# Incur debt to save for retirement?



## Racer (Feb 3, 2010)

Hello all,

Hoping you can send some advice my way.

I'm 32, my partner is 35. 
I gross $42,500; partner grosses $140,000 plus possible $40k in bonuses (this year he had 50% pay due to recession). 
$198,000 in debt (going down by about $6,000 each month from our net of $10,500).
House is worth $460,000 (lender appraisal).

Only $40,000 in retirement savings. 

Bank is offering us a new $250,000 mortgage, 2 year term, at 2.9% fixed rate. We can characterize the loan as for "investment purposes" and make it tax-deductible. 

Should we do it? I feel like we are late in the game when it comes to retirement savings. We are planning to have a baby in 1-2 years (but won't need to move). 

Partner's income is from his partly-owned oil&gas company, so if another slowdown happens, his income will go down. I'm a junior lawyer at a small-town firm.


----------



## OhGreatGuru (May 24, 2009)

Let me get this straight. You're current debt is $198,000 (presumably mortgage debt on your home); you are already concerned that the major income partner's income is not stable from year to year; but you are thinking of increasing your debt to $448,000 so you can invest? You must like living on the edge.


----------



## Racer (Feb 3, 2010)

Should have added that we are owed shareholder's loan of $600k (so our networth is pretty solid), and partner is CEO & can ensure that leverage never endangers that position. 

And yes, all our debt is mortgage debt, except for $29,000 of what's left of my student loans.

So you would suggest paying off mortgage debt and no saving? 
Or slow down mortgage repayment and put half away for retirement?

Saving for retirement is not as tax efficient as taking on the debt...

Thanks for the comment. I'm tired of real-life taboos against money discussion.


----------



## Racer (Feb 3, 2010)

Also, I'm due to receive $95,000 in January 2015. US interest income tax (whatever their equivalent is) is payable on $30,000, so likely a chunk will go to taxes.

You see the dilemma. I mean, we "have" money. We just don't have money.


----------



## Ben (Apr 3, 2009)

"Incur debt to save for retirement?"

No way! This is an oxymoron, no matter what anyone tells you.

You may be a little late to the retirement savings game, but you seem to have had a good reason - law school. This will probably turn out to be a good investment for you. 

With your current income, you are increasing your net worth by $6000/month. This is very good. You are living well within your means at monthly expenses of $4500.

Plus, both of you have great future earnings potential, and can do even better in future, even with a child on the way.

Keep it simple. You'll be just fine.


----------



## Sampson (Apr 3, 2009)

Ben said:


> You may be a little late to the retirement savings game


Wow! Tough crowd, I never considered 32-35 as 'late to the game'. 



Ben said:


> Keep it simple. You'll be just fine.


I agree here, its good advice.


----------



## Berubeland (Sep 6, 2009)

The investment you describe is called the Smith Manoeuver. 

It sounds ok to me as long as you are making more interest on your investment than it is costing you. So you need to be good at investing otherwise you could get yourself in hot water. 

That's it!


----------



## Ben (Apr 3, 2009)

Sampson said:


> Wow! Tough crowd, I never considered 32-35 as 'late to the game'.


I probably should have underlined little late to the game. Actually, they're really not late at all.

Just reading Racer's qualifying comments now (were hidden for some reason when I commented). If the net worth is really $300k + $600k, then they've dunked the basketball before the tipoff. 

Do want to ensure enough cash on hand to get through financial difficulties, given volatility in husband's salary, volatility in the company itself, and planning for the baby. Hopefully that $40k is not sitting entirely in RRSP's. Even if it were, with that $6k/month surplus, it wouldn't take long to build a nice cash cushion.


----------



## HaroldCrump (Jun 10, 2009)

Racer, do you guys plan to retire at or before 40?
If not, I don't see how you are behind on retirement savings in any way.
In fact, I believe you guys are well ahead of the majority of people.
Your debt is relatively low compared to your assets.
$400K in retirement savings is not bad at all.
The equity in your home is also "retirement savings".
Taking on more debt esp. when your partner's income is not stable from year to year is not the best move.
It appears you guys have reached where you are by keeping debt under control, so why start now?


----------



## John_Michaels (Dec 14, 2009)

Kudos to you, you've done very well!

I believe the question is really 'do I use margin to invest'? ...stretching the term margin of course. Depends on your risk tolerance of course.

Margin does provide for the possibility of significantly enhanced returns of course. OPM is a wonderful thing.

However, my approach would be to avoid this, As HaroldCrump said, why start now? My focus was to eliminate all debt before investing. I never did (do) margin. My over-riding fear for my family is that margin calls do happen and I know it will happen at the worst possible time.


----------



## Racer (Feb 3, 2010)

Thanks for the great responses. I think my posts are delayed because I am new to the forum.

Our net worth and cash flow is good ... This month our short-term stretch goal is that we are trying to pay back debt at $7,500.

We are racing now to hit some goals because partner and I want him to stay home and raise the kids eventually. I'll likely be at home and work p/t for 2 years during pregnancies, and then we'll do a switcheroo about 4 years from now. I'd prefer adoption in 4 years, but partner prefers otherwise.

He wouldn't mind working part-time, but p/t will not work with his current job. He is trying to exit by selling the company or just phasing himself out of his position, but that is impossible to count on.

Once we take his income out of the picture, our situation looks different. 

Even just writing this message out has shown me the flaw in the mortgage deal -- Even if we amortize that mortgage over 10 years for payments of $2,500/month, my income would have to somehow cover that as well as our regular $3,000 of household expenses. I'd have to assume a net income of $65,000-ish. But then...the escrow funds are released in early 2015.

Our $40,000 is locked away in RRSPs. Half of my spousal SD RRSP has been sitting in cash since 2007, due to decision-making paralysis. I listened to some folks who predicted the big market corrections, but haven't geared up the nerve to wade in yet and missed the last big dip in prices. Ugh, I don't even have the funds in a revolving GIC. 

I am an inexperienced investor. I am currently unwilling to hire a financial planner. I have done a fair bit of reading about money matters in the last 3 years, but have taken no action. I haven't yet read or studied technical analysis, or anything detailed. 

Sorry this is a detail dump. Anyone in real life who has heard a part of our financial situation (usually the temporarily high income) is quick to dismiss the need to plan, or wants to volunteer our cash flow for themselves. 

I suppose the uncertainty that comes with financial planning is weighing on me. Any further comments or thoughts would be most welcome.


----------



## Racer (Feb 3, 2010)

I see my other post hasn't come up yet so I hope this is not too disjointed.

I forgot to mention the other question mark in our financial situation - we have a $40,000 income tax refund that has accumulated over the last few years. Partner had a previous company that folded, and when he didn't close it properly the CRA put a freeze on our personal taxes. The new company has grown very fast and has taken all of his time.

I've been telling him "no baby" until the tax bill is sorted out (potential liability of $80,000, but partner thinks it will really be much less than our outstanding refund), but he didn't seem to listen. Finally, I said "no garage" until taxes are fixed and he miraculously made a move. We'll hear about that in the next few months -- the bank is holding the mortgage offer open until April. 

Reading my posts as though they are written by someone else, it's easier to see the lack of stability that the forum members have been commenting on. From the inside, it just seems like life has moved very, very quickly in the last 4 years (partner's company started up 5 years ago, my law school, marriage and new house, started practice, etc) and we can't keep up. It keeps me up at night.

Retirement age for me is "whenever". I'm not in a rush, I have found my dream job. But my partner finds his current work stressful and wants to be with the kids and putter around doing odd jobs "as soon as possible". He'd flip houses for a living but the local real estate market is unpredictable. 

He understands he may have to wait at least 4 years until I am past maternity leaves and am back at work f/t, and that he may have to wait longer than that depending on our retirement plan.

Maybe the right thing is just too keep it simple until life settles down, rather than trying to hammer out a plan to retirement right now.


----------



## MoneyGal (Apr 24, 2009)

Racer: I would encourage you to think of everything you ARE doing now as retirement planning. 

Retiring debt is a huge part of retirement readiness, and you are doing that. 

You don't need to add "borrow to invest" to make this a retirement plan!


----------



## MoneyGal (Apr 24, 2009)

Also: someone who is "kept up at night" by rapid change and (although you didn't say this) a potential tax bill of $80K is probably not someone who should be using leverage against a principal residence as an investing strategy. 

Secondly - it sounds (and again, I'm doing some reading between the lines here) as though your partner is saying that making as much money as possible is the "fastest" route to retirement/"puttering around with the kids" - hence your contemplation of leveraged investing. 

Another route is to consciously step back from intense involvement with the paid labour market. I think there are other people (in addition to me) who have done that here. I have two small kids and neither my husband nor I work more than 35 hours in an average week (sometimes more, but sometimes less). I think of this like enjoying a little bit of retirement all along - not planning for a binary switch of LOTS OF WORK and then none. 

(Finally - and I may be overstepping a line here, but I'll go for it anyways: staying at home with kids has challenges all on its own. Before I made that part of my life plan, I'd be pretty certain that's what I wanted to do. I wonder if your partner is saying he wants to be free to "putter" not because that's what he really, in his heart of hearts, wants to do - or whether he just wants a work situation with less stress. I hope that's clear...)


----------



## OhGreatGuru (May 24, 2009)

I pretty much agree with most of the previous comments. Paying off the mortgage on your principal residence is "saving for retirement" since retiring with a mortgage-free home should be part of most people's plans. You will also find that once you are debt-free (or at least significantly debt-reduced) you will have a lot more flexibility in pursing alternate careers/lifestyles, because you don't have to meet that monthly mortgage payment. Essentially, you can enjoy the same lifestyle on a lot less income, so you don't have to keep working at a stressful job just for the money.


----------



## Racer (Feb 3, 2010)

Thank you all so much for your thoughts. Very insightful. I need time to mull over the comments. Particularly moneygal's (btw, no worries about line-crossing). 

One of my posts has still not shown up - thanks for patience with the delay. I'll quote and drag it to the end of the thread when it arrives.

In the meantime, here is a summary of pros & cons to the new mortgage:

*CONS*

Taking on debt always involves risk and reduces flexibility.
Debt is secured to principal residence, so this means that a financial crunch would threaten our needs/wants/hopes/dreams
[*](BUT we'll have liquidity in the form of the RSP, as described below)​

*PROS*

The "all at once" scenario would take a lot of time and work, given that I am an inexperienced investor, but the time and work will be contained as a single project, planned and implemented over about 8 months.
[*]I'll summarize my plan for specific purchases in a presentation to husband, to keep him in the loop -- Nerd Alert, I know  -- and then with an hourly-based financial planner​
If the "all at once" project is implemented over 2 quarters, I can reduce my transaction fee drag by doing the first 25 trades in one quarter and the rest of the trades in the second quarter and qualifying as an active trader at our discount brokerage.
The "all at once" scenario will let us ensure that capital gains stocks can go in the RSP, while interest-producing or yield products can be tax-deferred in the RRSP. 
[*]If we did it "little by little" we would have to choose between short-term and long-term tax advantages -- either we stay diversified between growth and yield inside the RRSP or we forego the maximum short-term tax advantage of the RRSP.​
Rebalancing the portfolio will therefore be easier than "little by little" investments and less time-consuming over the years. 
It will allow us to deduct about $30,000 for a bottom-line tax savings of about $12,000 each year.
It increases our ability to take advantage of the time value of money.

Criticism would be most welcome. I'm not certain about some of my points. 

PS: All interest-producing investments will of course max out our TFSAs first - I just said RSP for convenience's sake.


----------



## MoneyGal (Apr 24, 2009)

How does it increase your capacity to take advantage of the TVM? I suspect you need to unpack that assumption a little bit.


----------



## Berubeland (Sep 6, 2009)

Racer 

I'll tell you I love risk in stocks but you are scaring the bejeesus out of me. 

What the hell makes you think you will as an inexperienced investor make money in the stock market. My first year investing I made -66%. I bought BNK.TO when it was $1 then it reverse split (they put 6 shares into one share) then it was still worth $1 then I bought Fannie and Freddie shares at 5$ because I thought they could go no lower.... until they went down to $0.36. And on it goes. 

The idea of you having $150,000 to launch your learning about trading career on margin is not a fine one I was in favor of it when I did not realize that you were new to the whole thing but this is a very advanced manoeuver. 

When you start trading stocks there is a considerable learning curve until you find your niche some people like dividend stocks, some bonds, some common shares, some like preferred. People pay for their education in the stock market and they pay by losing their dough until they learn. 

I agree with Moneygal.... work smart not hard. I am practically semi retired myself. I get to spend lots of wonderful time with my 2 year old son. Don't get me wrong I work just on my schedule and with my brain. No one needs to know how long it take me to figure things out.....I don't work by the hour and my intellectual property is worth a lot more than even I think. I make more now then I did working full time and I get to keep more in my pocket.

Once you stop believing that you have to work hard for your money and you stop feeling bad about it it gets much better.


----------



## Racer (Feb 3, 2010)

MoneyGal, I did have an assumption in there that I would beat the interest rate on the loan...the longer the time in the market, the less exposed one is to short-term stresses or losses, right? 

Berubeland, what does your handle mean if you don't mind me asking? Thanks for the comment -- I would not venture into the kind of individual stock-picking you describe. ETFs and index funds only. 

I don't want to become a professional investor-type, I just want to plan for retirement. The online calculators don't allow me to put in the 'weird' parts of our financial situation -- husband's income maybe going down, shareholders' loans that are relatively safe but locked away (the company restructured debt during the slowdown so that the bank has to approve any withdrawal of shareholders loans), etc. And it's virtually impossible to discuss things with our current social circle, as we are a few steps ahead of them. The only financial planners I have met IRL have been mutual fund salespeople in disguise. (We haven't hunted very hard, though, as we don't have very much money to manage.)

Those Early Ernie and Late Lucy type of charts are what's motivating my urgency. You know what I mean: "Broke Bob invests only $16,000 in 1988 and now he's a multi-millionaire; Professional Pete did all the right things and hocked everything for grad school but had to pay $100,000 in 2008... and now he's only got $105,000 for retirement." 

As far as lifestyles go, I really am not a work smarter kind of girl -- not meaning to sound disingenuous. I like the challenges of an intense schedule (as long as the rest of life isn't too chaotic -- and the next few years promise to be fairly level, compared to the hecticness of the last few years). The long trek to making partner is okay with me (I'm at a small firm, so it's pretty fun too). I have truly lucked into a job designed for me. 

Husband is not the same. I would work 10x as hard to give him the flexibility he wants -- except it doesn't work like that, does it. 

Hence the attraction of the All at Once scenario. Get the machine going, harness the power of compound interest, protect ourselves with diversification... and all of those other maxims  We have something that few others have -- access to a lump of capital (loan) and the means to fully repay it in 10 years. Surely there is a way to set up a plan for the future that is cheap, fast, and simple.


----------



## CanadianCapitalist (Mar 31, 2009)

Racer said:


> MoneyGal, I did have an assumption in there that I would beat the interest rate on the loan...the longer the time in the market, the less exposed one is to short-term stresses or losses, right?
> 
> Berubeland, what does your handle mean if you don't mind me asking? Thanks for the comment -- I would not venture into the kind of individual stock-picking you describe. ETFs and index funds only.


I hope MoneyGal doesn't mind me butting in here. I don't understand how the longer the time in the market, the less exposed you are to short-term losses. Keep in mind that stocks can go for long stretches without beating bonds. The question is: will you be able to keep the faith when stocks underperform and keep paying interest on your leveraged loan? 




> Those Early Ernie and Late Lucy type of charts are what's motivating my urgency. You know what I mean: "Broke Bob invests only $16,000 in 1988 and now he's a multi-millionaire; Professional Pete did all the right things and hocked everything for grad school but had to pay $100,000 in 2008... and now he's only got $105,000 for retirement."


I don't know what Broke Bob invested in but I can assure you that stocks haven't returned anywhere near 20% over 22 years. In fact, Broke Bob will have about $105,000 today. Not bad, but nothing spectacular.

I second (or third) the suggestions made by other posters. I'd personally slow down and pay down the mortgage and contribute to a RRSP but won't leverage to build up a taxable portfolio. The reason: the hurdle rate imposed by your interest payments often wipes out any extra return you can get from stocks. So, why bother? It is one thing to invest your savings and get bond like returns from stocks. It's quite another to invest borrowed money and find that it is hard to break even, let alone make profits.


----------



## MoneyGal (Apr 24, 2009)

oh dear oh dear oh dear. Your other (delayed) post is now up. 

Someone who has had half of an RRSP in cash since 2007 because of an unwillingness to make decisions should not be obliging her future self based on an assumption of beating a 2.9% hurdle rate. 

You are relying too much on a few, sales-oriented descriptions of "financial planning." It's right there in your post: you believe in the power of compound interest, but even knowing that, you've been unwilling to commit to even a GIC, never mind an index fund, for your own current monies. 

Being successful in investing is as much behavioural as it is anything else. And right now, you don't have that part handled. You've also described the next few years, including pregnancies or possibly an adoption, as less stressful than the last few. But what if you have complications during pregnancy? What if one of your kids becomes ill? If you pull the trigger on this scenario, you are adding a requirement to make frequent, high-stakes financial decisions over a long period of time. There's no way you can beat your hurdle rate if you leave the money in cash, but that's what you've been doing with a large (I assume) part of your current assets. What will be different in the future? 

What if I showed you a chart that demonstrated that Robert Risky has fewer retirement assets than Sally Sapher, although both have been investing the same amount for the same period, him in indexed funds in a 40/60 asset allocation, her in GICs? *Over the last 19 years, Sally's returns beat Robert's most of the time.* (Note: my data ends in March 2009)

The assumption that "starting early and just letting the power of compound interest work for you!" rests on a couple of assumptions which just are not guaranteed and do not match the real-world evidence - including geometric returns and "staying the course" in decision-making over a very long time horizon. 

I hope you spend a lot more time gathering evidence for and thinking through the implications of your proposed course of action. I think you are building a castle in the air. Yes, people end up with few assets for retirement because they start late. But "just starting early" does not necessarily correct for this problem. It gets you into the game - but there are many ways to be knocked off track once you are in the game. Your model is very, very one-dimensional right now.


----------



## Berubeland (Sep 6, 2009)

It's kind of hard to explain my name... but here goes. 

My parents come from Northern Ontario and have very strange and fixed ways of doing things. They are very vehement about the way they do things being the only proper way to do things. Their way of doing things has made them reasonably wealthy. This wealth in their case is not a way to enjoy life or relax or anything if anything it's the opposite they are more rigid than ever. For instance my parents have never had a mortgage, they are very frugal, they shop for most of their clothes at Value Village. A few years ago they took a vacation in the States almost every night my dad refused to eat out saying that he was not paying 12$ for dinner when all he's going to eat is a soup. So they sit in the car and eat peanut butter and crackers and cheese. My mom spends all her time complaining about him not going in the restaurant but it's not like she gets out of the car herself and goes to the restaurant. 

Now my parents and my husband pretty much hate each other. And as time went on my husband started referring to these rather strange mannerisms as coming from Berubeland. (Our last name + land) 

Now when it comes to matters of money I'd much rather emulate my parents in at least some of the things they do than just about anyone else. So on this board and in matters of personal finance I'm Berubeland.


----------



## Berubeland (Sep 6, 2009)

*I don't want to become a professional investor-type, I just want to plan for retirement.*

I suggest you change your mind. Many people are here on this board and there is one story you hear with astonishing regularity. They had a financial planner and didn't do well and resolved to learn as much as they could. The stock market is a big place and most people will find a segment they become relatively interested in a learn that very well. 

Putting money in the stock market does not guarantee returns. I suggest you START WITH THE MONEY YOU ALREADY HAVE. You have $40,000 do something with that. Put it in some kind of very safe investment.

Then get yourself a virtual portfolio at www.wallstreetsurvivor.com and start trading there. See how you do.... test out your ideas. If it works then use your ideas on real money. The fact that you are using fake money will probably work on your paralysis. If you are successful then you may have more confidence to make those investment decisions.


----------



## MoneyGal (Apr 24, 2009)

CC! That post belongs in the "Girls!" thread.


----------



## CanadianCapitalist (Mar 31, 2009)

Oops. Thanks MoneyGal. The post is moved here:

http://www.canadianmoneyforum.com/showpost.php?p=17203&postcount=8


----------



## MoneyGal (Apr 24, 2009)

Well, it wasn't *that* inappropriate here...there's a lot of women in this thread.


----------



## Racer (Feb 3, 2010)

Hi folks,

Some more great comments, thank you. 

I have a correction to make -- I'm not sure why I painted the 'paralysis' picture. That was beyond self-deprecating and ventured into misleading. Life in the last 4 years has been hectic for a number of reasons not included in the regular life events I listed. And much of that time has been spent allocating some once-in-a-lifetime fluke-ish windfalls for me ($250K, plus the $95K still in escrow), as well as the net $600K bonus-downs for husband. The $40,000 in RRSP was truly a token contribution. I'm not saying that to brag. Just to point out that although I had meant to "get into" investing so that I could time my buy-in during the market drop everyone was anticipating (and then missed that opportunity), that was due in part to some legitimate prioritizing. 

The second correction I need to make is that I am not new to investing generally, just to investing in publicly traded securities. I would be okay with weathering low payout times -- I/we have a very high tolerance for risk if we believe in the fundamentals. Hence reinvesting husband's bonus-downs into shareholders loans, to grow his company. Before law school, I worked at a private equity fund, so I have some experience with understanding a company, its market, etc. 

So I would challenge the jump from "keeping the $20K in cash was a boneheaded move" to "I am the kind of person who makes boneheaded moves"  Well, I am quite the idiot on a regular basis, just usually not with money. It's entirely correct that I was building a castle in the air and using a one-dimensional model, but I was not presenting a plan, I was presenting a plan-for-making-an-investment plan. 

We are invested very heavily in husband's company, so I want to diversify away from that. Our biggest bet for retirement income, and especially early retirement for husband, is the sale of this company. I wanted to lock in some liquidity now, to hedge that big heavy bet (in addition to my worker-bee income, of course).

That said, all of your comments and advice have been top quality. There's just no need ("why start now?") to accelerate our traditional-style investments. And I take to heart the point about the leverage creating a hurdle that I may not be able to beat. 

In a very strange and scary way, I forgot that $20K is a lot of money in itself. Which is crazy, given the work I've had to put in this year to insulate myself against the "lifestyle creep" that seems part and parcel of my new profession.

Berubeland, your parents sitting in the car with the cheese and crackers had me laughing out loud. 

Moneygal, your comment about husband's desire to putter as a way of leaving the current job stress inspired a great pillow conversation last night. (Though I have to say, I did tell him that the thought just magically occurred to me because I am such a considerate and thoughtful woman  ) Thanks. 

Btw, he did mention he talked to the bank about rolling out some of those s/h loans this year, and that's looking good. So maybe the "little by little" approach" will be a "medium amount by medium amount" after all -- BUT WITH NO LEVERAGE  That would truly have been investing on margin, without any guarantee of pay-out. Thanks for pulling me back to reality. 

We can pay off our debt this year and then re-evaluate from there. 

Well, we're off to see Dear John tonight <swoon>. Gnight all, and thanks again.


----------



## sprocket1200 (Aug 21, 2009)

sounds like alot of assumptions about the future that may or may not come true. do not borrow to invest. there are enough people that have done that with real estate (including their primary residences) that will be begging for forgiveness once rates rise...


----------



## John_Michaels (Dec 14, 2009)

Racer - congrats. I think this falls under 'the harder I work, the luckier (fluke-ish?) I get"


----------



## Racer (Feb 3, 2010)

Thanks John. 

I am not being bashful about the flukeyness though, at least when it comes to $94,000 of that windfall. I bought a niche (read: difficult to sell) house -- a tiny little 2-bedroom that was smaller than most condos, just before law school, because I was afraid of being priced out of the market if I waited until graduation to buy. 

Little did I expect that the real estate market would just not stop - it just turned red hot. So I informed partner that the wedding date needed to be moved way up, because I needed to get the heck out of real estate. (Pretty romantic, hey?) I only had that house for 1.5 years, and grossed a profit of $94,000 -- $79,000 after realtor commissions.

Now that was a fluke if ever I have heard of one.

And wouldn't you know that my little house went on the market last week. The fellow who took it off my hands is listing it for $11,000 less than what he paid. And that doesn't count what he'll be paying in realtor commissions. I feel sad about that, but relieved that I escaped in time. 

At the time, everyone was telling me not to slash the price as "low" as I did, to use it as a commercial property, to wait until prices rose again. Some straight out told me I was stupid. Now my realtor acquaintances are telling all kinds of sad stories, as people learn the hard way that they bought an overpriced house. 

Hmm... that inspires an idea for a new thread -- how to know when it's better to buy than to rent.


----------

