Dr. Garth

So many maladies. So little time. Let’s snap on the latex, pull on the wellies, flip the goggles and wade into the waiting room. Oh, the humanity.

“Hi Garth, I know you are probably incredibly busy but wondering if you could offer us some advice?” Arnie asks. “My wife and I were entirely in mutual funds with our credit union for years.  We have just recently had our advisor move all our accounts over to ETFs (roughly $850,000).  We have been taking $1,500 monthly from our non registered account.  Please see the below email we just received from our advisor. I don’t believe this would be the best course of action, do you?

“Hi Arni and Dawn.
It seems we have run into a bit of an administrative issue since switching your account to ETFs.  Since the daily price of ETFs fluctuates throughout the day, it has made determining the exact number of units to sell to satisfy your monthly payment a bit challenging.
My suggestion is to build in a cash wedge to your portfolio.  You currently have 15% of your portfolio invested in a low-risk bond ETF.  The value of this is approx. $37,000 which is nearly equivalent to 2 years of payments.  I would like to sell that bond ETF and place the money in a high interest savings account and take the payments from there.  The other 3 ETFs would remain as-is. Okay?”

Well, the doc finds this interesting. First, all securities based on tradeable assets wiggle in value. Mutual fluctuate daily. ETFs do so constantly, but settle at one price at the end of the trading day. This is not ‘an administrative issue’ but one of planning and competence. Harvesting $1,500 a monthly from a portfolio of $850,000 is a piffle. Any correct B&D portfolio should have about 2% in cash – enough to pay you for a year, replenished routinely as assets are managed. This ‘cash’ should be in a fully-liquid, high-yield ETF, as we’ve outlined here in the past. So keeping 15% of the overall account in a savings accounts is (ahem) dumb.

But wait. There are other complications.

A portfolio of this size should not be in just four ETFs, only one of them in boring safe stuff. A better number would four times that many in order to gain diversity, global exposure and the correct balance of 60% growth and 40% fixed.

By the way, what are you paying TNL@TCU? Nothing, I hope. Time to move on, Arnie.

Jeff apparently called the Doctor a few years ago and we chatted about him becoming a client. “We didn’t have the necessary funds back then but we have kept reading your blog and saving and your advice has served us well,” he says. “Today I have a question.”

“I saw a short column in the Globe by Rob Carrick talking about basically emptying your TFSA in order to pay off your mortgage. He was in support of that idea considering current mortgage rates and general rates of return from a TFSA. What do you think about that strategy?”

Rob’s a smart guy with a usually-clear view of the perils of chunking too much net worth into residential real estate. But we all err.

TFSAs are immensely valuable. If you feed one for decades, building it into a swollen nestegg of hundreds of thousands by retirement, it can provide an untaxed income stream which won’t reduce government benefits. An RRSP can’t do that. Nor a RRIF. Or a FHSA.

Sheesh, we’re up to $95,000 in allowable contribution room now – almost two hundred grand for a couple. Keep that baby fed for 15 more years with an achievable 6% return from growth ETFs, and you’ve got $975,000. That could throw off $58,500 in annual (tax-free) income. Add in CPP and OAS (unreduced) and you’d have a household income of almost $100,000 – and pay virtually no tax.

Is your house going to pay you five grand a month in retirement?

Nope. Mortgage rates are still in the 5% range, which is historically cheap. Get a weekly-pay mortgages which chops the repayment time substantially, and focus on throwing extra cash you can into the TFSA first, then an RRSP or non-registered account after that. Cancelling the Globe subscription might help.

Now, to Victoria where Stu need psych help.

After 23 years, with an unaffordable mortgage renewal coming, he and spouse sold the house. “We’re still recovering from Covid as self-employed,” he explains. “Our income over the last 3 years has been only about 50k combined. Terrible.”

“So we are sitting on the cash from the sale of the house its currently invested and just waiting to decide what to do next. Is it time to jump back into the real estate market? I’m not sure, and there’s no way now we would qualify for a mortgage. We could buy out right but that will max out the capital we do have – the only way we could do it.

We want to have a home as we need a place to live, but its absolute crazy town prices here for what you are getting, We have about 10 years left in our working career to make money to some day retire, I hope. I like your brutal honesty and point of view. What would you do?”

Hey, Stu. Get a grip. You sold a house because you couldn’t afford to finance it. Why would buying another one make things better? Your income is barely enough to cover living and ownership costs, even without a mortgage. And if the housing market goes stale or stagnates (as all the kiddos want) you’d lose a whack of irreplaceable retirement capital. Putting all your net worth into one asset is a huge risk – especially since you lack the time to recover from a financial hit.

Stay invested. Place the funds wisely and carefully. In a decade they should (almost) double. Max out the tax shelters, especially TFSAs. Strip realtor.ca from your computer bookmarks. Just because you can buy a modest house with cash doesn’t mean your should. The consequences in the final decades of your life could be devastating. And getting old is hard enough. Trust me.

About the picture: “Hello Mr. Turner: This is Neige,”writes Jessy. “Neige is clearly the result of selective breeding for maximum cuteness.”

To be in touch or send a picture of your beast, email to [email protected]’.