Reader Mail: Babe in the Woods II

Babe in the Woods has contacted me again with a bunch of questions.  After the last response to her questions, she has gone out and read a couple personal finance books and now has more questions. 

So I've just finished reading The Wealthy Barber for the first time, and am pretty inspired. I'm starting to do research on RRSP's and mutual funds, and doing some goal setting, but am confused about a few things. How is the rate of return determined and what can you do to increase it? What are some of the options to big banks, and could I do better with an alternative institution? How do I research which funds and fund managers are the best?
I became more confused when I came across an excerpt from Smoke and Mirrors: Financial Myths That Will Ruin Your Retirement Dreams by David Trahair

He seems to think that mutual funds and RRSPs may be a bad thing because of the baby boomer factor. This is making me think twice, just as I'm about to start my own financial journey. Is there some truth to what he says or is he just blowing smoke? And if it is true would a high interest account be another good option in saving for retirement? My instinct is to trust David Chilton's advice and I like the idea of the split spousal RRSPs, but want to be sure before I start committing to a twenty year plan of action.

Also what would be the best type of account to set up to save for an emergency fund or for things like vacations? I have an old blue chip account with the Royal Bank, so am thinking of looking into their new high interest accounts that you have written about.

My Response: 

The Wealthy Barber is one of my favorite books of all time and taught me a lot in my early years.  Perhaps this is the book that can be introduced to your children when they start learning about personal finance. :)

The 2nd book though I haven't read, but I've read from RRSP naysayers before.  Nobody knows for sure what the markets are going to return in the long run.  Sure, demographics might be a factor, but can anyone really tell for certain?  I would say that they put their strong opinions/hypothesis out there to sell books more than anything else.

If you are planning on retiring in 20 years, you need to work out exactly the income that you will require and work backwards from there.  If you haven't already, check out my "early retirement series".  I did a number of calculations there that help determine the numbers required to retire.  Note that you will have to account for the age of your children when you to decide to retire and big debts (like the mortgage) should be paid off by then.  One of the best books that I've read with regards to planning for retirement is "Why Swim with the Sharks", which is what my early retirement series is based upon.

With that said, a high interest account that pays 4% within your RRSP is "ok" if you want a small cash holding while waiting for the right investment.  However, if you want to retire in 20 years, investing solely in a high interest account will not work.  With inflation being around 2.5%-3%/yr, it would leave you with VERY little growth and probably not enough to retire on. 

With your husband in a higher tax bracket, an RRSP invested in a balance of equities/bonds would be the ideal choice. When you do start looking into equities, look into index ETF's and/or index mutual funds.  If you are just starting the RRSP, I would suggest that you go with bank mutual funds because it will eliminate your annual account fees. 

If you do go with a bank, they will probably try to sell you their higher MER products.  Don't do it.  Simply tell them that you are interested in their INDEX mutual funds.  Also, make sure that there are no annual fees associated with the account.  I know that CIBC has a bank RRSP account that charges no fees providing that you stick with CIBC sponsored mutual funds.  The other big banks should also offer this.  If you'd like to buy the index funds yourself online, TD offers the TD-E funds which have extremely low MER's for an Index mutual fund with no annual fee.

Now to answer your questions specifically:

  • Rate of return is measured by how well the mutual funds/equities/bonds have returned for the year.  This is basically out of your hands, but over the long term (20+ years), equities have returned 8-10%. 
  • You can research mutual funds through sites like:  morningstar.ca or globeinvestor.com
  • For an emergency/vacation fund, setup a high interest savings account.  My wife and I use a combination of  a high interest savings account (@ PC Financial) and personal line of credit.  The RBC savings account is also a decent choice where it currently returns 4%, and if you already have a regular chequing account there, it makes it even more appealing.

Hope this answers some of your questions.  I don't think the main concern is whether it's best for you (or your husband) to invest in RRSP's or not, I think the real question is what investments are you going to buy within the RRSP.  But that's just my opinion.

Disclaimer:  This blog post is meant to be of entertainment value only and under no circumstances should be it be considered financial advice.  I am not a financial professional so any information that you find on this blog should not be considered financial advice.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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FourPillars
13 years ago

Babe – I might have mentioned this in your last post but take your time with the whole financial planning, investment learning. There is no rush and if you want to learn how to do it yourself it can take a while to learn enough to be comfortable.

Mike

Babe in the Woods
13 years ago

Thank you so much, that gives us some very good options and makes things much clearer to me. I hope this post will help other newbies out there as well.

Not to pester you with too many more questions, but how big a portfolio is big enough before you’d recommend switching for future reference? 10,000 or `100,000?

Babe in the Woods
13 years ago

The more I read the more confused I am. Perhaps I should try to do one of these days when I catch up on sleep.

I just came across this website http://www.efficientmarket.ca/article/ETF_Investing

there’s a new acronym “ETF” these are better than mutual funds? the wealthy barber didn’t mention this, or i have to reread things more closely.

Also I was trying to find this out on my own, but at the risk of sounded simple minded, if I set up this account with TD which sounds great, does it mean we have to set up our RRSPs there as well? Do people generally move funds from one bank to another which houses their RSP? or can it, should it, or must it be all done in one institution?

If I take your meaning, the RB high interest account may make sense to save up for things like emergency funds, a downpayment on an investment property, vacation etc, and the TD e fund would smart for a RRSP account at the TD? I wouldn’t move the TD self direct e funds to RSPs at the RB?

Even I’m embarrassed to ask this question. Just trying to figure out how these things work. The charts about the ETF looked a little scary, but hoping to make sense of all these things.

Babe in the Woods
13 years ago

God bless your cotton socks! My grandmother always said what you give you’ll get back seven fold. I hope you get lots of great advice. Thanks again…

Babe in the Woods
13 years ago

oops. first lesson. it’s “RRSPs”.. getting it straight before I embarrass myself at the bank. I was never one for acronyms.

nobleea
13 years ago

some comments:

they recommend contributing lump sums to rrsps early in the year as it has more time to compound. but also because if you do it in january or february, you get the tax refund right away, rather than having to wait another year (rrsp contributions in the first 60 days of the year count towards the previous year’s tax return)

i think Chilton’s advice not to use your rrsp money for the home buyers plan is a good idea. but i also think using the home buyers plan is a good idea. use the bank’s money instead! borrow 20K, contribute it to your rrsp, withdraw it after 90 days under the HBP and give it back to the bank. the large tax refund is yours. technically, it’s a interest free loan of future years tax refunds, but i think we’re all about interest free-anything.

Babe in the Woods
13 years ago

That is all very useful. Thank you so much. We were debating which bank to go with… I already have an account with RBC, and it was looking good in terms on polls on customer satisfactions and ranked first on returns on investment in a globe and mail poll, and won a corporate knight award for ethics. But I’m curious about this Citizens Bank that Nancy mentions. How does it compare? Their high interest account seems to have less fees off the top of my head, and there is something about it being tied to their rsp plan. (I haven’t had much chance to research it, but wanted to ask peoples opinions while I still had a chance (-:) How well established is this bank to risk a 27 year investment and saving plan? Do some banks offer more options with regards to mutual funds than others, or are all RSSPs equal? Do you find your own investments and plonk them in, or do the banks that house your investment portfolio offer you specific choices?

As you see I have a great deal to learn about how things work once we get the split spousal account set up. I guess it’s possible to keep a high interest account in one place and move it to another bank to maximize RSSP’s but is this wise?

That’s a good point about the Smith “move”… and where is spell check when you need them anyway?

Maybe we could do the loan under my husbands income, and do the investments mine to maximize tax benefits? or could it even work that way? would there be any benefit to the SM for us? I can help save for a downpayment, we’d have to get a mortgage under his name, as I likely wouldn’t qualify with my income (athough I may be wrong about that in a few years and if I’ve done some saving and investing.) Other investments like mutual funds could be done in my lower tax bracket.

Either way we have to build our credit over the next few years, and save for that downpayments. after we maximize RSSPs, take care of insurance and RESPs. That 10 percent plan may not be as easy as it sounds, but we may try to give it a shot and see if it’s possible (and see how thrifty we can be before it hurts. I think we’ll need a vacation now and then.) I should do the long term math to see how much we will need in our golden years, but I see I have a lot of painting to do. Or consider a part time job to meet our financial goals when the children start school. (We are lucky to live in the part of the country where you can answer phones for 25 dollars an hour, so it’s tempting.) I believe with hard work I should be able to do it with my art alone, and improving my skills is another kind of investment if keep putting the time in. Art appreciates in value. Mary Pratt could more than meet my yearly goal with “one” painting (although I could be a few decades away from that, and even if I could it would be harder to sell, so it’s all moot.)

Thank you again.