What is the Smith Manoeuvre and how do you do it the right way?
The Smith Manoeuvre is a strategy where you borrow against your home to invest for your retirement. It converts your mortgage over time into a tax deductible credit line.
To do it the right way, there are three key points:
You should not take monthly income from the investments. You need to do it for the right reason and you need to choose the right strategy.
If you’ve read about the Smith Manoeuvre on the internet, you’ve probably actually read about the Smith/Snyder. The difference is with the Smith Manoeuvre there is no payment from the investments. If you’re taking monthly payments from the investments – that’s the Smith/Snyder.
You need to be careful taking any income from the investments. It can create tax issues and actually reduces the benefits from the strategy.
It’s also important to do the Smith Manoeuvre for the right reason. It should be for your retirement savings – not to pay the mortgage off faster. If your goal is reducing debt, then borrowing to invest is probably not the right strategy for you.
And there isn’t just the Smith Manoeuvre. There actually 7 different strategies. You should choose the right one.
Why would people want to do it?
The main reason is to save for your retirement without using your cash flow. In helping our clients save for their retirement, we found often there was a trade-off between your lifestyle today & your lifestyle in the future. Many have a family and things they want to do now, but still want a comfortable retirement.
The Smith Manoeuvre uses equity in your home to invest instead of using your cash flow. That often makes the difference so that our clients can achieve their retirement goal without cutting into their lifestyle today.
It is borrowing to invest, which is a strategy that can give you higher returns over time.
The common mistake for investors that want to make a higher return is to buy riskier and riskier investments. The problem is that risky investments can be less reliable. A more reliable method is to stick with solid investments and leverage them for the long term.
How do you deal with the risks?
Borrowing to invest is a risky strategy. This is not for everyone.
Here’s how you deal with the risks:
1. It must be a long term strategy: You should intend to do it for 20+ years. The risks are much lower long term.
2. We are selective on who we recommend it to. About 2/3 of the people that want to work with us are not right for this strategy. We need to be confident that you are the type of person that will be able to stick with it long term, through the inevitable bear markets. You must be able to stay invested through down markets.
3. It must be part of your long term, written plan. This keeps you focused.
4. You should get advice from experts. The Smith Manoeuvre is easy to do, but also easy to mess up.
How can you help Canadians become wealthy?
I looked at the Forbes 400 richest Americans to see how they made their money. All 400 made their money by borrowing to invest – either into a business or the stock market – that is, except for a few who inherited it from someone that did.
Borrowing to invest is the method used by the wealthy to build their wealth.
If you have a long term viewpoint, then borrowing to invest may not be as risky as people think. If you want to be wealthy – act like the wealthy.
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.
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