorities:
1. If your marginal tax bracket today is higher than when you withdraw the investments, then RRSP is generally the most effective, then leveraged investing, and lastly TFSA. Contribute and get a 40% tax refund, then withdrawing decades later paying 20% tax is a winner.
Leveraged investing generally beats TFSA for tax consequences, if you invest tax-efficiently. With TFSA there is not tax. With leveraged investing, most of our clients get refunds most years, even after many years when the investments are up a lot and they are retired and withdrawing from their investments. The interest if fully tax-deductible every year, while the income is mostly deferred capital gains taxed at lower rates and deferred for many years or decades.
This would not be true if your invesmtents trigger a lot of annual tax.
2. If you are in the same or lower tax bracket today vs. when you withdraw, TFSA beats RRSP. For example,if you are in the lowest 20% marginal tax bracket today, you will retire at the same or higher tax bracket, especially when you take into account other government benefits that you may lose based on your taxable income. Then TFSA is better.
When your tax bracket is the same now and when you withdraw, TFSA still generally beats RRSP. The math is complex, but the short answer is that you have to “top up” your RRSP every year for RRSP to keep up with TFSA.
I am a big fan of Lifecycle investing and respect your take on the strategy with Rempel Maximum.
I would love to know your thoughts on investing in a RRSP vs leveraged taxable account.
For example, If an individual has maxed their TFSA, would it be wiser to invest into a taxable account (with leverage/margin) or into a RRSP with no leverage? Which account would generally have a higher balance after a long period of time?
Great post. I was checking constantly this blog and I am impressed! Very useful info specially the last part 🙂 I was looking for this certain information for a long time. Thank you and best of luck.
Thanks for much for the kind words. I’m glad my blog & ideas have been helpful for you.
Ed, I’m always surprised by how detailed and helpful your articles are… compared to other blogs. The same goes for all your comments. With your help I’ve implemented a lot of your strategies and am definitely on my way to become a multi-millionaire.
Please keep them coming. I’ll for sure buy a few copies of your book whenever you write one. 🙂
I used to love to watch “Who wants to be a millionaire”. Thanks for detailing out the steps.
Thanks Ed for the detailed reply.
Thanks for the kind words, Jamie.
Your maximum feasible leverage depends on a few issues:
1. The most important is how much leverage you can emotionally tolerate. The way I suggest to look at it is how much of a decline can you tolerate in a 30-40% market crash without feeling like you have to sell or switch to something more conservative? For example, if you borrow $100,000 to invest and a year later, the investments are at $60,000, will you be able to stay invested? Better yet, will you want to buy more while it is low? If you think you would switch to something to avoid losing more, then $100,000 is too high for you.
2. Investment leverage can be a combination of investment credit lines and investment loans. Both have issues:
Credit Lines: If you have a home, you can have a secured credit line based on your equity. Unsecured credit lines are also available, but usually at higher interest rates.
Investment loans: The most common types are 100% loans and 3:1 loans. 100% loans are harder to qualify for. Usually, interest-only loans are preferred (You probably want to focus cash flow on non-deductible debt or on more investments.), but they can be harder to qualify for than P+I loans. You have to qualify with the bank, plus if you are working with a financial advisor you have to qualify based on guidelines advisors have.
The genearal guidelines are a TDSR under 35% and total leverage less than 30% of net worth. You have to make a strong case if you this is not enough for you.
In general, mutual funds and segregated funds are the only equity investments accepted as colateral. Individual stocks and ETFs are considered too high risk for the bank.
Depending on which issue is stopping you from borrowing more, you may be able to focus on that issue. For example, sometimes the most effective strategy is to forget RRSP and TFSA. Invest all your available cash in non-registered investments and pledge them for a 3:1 loan. You have to figure out whether or not that grows your wealth faster than RRSPs or TFSAs.
Too get the maximum, be save a large part of your income (20-50%) and build your net worth. Invest for long term growth. As your net worth and income grow, you can increase your leverage.
This process may start relatively slow if your income or net worth are low. But it compounds with time. There is a list of factors that all rise over time:
– You can save & invest every year.
– Most years your investments grow.
– Your net worth grows from the 2 above and as your debts are paid down.
– You can reinvest your tax refunds.
– You can pledge other investments for larger loans.
– Your income rises.
Don’t be too disapointed if you cannot borrow as much as you would like while you are young. Many younger people can only qualify for $30-50,000 at first, but the maximum they can qualify for may rise by 30-50% per year. It’s a long term strategy. After 10 years of pushing it, you can get to higher figures. After 20 years, you can get into seriously high figures, if you can stomach that.
In general, you should not do leverage where you cannot afford to make the interest payments. You can borrow to pay the interest payments (“capitalize” them). Capitalizing is part of the Smith Manoeuvre and can be used with other leverage.
Most people should not be pushing for the maximum here. However, for the small number of aggressive wealth-builders, this is the process.
Great article! Really puts your past story/article into perspective. In your experience, what is the maximum amount of feasible leverage? And how does one maintain that while not use their income to service a very large loan?