Savings Squad: ‘Unsaving’ for retirement
By David Trahair
RRSP or pay down the mortgage? It seems every February we are asked to ponder this question. The usual recommendation is to do both: Make an RRSP contribution and use the refund to pay down the mortgage. The problem is that when it comes to personal finances, simple solutions such as this are often wrong. Blindly following them can set people on a path to financial disaster.
First of all, notice that the question is never “RRSP or pay down credit card debt charging 20% annual interest?”
That’s because there is a simple answer to that question: Anyone with credit card debt at 20% per year should not be making an RRSP contribution.
The reason we hardly ever hear a straight recommendation like this is easy: It does not make money for financial institutions. They make money off your debts as well as your investments. That is why RRSP loans are so popular and relatively easy to get. The banks win both ways – they earn interest on your loan and fees on your investments. It’s win-win for them … but lose-lose for you.
Why is the answer so obvious? Because there is no way on earth you are going to beat a 20% annual rate of return consistently even if your name is Warren Buffett.
How can you make a rate of return by paying off debt? Think of it as the absence of a cash outflow, which is as good as a cash inflow and even better if the inflow is taxable. For example, someone with a revolving credit card balance of $ 10,000 will pay $ 2,000 annually in interest at 20%. If the debt is paid off, the $ 2,000 will no longer be flowing out. That is better than earning $ 2,000 in investment income since those inflows would lose a portion to tax – up to 46% in Ontario depending on your tax bracket and the type of income.
There is also the vital issue of what you actually do with the RRSP refund. I have analyzed different spreadsheets and the truth is that if you reinvest your RRSP refund in your RRSP and the rate of return on your RRSP and your debt over your life is the same, you end up with about the same amount in your RRSP whether you make RRSP contributions, pay down debt or use the refunds to pay down debt.
The problem is that many people investing in RRSPs aren’t doing that. They are spending their refunds on trips and toys – enjoying the good life today at the expense of paying tax on RRSP and RRIF withdrawals later. They are effectively “un-saving” for retirement.
It’s okay to be flexible. There is nothing to say that your solution has to be 100% RRSP or debt-paydown. Maybe one year you make an RRSP contribution and your spouse or common-law partner doesn’t, instead using the money to pay down debt. The next year simply reverse roles. That way you really can get the best of both worlds.
So when should you make an RRSP contribution instead of paying off debt? Consider these questions:
Can you afford to pay off all your credit cards each and every month using cash rather than a line of credit?
If you own a home, are you on schedule to pay off the mortgage in full before you retire?
Are you confident that the average rate of return after fees on the investments in your RRSP will exceed the interest rate on your debt until you reach retirement?
Are you now in a mid to high tax bracket (i.e. earning taxable income of at least $ 30,000 per year) giving you a significant tax refund on your RRSP?
Do you think you’ll be in a lower tax bracket after retirement than you are in now?
If you confidently answered “yes” to all those questions, then go ahead and keep making those RRSP contributions. If not, consider making 2012 the year you pay down debt instead.
David Trahair is a chartered accountant and author of Crushing Debt.
Wendy Kopp: We Need to Put Education on the Global Agenda
On arrival at Davos I wrote about how appropriate the “transformation and new models” theme of this year’s World Economic Forum is for framing what needs to happen in education. What I’m realizing a few days into the Forum however is that the topic of education really isn’t on the agenda at all!
We’ve addressed everything but — the threats to our economic strength, our environment, our public safety, our health. We’ve addressed youth unemployment and the need for international cooperation and collaboration. But we just aren’t focusing on education or on the need to address the enormous educational disparities that persist in countries all around the world.
How can this be?
Maybe the world’s leaders have thrown up their hands about the possibility of change in education? And yet as I said in my last blog, there is plenty of evidence around the world that we can have not only incremental change but truly transformational change in education if we channel our leadership energy against it.
Perhaps the issue is that the world’s leaders believe that education is the one issue that is intensely local? What I’ve seen in our own work at Teach For All, however, is that educational disparities are universal in their nature. All over the world, children facing the challenges of poverty attend schools that aren’t designed to meet their extra needs; across country lines, the lives of marginalized kids look far more similar than they do different. At the same time, it’s been amazing to see the institutional patterns at the system level, all over the world.
Given that the nature of the problem is similar across country lines, the solutions will be shareable. So it’s a miss that our leaders aren’t prioritizing a global commitment to expanding educational opportunity.
Imagine a world of decreasing educational levels and growing educational disparities. In that world, the global threats we face only become larger. On the other hand, in a world of improving educational outcomes, our global welfare improves. If the world’s leaders are serious about improving collective well-being, we’d better get serious about prioritizing education, in our nations and in our global discussion.
Hopefully we won’t have to wait for the Davos participant list to be filled with generations of alumni of Teach For All programs in order to see the day that education is one of the main focuses here!
Wendy Kopp, Chief Executive Officer and Co-Founder, Teach For All, USA; Social Entrepreneur, Schwab Fellow of the World Economic Forum
From:The Blog
Why that condo rental might not work
Toronto condominium investors might find themselves disappointed in rental rates, according to a new survey.
“Investors have been able to rent out their condominiums units in Toronto — but not necessarily at the rents they were expecting,” says Altus Group, a real estate research firm, in a new report. “The addition of more than 9,000 condominium apartments units to the Toronto rental stock in the past year has kept average rent increases to a minimum.”
The addition of new 9,000 units to the Toronto marketplace compares with 650 the year before and comes as demand in the city has been strong enough to reduce the overall vacancy rate.
The vacancy rate in Toronto dropped from 1.7% to 1.1%. The surge in supply has kept down average rental rates which climbed to $ 1,608 per month for a two bedroom apartment, up 0.8% from a year earlier.
Across the country, condominiums are increasingly becoming an important element in the rental stock with not much purpose-built rental stock going up.
The report notes condo units are on the rise in all six markets survey which in addition to Toronto include Edmonton, Calgary, Ottawa, Montreal and Vancouver. In Edmonton and Calgary, condo units are 17% and 24% of the rental stock respectively which compares with 10% and 6% five years ago.
ProPublica: Foxconn By The Numbers
An investigative series [1] by the New York Times and a performance piece by Mike Daisey [2] featured on This American Life [3] have put the spotlight on Foxconn [4], the Taiwanese company whose massive Chinese factories manufacture some of the world’s most popular consumer electronics.
As well as working with companies like Dell, Motorola, Nokia and Hewlett-Packard, Foxconn assembles popular Apple products like the iPhone and iPad.
Here’s a quick look at what we know about Foxconn. (The company disputes workers’ accounts [5] of abusive conditions. In a 2010 company report [6], Foxconn said it promotes “employee respect, an atmosphere of trust, and personal dignity.”)
Working for Foxconn
1.2 million: number of workers employed by Foxconn [7] in China, according to the New York Times.
40: Estimated percent of the world’s consumer electronics [7] manufactured by Foxconn.
7: seconds it takes Foxconn’s workers to complete a single step of their work [8], according to a survey cited by the New York Times.
12: Hours in a typical work shift, according to interviews [9] with Foxconn employees [2].
83.2: Average hours of overtime worked each month [10], according to a 2010 survey of Foxconn employee.
13: age of a Foxconn employee Mike Daisey interviewed [2] outside the gates of a Foxconn plant in Shenzhen.
91: cases of underage labor found by Apple’s audits of its suppliers [11] in 2010, the year Daisey visited China.
3,000: number of workers Foxconn could hire overnight, according to Apple’s former worldwide supply demand manager [12].
10-20: percent estimated monthly turnover [2] in Foxconn’s workforce.
$ 7,500: amount founder Terry Gou used to start the anchor company of Foxconn Technology Group in 1974, according to the company website [13].
$ 5.7 billion: Terry Gou’s estimated net worth [14] as of March 2011.
Living Conditions
230,000: number of workers at “Foxconn City” [12] in Shenzhen, according to the New York Times.
13: tons of rice prepared each day [15] at the central kitchen at Foxconn City.
$ 0.65: meal allowance for dinner at the Foxconn City canteen [9] in 2010.
2: number of free swimming pools [16] there, according to The Telegraph, which noted that the pools “are said to be quite dirty.”
70,000: number of workers at Foxconn’s Chengdu plant who live in company dorms [17], according to the New York Times.
20: number of employees sometimes packed into a three-room apartment [17].
200: Reported number of police officers who responded to a Foxconn dormitory riot [17].
Deaths
17: Number of reported suicides [18] of Foxconn workers in China between 2007 and February 2011, according to Wired. Eleven workers died after jumping off buildings in the Foxconn Campus in Shenzhen, which were then draped with preventive netting. (Wired noted that the rate actually seems to be below China’s national averages.)
70: number of psychiatrists employed by Foxconn [19] to prevent suicides, according to a 2010 announcement by CEO Terry Gou.
100: Estimated number of employees at a Foxconn factory in Wuhan who stood on the roof of a factory building this month to protest [20] working conditions and wages. Several threatened to commit suicide, according to the New York Times.
$ 450: monthly salary a worker involved in that protest said employees had been promised [20] for moving from the Foxconn campus in Shenzhen to one in Wuhan.
34: continuous hours a Foxconn employee worked in 2010 before he collapsed and died [2], according to media reports [21].
4: workers killed last year by an explosion at a Foxconn factory [22] in Chengdu, China that assembles iPads [23].
$ 22: approximate daily salary [24] earned by Lai Xiaodong, a 22-year-old college graduate, working at a Foxconn factory in Chengdu, China, according to the New York Times.
$ 150,000: approximate amount the company wired Lai’s family [7] after he was killed in the aluminum dust explosion.
Sign up for ProPublica’s daily email here.
From:The Blog
It’s time for RRSPs to apply for travel visas
By Mark Jasayko and Neil McIver
Over the last couple of years, the geographic diversification of RRSP investments has become as important as remembering the contribution deadline date.
We Canadians may feel inclined to be true to the Maple Leaf with our investments. After all, there are many upsides to living in Canada: Tim Horton’s doughnuts, Hockey Night in Canada and universal health care.
Investing in home-grown Canadian stocks can breed good feelings because of brand familiarity. We have seen evidence of such “investment nationalism” reflected in the lack of foreign exposure in Canadians’ RRSPs in recent years, even though foreign-content limits were completely eliminated in 2005.
The reluctance of Canadian investors to immediately increase foreign exposure after the restriction was lifted initially paid off as the Canadian dollar increased almost 25% against the U.S. dollar over the next five years (although, during the depths of the 2008-2009 financial crisis, the C$ briefly retreated to 2005 levels).
On a currency-adjusted basis, this helped Canadian stocks to trounce American stocks by about 6% (annualized) over those five years — until last year. In addition to that, the strength of our currency internationally was enough to wipe out all the gains if one had broadly invested in international stocks.
But last year, the strategy of “Investing Canadian” began to break down. And, if recent trends continue, a number of factors could adversely affect investors who are overexposed to Canadian securities.
First of all, while Canada has benefited from being a resource exporter in the face of increasing demand for our raw materials from China and the developing world, the pace of economic growth elsewhere is slowing. And our economy will be vulnerable.
The other factor is the C$ itself. It is particularly dependent upon trade flows compared to a reserve currency like the US$ , which represents a safe haven in volatile markets and represents a sizable portion of reserves held by other central banks. The C$ does not have this cachet. If we continue to see stress and anxiety over Europe, the US$ will benefit disproportionately relative to the C$ .
In addition to avoiding pitfalls, there are also some benefits to diversifying out of Canada, especially into U.S. securities. In general, the stocks of U.S. companies represent better value than Canadian stocks. Also, a number of U.S. stocks represent good inflation hedges to protect against the fallout from the numerous money-printing policies pursued by an increasing number of central banks. Many companies should be able to keep increasing dividends during an inflationary episode, something bonds don’t do. All of this will increase investor interest in U.S. stocks.
It is common for investors to continue investing in areas that have already had a good run. However, ‘rearview investing’ is one of the costliest mistakes an investor can make as new markets and sectors take over in a business cycle.
Although investing in Canada has been rewarding over the last number of years, it is time to break old habits and look beyond our border in order to maximize RRSP returns.
Mark Jasayko and Neil McIver are portfolio managers with the McIver Wealth Management Consulting Group of Richardson GMP Ltd. The opinions expressed are their own.
Business
- Wendy Kopp: We Need to Put Education on the Global Agenda
- ProPublica: Foxconn By The Numbers
- Miles Mogulescu: You Can Bet Romney Doesn’t Stash Millions of Dollars in Cayman Islands to Work on Its Tan
- Ryan Holmes: Turning Your Passion Into Your Position: Social Media for the New Job Market
- Motohisa Furukawa: The Search for a New Growth Model