# greedy or smart?



## rajbabba (Mar 12, 2015)

Hi,

My first post after being a long time reader!

I am 40 in good health with wife and 2 kids.

I work in the investment management industry for an employee owned company. 

I currently have a net worth of $1m and in last couple of years gross income for our household has reached 250k per year.

Being a numbers guy I have a spreadsheet calculating net worth to retirement. It ranges from $4m to $8m using very conservative parameters but the range is dependent on how long I stay at my current employer where my income and potential capital gain of stock ownership are a big driver to get to the higher end of the net worth range.

So finally to my question....i am considering doing the smith manouevre with my mortgage which would add about $400k to my net worth projection. it would mean maintaining a 65% mortgage/HELOC on our home. In addition to this debt, I have sizeable debt for my company stock ownership which I consider good debt as it is at prime-25 and completely tax deductible and pays a dividend which more than covers the interest payments.

My wife is uncomfortable with using the heloc to invest (especially as I have the company stock debt) and says I am being greedy. I feel like I am leaving something on the table by not doing the smith manouevre and maxing out my potential net worth. It is like a a hobby/challenge for me!

So, am I being money smart or money greedy?


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## Just a Guy (Mar 27, 2012)

It all depends on what you buy...if you buy penny stocks and gamble, you're probably being greedy. 

If you buy undervalued assets, that are worth something more, even in this overpriced economy, then you are probably smart. 

Borrowing money to buy assets technically should be a zero sum transaction as what you buy has the same value as the debt. There is nothing "greedy" or "stupid" about it if done right. In fact, the argument could be made that you are diversifying out of an overvalued "real estate asset" into other assets to reduce your exposure. 

But then, there are always ways to justify mistakes...


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## OnlyMyOpinion (Sep 1, 2013)

If it was just yoursef, I'd say do what you want. If I had a wife and 2 kids depending on my future success/earnings I'd be making sure my plans did not jeopardize them. If you lost your job or health, etc. would that affect the plan? Similarly, is all of your net worth tied up in the company?


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## CalgaryPotato (Mar 7, 2015)

Maybe I'm confused, but here is how I am taking this. The smith maneuver generally means you have a mortgage. You sell off investments, you pay off your mortgage. And then you take a loan back out against your house to put into the investments.

If you have investments and carry a mortgage that should be the exact same level of risk, as doing the smith maneuver... 

Also no one ever needs $8million for retirement. You may want to retire rich, and $8million is your goal for that. But most people will never make that much in there life let alone have that much sitting in their account at any point in time.


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## Guban (Jul 5, 2011)

^ +1 

The Smith maneuver should result in having similar investments but making the mortgage tax deductible. Therefore, no increased risk.

As to the $8 M needed. I suppose it depends on what you want to spend in retirement. If that's the lifestyle you want, go for it!


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## 0xCC (Jan 5, 2012)

CalgaryPotato said:


> Maybe I'm confused, but here is how I am taking this. The smith maneuver generally means you have a mortgage. You sell off investments, you pay off your mortgage. And then you take a loan back out against your house to put into the investments.


That is almost right, you just added a step that isn't really part of the Smith Maneuver. You start by making regular mortgage payments (not selling investments) and then borrowing back from the mortgage the amount of the mortgage principle you just paid off to invest. Your mortgage balance stays roughly the same but the interest you pay on the portion that has been invested is tax deductible.

As to whether this is being smart or greedy, I don't think there is quite enough information to figure this out. As Just A Guy notes, it sort of depends on what you plan to invest in. I think it also depends on what percentage of your current portfolio the mortgage represents. What do you plan to do with the mortgage as you go into retirement (pay it off or keep it)? Are you planning to have investment income cover your mortgage payments (at least on the SM portion)? What happens if interest rates rise (say to the point that investment income is less than interest expenses), how does that impact your planning?

I have personally used a pseudo-Smith Maneuver strategy. I say pseudo because we have done straight-up investment loans and also sold off investments when our mortgage term ended and "paid off" the mortgage but then immediately borrowed back the same amount and re-invested it. So it wasn't a borrow back one payment at a time typical Smith Maneuver strategy. We are a couple of years older than you, no kids and with a lower household income. We currently have a mortgage that is roughly 5% of our total investment portfolio value and that mortgage interest is 100% deductible at this point. The mortgage has been totally invested for almost 6 years now and at its largest probably represented about 20% of our total portfolio value. We plan to have the mortgage paid of before retiring. In fact, we could have paid it off already but rates are low enough now to make that a less attractive option.


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## carverman (Nov 8, 2010)

It is not as easy to use your "mortgage" on your principle residence in Canada to be tax free. In the US, it's a different story, as mortgages can be tax deductible...not so here in Canada. To use this maneover I would
think you REALLY NEED to know and be sure you know what you are doing,
not to run afoul of CRA that will track your investments like a hound dog. 




> With a readvanceable type of mortgage, your Home Equity Line Of Credit (HELOC) increases with every dollar paid down on your mortgage principle. This is the basis of the leverage that you will use with the Smith Manoeuvre strategy. With a Smith Manoeuvre, you then use this increasing credit line to invest in income producing stocks, preferably in the form of Canadian dividend-paying companies, since the dividend returns from these companies have favorable tax status.





> For this loan to be tax deductible, you must invest in a *non-registered investment account*. RRSPs, RESPs, and TFSAs do not qualify.
> You also cannot make any non-investing purchases with the HELOC money. T*his is to keep a clean paper trail for the CRA, and to show that the entire loan is for investment purposes.* It is very important that you follow this procedure correctly, or you could find yourself in trouble — and owing money to the government.


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## Cal (Jun 17, 2009)

I will argue smart....you would have the same debt, and I will assume, would hold the same equities/assets anyways, so I would argue it would simple be a more tax efficient way to have the same assets. You could even err on the side of caution, and only get HELOC to cover enough interest payments to reduce your tax position, as opposed to getting HELOC for full amount that bank would give you.


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## CalgaryPotato (Mar 7, 2015)

Guban said:


> As to the $8 M needed. I suppose it depends on what you want to spend in retirement. If that's the lifestyle you want, go for it!


Don't get me wrong, I think he should definitely shoot for his goals!

The one thing I would caution about, is having a fiscal plan that involves extreme saving until retirement with the goal of having a lavish retirement. I'm personally biased on this one, because my Mom was diagnosed with a terminal illness a month after retirement, my step dad died before his retirement, my Dad retired because of a terminal illness, and another close family friend was diagnosed with a terminal illness within a few months of (early) retirement. 

Not to be depressing but don't lose the journey of your life waiting for the destination.


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## OptsyEagle (Nov 29, 2009)

In my opinion, when it comes to money, two situations take away from the enjoyment of your life. Not having enough money and having too much money. Although not having enough money is by far the uglier situation, having too much money will also generate life annoying situations with very little compensating benefits.

With the varied personalities of people on this planet, I doubt my opinion is universally agreed upon, but I think for most people, if you give it some serious thought, you will probably agree. I think most people who strive to make more and more money, regardless of the amounts they already have, are probably doing it for the sole purpose that when their will is read, someone will say, "Wow, that guy was really successful", forgetting about the fact that someone has to say "Wow, that guy is really dead" before that day ever comes.

Anyway, all just my opinion.


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## rajbabba (Mar 12, 2015)

House is worth 900k and current mortgage is is 250k so I am able to borrow additional 370k to be up to 80pct total of property. Would use that 370k to invest in blue chip dividend stocks.

Would not really need extreme saving - in fact, the cash flow here is mostly flat.

It just means expanding our balance sheet tot are advantage of our current situation. Also, I hate the idea of having a home worth 900k that is not 'working' for me. But as my wife argues, at what point is it just greed against what I think is good financial management?


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## OptsyEagle (Nov 29, 2009)

rajbabba said:


> But as my wife argues, at what point is it just greed against what I think is good financial management?


If the leverage portfolio goes up in the first year or so, she will say it was "good financial management". If it goes down in the first year or so, she will be certain that it was "just greed".


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## Guban (Jul 5, 2011)

OptsyEagle said:


> In my opinion, when it comes to money, two situations take away from the enjoyment of your life. Not having enough money and having too much money. Although not having enough money is by far the uglier situation, having too much money will also generate life annoying situations with very little compensating benefits.


What annoying situations are you referring to? The management of money may increase with the amount of money one has, but it is not a direct correlation. One can scatter a bunch of GIC's around, or invest in government Tbills.

Given the choice, I'll take the too much money "problem". I can always fix that "problem" by giving it away, or spending it! Not having enough money is a harder one to fix.


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## OptsyEagle (Nov 29, 2009)

Guban said:


> What annoying situations are you referring to?


Money management, security issues, people wanting it, inability to help people you know due to the resentment it creates. Estate issues. Do you really want the bimbo that is sleeping with your daughter's husband getting her hands on it when you die. Do you want your wife's next boyfriend spending it. Those are about the only people who will get any material benefit from it. Your kids might, long after they really needed it. Probably the biggest PITA is looking after all your stuff. If your house is bigger then you need it, someone has to clean it. Either that is you, your wife or now you have some strangers running in and out of your house. Someone calls you in the middle of the night to tell you that the idiot you hired to look after your boat, didn't set the anchor right and now it is coasting out to sea. The police call you to tell you they responded to an alarm going off in your summer home that you use maybe 2 weeks out of an entire year. Don't worry, it was a false alarm and they will put the $250 bill for that call in the mail.

Remember, I am talking about the money you have above the money you need. Since we may never know how much we will need, I would suggest coming up with a number and doubling it. But after that, more just creates problems...and I did point out that not having enough was, of course, a bigger issue.

I do know that the $8 million the OP mentioned in his original post is about 2 times what I will ever need in my lifetime, so the answer to his fundamental question is: Yes, what he is discussing is just greed.

All my opinion, of course.


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## Guban (Jul 5, 2011)

rajbabba said:


> House is worth 900k and current mortgage is is 250k so I am able to borrow additional 370k to be up to 80pct total of property. Would use that 370k to invest in blue chip dividend stocks.
> 
> Would not really need extreme saving - in fact, the cash flow here is mostly flat.
> 
> It just means expanding our balance sheet tot are advantage of our current situation. Also, I hate the idea of having a home worth 900k that is not 'working' for me. But as my wife argues, at what point is it just greed against what I think is good financial management?


Ok, I thought that you were just going to replace the *existing* investments using borrowed money. It sounds like you want to expand your investments using borrowed money. ie. leverage.

I would think that in this case, I'd have to agree with OptsyEagle and say that this is more the situation of greed. It sounds like you don't need the money, nor will have the need for it at a later point in time. Leveraging magnifies the risk in a portfolio while possibly increasing the return.

However, you know the saying, by some ... greed is good.


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## Beaver101 (Nov 14, 2011)

Guban said:


> ...
> However, you know the saying, by some ... greed is good.


 ... how applicable here for the poster :encouragement:


> ...I work in the investment management industry for an employee owned company.


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## OnlyMyOpinion (Sep 1, 2013)

Beaver101 said:


> ... how applicable here for the poster :encouragement:


Seems like this might be a presumptuous comment?


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## Beaver101 (Nov 14, 2011)

OnlyMyOpinion said:


> Seems like this might be a presumptuous comment?


 ... how about both greedy and smart are good on Wall/Bay Street?


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## mrPPincer (Nov 21, 2011)

OnlyMyOpinion said:


> Seems like this might be a presumptuous comment?


Original poster works in the same industry that the movie was about, where the phrase came from, & the comment did qualify the phrase with "by some", so really is it presumptuous? I think it's applicable.


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## OnlyMyOpinion (Sep 1, 2013)

mrPPincer said:


> Original poster works in the same industry that the movie was about, where the phrase came from, & the comment did qualify the phrase with "by some", so really is it presumptuous? I think it's applicable.


Ok, I apologize to Beaver101 then. I didn't realize it was humour related to some movie. I'm guessing it was the 'wolf of wallstreet' movie? Which I admit we did not watch.


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## rajbabba (Mar 12, 2015)

Lol. I am not a salesperson or a stockbroker or trader....i work in client service for an institutional asset management company managing pension assets. I make a good income but not a great income. Income is only higher because of the company ownership. So I could be in any industry and be in the same situation.


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## Eclectic12 (Oct 20, 2010)

carverman said:


> It is not as easy to use your "mortgage" on your principle residence in Canada to be tax free...


It all depends on what one means by "use your mortgage".

It was easy for me to have a HELOC setup as part of my mortgage, borrow against it to buy qualified investments and write off the interest. The dividend/cash distributions as well as the occasional sale of investments paid off the mortgage far faster than I would have done otherwise.


Though ... in a SM of it's purest form, paying off the mortgage earlier is not the goal.




carverman said:


> ITo use this maneover I would think you REALLY NEED to know and be sure you know what you are doing, not to run afoul of CRA that will track your investments like a hound dog.


At the end of the day, a SM is only a bit different than borrowing to invest so there are lots of details available on how to avoid any issues.

http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm
http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm


A bit of reading and a bit of work to stay onside ... but not that difficult, if one is already a DIY investor, IMO.


Cheers


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## My Own Advisor (Sep 24, 2012)

First of all, congrats on working so hard.... re: $1M net worth and with kids at age 40.

Regarding your goals, I guess it depends on what your goals are. A net worth of $4M can be achieved with $8M in assets and $4M in liabilities. Personally, that's not for me since I would rather be debt-free and asset-wealthy.

Regardless...your income is great so this along with your human capital will determine if you can reach your goals. 

In terms of the SM, I know folks who have done this and are doing it, and it if works for them - great. I think you need to be very comfortable with leverage to pull this off. It's not a short-term thing, otherwise, why not just pay down debt and invest?

Only you can decide how much challenge you want but I would ask yourself if you're doing this well, so far, why change the approach? Why take on more risk than necessary?

Good luck - let us know what you decide!


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## Cal (Jun 17, 2009)

CalgaryPotato said:


> Not to be depressing but don't lose the journey of your life waiting for the destination.


Great life advice for anyone.


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## Just a Guy (Mar 27, 2012)

Having $8m in assets working for you, generally earns you more than $4m in assets, even if you have half of it as a 3% liability. Done right, debt can make you wealthy a lot faster than no debt. Done wrong, it can run you into bankruptcy faster as well though.

People who fear debt will generally earn wealth more slowly than those who use it as a tool, but that doesn't mean one system is better/worse than the other.


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## rajbabba (Mar 12, 2015)

Thanks for all the replies. I think I will be greedy/smart...however you wish to describe it!

I liken it to a sports person striving to improve that extra 5pct even if it means a higher risk of injury. It is in their dna to be the best they can. 

I have always taken a keen interest in personal finance and am comfortable with debt. Being a CFA charter holder, I am aware of the risks and want to put my experience and education to the test.

As the smith manouevre strategy I plan on using will hopefully only affect my net worth at the margin, I am not overly concerned...just need to convince my wife now!


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## OptsyEagle (Nov 29, 2009)

I will add that there is a big difference between having $8 million dollars, and having a projection that says you might have $8 million dollars some day.

If you had $8 million right now...this strategy would be nothing but greed. Good luck to you.


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## OnlyMyOpinion (Sep 1, 2013)

I think though as JAG and the OP point out, entrepreneurs, incl real estate investors have a bit of dna in their personality that allows them to be comfortable with risk and leverage. I suspect it has played a key role in many successful multi-$MM's. It is not so much greed as a drive to 'score'. If you're not leaving your home and your loved ones at risk of a 'black swan' event, I can't fault those types of individuals - they've added to our successful businesses and economy. :applause:


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## Just a Guy (Mar 27, 2012)

For me, it boiled down to my first real contract for the government...I learned that a million dollars is not really a lot of money having been put in charge of multi million dollar projects. It was a good lesson to learn. I've never feared "large numbers" that hold so many others back.

When I ran my business, spending 10's of thousands of dollars on something didn't cause me to worry...

In real estate, it was the same. If the numbers said it would work, the size of the numbers didn't matter.


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## cougar (Oct 15, 2014)

Happy wife, happy life. I would suggest that your wife's comfort level and agreeing on how to manage your family finances is far more important than the exact dollar figure you end up with in retirement-given it sounds like you expect to have enough for a comfortable lifestyle with either scenario. Of course I am making the assumption that you wish to still be happily married to your wife in retirement.


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## treva84 (Dec 9, 2014)

There is one thing I have never understood about the smith maneuver - as you pay down the mortgage you generate more money via the HELOC to invest. Your portfolio grows. You generate a tax return (borrowing to invest) on the HELOC which you can use to throw at your mortgage, freeing up more capital in the HELOC. After doing this for 15-20 years, you've 1) paid off your house faster than you would have due to the extra tax returns, 2) you've accumulated a larger investment portfolio than you may otherwise have been able to 3) you're paying regular monthly interest payments on the HELOC (usually prime + 0.5-1%) which you wouldn't otherwise be paying 4) The balance on the HELOC is presumably 65% of the value of the home (let's assume 500k home, so 325k).

So your home is paid off, you have an investment portfolio hopefully at least the value of your home, you are paying regular interest payments on a 325k debt. How do you go about paying off the HELOC? Do you plan to sell your home in retirement, downsize, and use this to settle the HELOC? Do you sell a portion of your investments? Do you just make the interest payments and ignore the debt?


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## donald (Apr 18, 2011)

If I were you I would spend some money in the next decade that would give you good 'utility' of the money you earn
You are obviously in good shape!
If you can comfortable get to 4m by 55(liquid)in the equity markets that should spin off 180k a yr(not incl a 4% withdraw on a year if you do that also which would put you well past 275k a year

Something that is not talked about much on here(because most of use have to plan beyond 55 to start dreaming lol)
Is I would argue there are infinite experiences that would seem more enjoyable in your 40's than in your 60's
What good would it be to wait till 60?......what are you doing to do with 8m when you are 'older' and many things might not be possible for a host of reasons
Your financial profile is in a sweet spot
almost hard barring unforeseen events that you will not be okay anyway you spin it

There is utility of $.......just ask a 70 yr old multimillionaire 
guess the long and short of it is don't skip imo things that can give you joy now than 'waiting'
We only get 1 day at a time and 24hr in a day 

If I was you I prob would try for 8m 2 though lol


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## namelessone (Sep 28, 2012)

SM is lots of work for little benefit. i can't believe so many people buy his idea. You can't take out HELOC at similar cost of mortgage.
What's your interest rate on the SM HELOC? 3.9%? if your marginal tax rate is 50%, your effective cost on that HELOC is 1.9%.. However, my mortgage cost me only 2.1%. A lots of work to save 0.2%.... 
It's even worse for people in lower tax bracket of 20%. 3.9% X 0.8 = 3.1%. It's a lot higher than my 2.1% mortgage.


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## Eclectic12 (Oct 20, 2010)

treva84 said:


> There is one thing I have never understood about the smith maneuver ... So your home is paid off, you have an investment portfolio hopefully at least the value of your home, you are paying regular interest payments on a 325k debt.
> 
> How do you go about paying off the HELOC? Do you plan to sell your home in retirement, downsize, and use this to settle the HELOC? Do you sell a portion of your investments? Do you just make the interest payments and ignore the debt?


As I understand it ... a pure SM would keep the debt and plan on the sale of investments to take care of it.

Being more conservative, I only used a % and sold a few investments to pay off the mortgage. 
Depending on one's age, risk tolerance etc. - I expect one could also use all of the dividend/cash payments to pay the interest plus whittle down the debt portion (particularly where one is not retired yet and has other income).


Cheers

*PS*

One may end up with two sources of cash flow to pay down the mortgage ... where the dividends/cash distributions paid exceed the interest charges, there will be whatever the excess is plus the tax refund.


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## Eclectic12 (Oct 20, 2010)

namelessone said:


> SM is lots of work for little benefit. i can't believe so many people buy his idea.


Turning non-deductible deductible interested into tax deductible interest is of no benefit? 




namelessone said:


> You can't take out HELOC at similar cost of mortgage.


True ... but 50% of the mortgage value being tax deductible wouldn't help someone with a high income?




namelessone said:


> What's your interest rate on the SM HELOC? 3.9%?


Depends on the market when it was arranged and what's happened to interest rates ... in my case it's just been cut under 3%.




namelessone said:


> ... if your marginal tax rate is 50%, your effective cost on that HELOC is 1.9%.. However, my mortgage cost me only 2.1%. A lots of work to save 0.2%....


One has to work the numbers out ... but then again, these numbers ignore that cash flow generated, which is decreasing the interest costs being paid at the 2.1%.


Then too, if one was lucky enough to spot and use the opportunity of Mar 2009 ... buying investments that have paid 8% in dividends which have increased since, while the shares doubled or tripled in price in two or three years wasn't a bad deal.


Cheers

*PS*

For the " ... people in lower tax bracket of 20%. 3.9% X 0.8 = 3.1%.", one can look at the higher interest and decide it is a problem.

Or one can look at the fact that the borrower has two assets that are potentially growing in three different ways (house value grows, investment income grows and share/unit price grows).

As long as the combination of interest costs, cash flow and investment income are within one's comfort level - it seems more likely that three sources of growth are going to do better than one. (Some of the dividend payers feared to be cutting their dividends in early 2009 have increased the dividends paid by 30% to 78% where interest costs have stayed flat.)

And that's ignoring that for an BC or Ontario resident in the 20% tax range, eligible dividends will be a second source to bring a tax refund to the table.


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