# Advice Please



## RachII (Jan 3, 2011)

Having only gained an interest in matters financial in the past year or two I have been regularly coming to this forum for an education. I hope to get a bit of advice on our situation so here it is:

My wife and I have been together for 15 years. The children are now off on their own with professional designations and both doing well. We only started putting money into RRSP's about five years ago and still have a fair bit of debt.

Me: 41 
Income 75,000 DB Pension Plan (Superannuation with Fed Gov't).
Disability and small life insurance through employer & private $275,000 life insurance on mortgage.

She: 51 
Income 45,000 No Pension plan but pays $40.00/mo for limited disability and life policy through work. No life insurance on mortgage.


Assets: Home $425,000.00 (est)
RRSP (Me) $1,150.00
(She) $31,000.00 (spousal)
We also have alot of "stuff" and two reliable cars although one 
will need replacing within a year or so. We "dollar-cost average" 
our RRSP's into mutual funds ($150.00 every two weeks).

Liabilities: Mtg. $297,000.00 (3.9% 5 yr fixed --> 4 yrs to go on term)
PLOC $35,000.00 (Prime +1%)
Loan $12,500 (5.650%)

We are newly on a budget that sees us paying $1500.00 to the PLOC and $350.00 to the loan each month. Our mortgage payment is $1890.00/mo. If anyone is interested I can provide more details on our budget.

*I am going to be getting about a $19,000.00 one time payout this Spring/Summer and planned on dumping half on the PLOC and half on RRSP's to soften the tax blow from this extra income in 2011. Any thoughts on this?

*I am becoming somewhat disenchanted with Mutual Fund investing due to MER's and their broad base of products allowing only marginal growth. ETF's are starting to seem more attractive to me but I recognize I am new to all of this! Does that make any sense?

I appreciate any comments. Thanks....


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## Rico (Jan 27, 2011)

Regarding the $1850 debt repayment per month, why would you pay a higher amount on the LOC (assuming prime is 3%+1 = 4% versus 5.65%)?

At 1850/month, you could have the 12500 loan paid off in about 7 months (while paying just interest on the LOC). You save 1.65% (and when 2% MERs bother people, 1.65% should too, no?).

Then, you can focus on the LOC (under 2 years @1850/month to pay off).

Regarding the 19000 . . . opinions will vary I'm sure but I would consider putting it all on the 12500 loan (is the 19000 net of tax? If not, at a rough 32% marginal rate you'll net almost 13000; just enough to pay that loan off).

I think debt needs to be the focus first (then that 300K mortgage).


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## RachII (Jan 3, 2011)

Thanks for the response Rico. I suppose the reason I thought of paying down the LOC is because of the intimidation factor of owing such a large $$$ amount. But it does make sense as you say to tackle one then the other becasue it is ALL debt. Even if/when interest rates go up this year whether the savings difference is 1.65%, 1.35% or .085%, it is still money saved. 

And yes, the $19,000.00 is a gross payout so I am expecting $12-13,000 after taxes. That will put my 2011 income over $95,000.00. Would we not be better off investing in an RRSP with future projected growth, AND getting a better tax return (which could then be used to pay down the debt) - versus - paying down the loan debt and saving that amount of interest? Keeping in mind our intention to continue aggressively paying down the debt. Shouldn't we try to see at least some of that $7-8000 instead of losing it forever to the taxman?

Appreciate your response Rico. Thanks.


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## OhGreatGuru (May 24, 2009)

I would try to put enough of that $19K payout into a spousal RRSP to at least keep you in the middle income tax bracket. It may be a little difficult to work out, because the federal & provincial brackets don't match. But the federal is the dominant portion of your income taxes, so you could just aim for that (it was $81,452 in 2009).

Otherwise, focus on debt retirement as your best investment. You can play catch-up on your investing when your cash flow improves.

PS: Do you actually have enough RRSP room accumulated to take it all anyway?


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## Oldroe (Sep 18, 2009)

If you have room I would put the whole amount in spousal and pay debt with tax return.


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## RachII (Jan 3, 2011)

Hi Guru and Oldroe. Yes my contribution allowable for 2010 is 29,000 and for my wife 86,000 (she's never contributed). We will probably be buying only $4000 this year so shouldn't change much for next year. Any thoughts on ETF's versus Mutual Funds? I suppose it's all about being knowledgeable about what it is your'e buying. Thanks for the advice.


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## Rico (Jan 27, 2011)

All good points. I forgot about your going into the next bracket.

83088 is the bracket cutoff (federal) for 2011. So pretty good extra savings on at least $10000 RRSP.

Food for thought - You're getting the payout in Spring of 2011 - $6000 taxes withheld at source will sit with the government for almost a year (interest free loan for them, argh!). If you buy that RRSP in the spring when you get the bonus, you won't realize the benefit of taxes back until April 2012. Instead, maybe pay off LOC/loan until Jan/Feb next year then buy a big RRSP at that time to offset the bonus. Then, use the refund to repay the RRSP loan. This way, you'll save around 9 months of interest @5.65% on ~$13000 (about $500 using a very rough calculation).

These are just some ideas, I am assuming your bonus is past March 1 RRSP deadline for 2010. Also, this would require discipline to pay off loan then buy RRSP at the right time, then pay off LOC.


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## Rico (Jan 27, 2011)

RachII said:


> Hi Guru and Oldroe. Yes my contribution allowable for 2010 is 29,000 and for my wife 86,000 (she's never contributed). We will probably be buying only $4000 this year so shouldn't change much for next year. Any thoughts on ETF's versus Mutual Funds? I suppose it's all about being knowledgeable about what it is your'e buying. Thanks for the advice.



Also, consider not claiming that $4000 until next year when you're in the higher bracket (or whatever portion of the 4K is yours).


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## RachII (Jan 3, 2011)

Good point Rico about paying down the LOC for interest savings until it's time to buy the RRSP. I guess the only thing will be to make sure we are not waiting so long that when we do finally buy, the fund or ETF price is high. There is something to be said for buying when the prices are decent correct?

As for saving the $4000.00 contribution until next year, (I already have the receipts) that will mean we contribute nothing this year for no tax return. Next year with the usual $4000.00 we contribute every year + the $12-13,000.00 + any extra we intend to save, our RRSP contribution will be sufficiently high already no? Would that extra $4000.00 deferred until next year make that much difference considering it will mean we get nothing this year?


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## Rico (Jan 27, 2011)

Buy low, sell high, for sure.  However, if your investment strategy is long-term, not getting into an ETF for 1 year shouldn't matter much. I honestly still think debt repayment should come first. Just my opinion.

As for the $4000 . . . I was thinking you'd get 4% more ($160.00) on that claim next year @26% vs. 22% this year (just federal, I don't know which prov. you're in).

I'll use Alberta as an example (10% prov tax). 4000 * .32 (this year) = 1280 refund. 4000 * .36 (next year) = 1440 (160 more).

Claim now, get 1280 now, pay off 5.6% loan = ~$73 interest saved (assuming 5.6%, compounded daily, for 1 year).

So, you'd get $87 (160-73) more by claiming it next year . . . unless I flubbed up somewhere.


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## Jon_Snow (May 20, 2009)

I would be very nervous holding that much debt as you move into your middle years... hammer away at that debt HARD. Your household income is pretty solid so you should be able to do it. And don't forget LBYM.


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## Pigzfly (Dec 2, 2010)

Given the option, I would probably redirect your repayments in order to pay off the higher interest rate loan. You said that the mental aspect of owing so much in one place was intimidating, would that be offset by the good feelings of completely paying off one of the loans?

You were wondering about your mutual funds - have you investigated which ones you hold, and the MERs, etc? There is a fair bit of basic information available regarding ETFs available on the internet. The Globe and Mail, for example, has a whole section of information on them. Reading this forum will also show you some of the favourites of people here. 

Use some of the info provided here and see if you can calculate an "optimal" RRSP contribution, then use the remainder to pay down your debt. After that, you should be in a happier place - ie you can realize your goals of debt repayment and RRSP contributions together, which seems to be what you're after. 

Ballpark, by Christmas, you can retire the loan, and owe somewhere around 20K total. (very rough math)


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## RachII (Jan 3, 2011)

Thanks Pigzfly. Yes all of our mutual funds (there are 5 of them but only three are being contributed to bi-weekly) have an MER between 2 and 2.25% And thanks for directing me to G&M for some ETF info. 

As for finding an "optimal" RRSP calculation Rico and Pigzfly seem to be suggesting, can someone point me towards a good calculator to find that out?

Jon_Snow I had to google LBYM. Great idea and I'd like to think we are capable of such a strategy long term. Watching the thousands go out the window each month to pay off old debt certainly makes me feel we are living below our means! Thanks for the tip...


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## cannon_fodder (Apr 3, 2009)

I'm assuming you will not have an easy time beating a guaranteed 5.65% after tax growth in your invested money. Thus, payoff the "high" interest LOC first.

I'd be interested in other's opinions, but even savvy investors would probably take 5.65% guaranteed after tax return and run.


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## Bullseye (Apr 5, 2009)

Forget the RRSP contributions, just hammer the massive debt load. You don't need the RRSP's as much you need to be debt free in retirement, with that nice pension. 

Worry about investing once you have debt paid, or at least well paid down. As CF says above, it'd be impossible to beat 5.65% guaranteed, and quite possibly even longer term with lots of risk. Take the easy, for-sure way, and take one less worry off your plate.


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## Plugging Along (Jan 3, 2011)

I agree with others. With the debt that you have, it would be harder to beat the interest you save in after tax dollars with the same risk.

Pay off your debt, then worry about investing.


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## Spidey (May 11, 2009)

RachII said:


> Having only gained an interest in matters financial in the past year or two I have been regularly coming to this forum for an education. I hope to get a bit of advice on our situation so here it is:
> 
> My wife and I have been together for 15 years. The children are now off on their own with professional designations and both doing well. We only started putting money into RRSP's about five years ago and still have a fair bit of debt.
> 
> ...


IMO, you have too much mortgage debt for this stage in life. I'm assuming, because of the federal government work, that you live in Ottawa where the average home price is about $350,000. Considering that you are empty nesters, do you really need the $425,000 house you currently occupy?

I would consider trying to shave $100,000 off your liabilities by moving to either a town-house or smaller house. ($325,000 can still buy a very nice smaller house or town-house in Ottawa.) If it's possible to buy a house near your wife's work, you will have the potential additional bonus of being able to get by with one car (a major saving) and saving her the hassle of a commute. I recently heard, and totally believe, that a reduction of an hours commute is equivalent to a raise of $40,000 in terms of the value of happiness it provides.

After that, initial financial planning is fairly straight forward. Pay off debts starting with the highest interest ones first and then eventually tackling the mortgage. The most you might want to consider doing until debts are paid off would be a small annual contribution to your wife's RRSP. I would prioritize debt-repayment over RRSP contributions for a couple of reasons: 

- Debt repayment is a guaranteed return and usually a very competitive one. Remember debt payments are made in after tax dollars so the return from paying down a 5.65% debt might be equivalent to getting almost 10% on an investment. How many people would not jump at a guaranteed 10% return?

- You already have a pension, which I'm assuming will continue in some form into retirement. This combined with OAS and CPP will provide a reasonable base. The biggest threat to a comfortable standard of living comes from the debt payment side of the ledger and not the income one. There is even the possibility that RRSP future withdrawals will minimize future government benefits. That all being said, I would re-enter savings mode, if possible, after the debts are extinguished. 


Suggested reading (available at the library) - Your Money or Your Life by Joe Domingues and Vicki Robin -- a must read. For investing consider reading books by William Bernstein, Gordon Pape and James O'Shaunessy.


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## RachII (Jan 3, 2011)

Thanks for all your comments.

Spidey we do not live in Ottawa but in a suburb of Vancouver where the average house price is over the $500,000.00 mark. Our home is comfortable and modest, and we have two dogs. As for public transit, there is nothing viable for either of us, and our places of employment are each one hour in opposite directions from our home.

We are making modest contributions to her RRSP's ($4000.00 annualy). We are also paying down our debt and thanks to advice in this forum have already payed an extra $1500.00 to the 5.65% loan this month. It will be payed off well before Christmas.

In reading your comment about my pension I see I didn't format my original post very well and caused the confusion. I am not currently collecting a pension but have a defined benefit pension that I will collect on retirement at age 62. At best I can take an early retirement at age 57 but not sure I will be in a position to. Alas I have plenty of years of work ahead of me.

Sorry for the confusion and thank you very much for the reading suggestions. I have recently read the Wealthy Barber, Master Your Real Wealth (Erika Penner), Gordon Pape's Sleep Easy Investing, and Rob Carrick's Guide to What's Good Bad and Downright Awlful in Canadian Investments Today. I will find the Dominguez/Robin book and look into the other authors as well. Thanks.


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## Spidey (May 11, 2009)

Yes, $425,000 is a very modest house in the Vancouver area. I used to live in Richmond, BC before moving to Ottawa about 7 years ago. It sounds like you are on the right track regarding debt payments and reading investment books. I like to throw in Gordon Pape (I've also read Sleep Easy investing) because it provides prospective on a fairly cautious approach to investing. However, IMO he is too much in favour of traditional mutual funds and too unfavorable toward index funds. For a different perspective, check out Bernstein's "The Four Pillars of Investing" and James O’Shaughnessy’s "What Works on Wall Street".


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## Pigzfly (Dec 2, 2010)

RachII said:


> As for finding an "optimal" RRSP calculation Rico and Pigzfly seem to be suggesting, can someone point me towards a good calculator to find that out?


Sorry - accountant does all the magic for us!


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