The mighty blunder

If this were a blog read by normal people, today’s topic would be what happens when a US president implodes.  But, Mr. Chairman, I fear for my life and that of Bandit’s, since the audience is rife with MAGAmaniacs. So the words ‘Donald Trump’ or ‘Michael Cohen’ will not appear in this post, lest we face man-shaming by a gang of deplorables in the dog park.

But, jeez, how long can it be that 45 survives?

Anyway, not going there. Not today. Instead let’s deal with the First World problems that plague us all. Like making $350,000 a year.

“You have the best blog on the internet. People should read it whether they care about finances or not.” Nice SU, Jim. Not get on with it.

My situation – early 30s single, probably married soon. I’m a physician, ~$350K/year. She’s in dental, ~$90K per year. I’ve followed your usual advice – maxed the RRSP, rented apartment, drive a clunker. I spend ~$60K/year on myself. Since I began making any significant money, and paying a marginal rate of 48%, I’ve spent way too much time thinking about my taxes, and I’ve paid too much money to other people to think about them for me.

I wonder if you share my belief that the implementation of income tax was a mighty blunder of our society. Since income taxes aren’t going anywhere soon, we need to get income taxes right (as much as we can). I’m completely convinced that a flat tax with a large personal deduction/credit is superior to the progressive tax.

If you agree, I’d like to hear your thoughts on the politics around income taxes. If the flat tax is the only system that makes any sense, then why don’t we have it? Is it simply that most voters can’t be convinced of its benefits? How much of a role do you think the tax preparation industry has in lobbying for complex taxes? As a financial guru, celebrity, and former politician, your perspective could be very interesting and influential. It will make for some great banter in your steerage section.

If you disagree, please discard and carry on.

It’s an idea many people have backed over the years, but without traction. The problem, Jimbo, is that (unlike you) four in ten families in Canada pay zero income tax. And they all vote. Meanwhile the top 20% of income-earners cough up 70% of the income tax collected – and they’re a political minority. So any party bringing in a flat tax would be correctly seen as benefiting the rich (doctors like you) while penalizing $80,000 families who own houses, minivans and offspring and pay no net tax.

That’s because in order to work and raise sufficient revenues for the government, a flat tax would need to be as universal as possible – with only the lowest income groups exempted. Your taxes would decline from 48% to (say) 20%, and people paying 0% would also go to 20%. See what I mean? Rebellion.

Over to Alan, a cop:

“I’ve been a reader of yours for roughly three years now and I can’t put into words just how often your insight and expertise has helped me change my financial well-being for the better.  As it’s tax season, you’ve spoken a lot recently about the importance of making RRSP contributions, which relates to a question I’ve had on my mind recently.

‘As someone who’s turning 30 this week, I’ve made many financial sacrifices over the last two years while several of my friends were out purchasing overpriced mortgage debt. I’m finally now just a few weeks away from maximizing my TFSA limit after spending prior years using it as a save and spend account. Yes, it’s all invested and diversified… Now I know the next logical step would be to return to making RRSP contributions (something I haven’t done since 2014), but I’m unsure of how that will conflict with my current career path.

‘I currently work in law enforcement meaning, yes, I do contribute to a pension plan. There’s absolutely no guarantee this thing will be around in five years, never mind when I reach retirement age within the next 35 to 40 years. However, if the pension plan is still around then (whether it’ll be a defined benefit or contribution by that point is anyone’s guess) what are the ramifications of drawing from an RRSP and a pension plan at the same time?

Yes, I know it’s absolutely important to take the money up front. However, I’m also curious to see what this will mean for my finances later on in life (if the job doesn’t knock me out first).

It’s easy to hate people with DB pensions, but you’re wise to question whether yours will be there decades from now. Defined benefit plans have been croaking steadily since they’re unaffordable to employers – unless backed by tax dollars. We’ve seen many instances in the US where ‘ironclad’ pension plans in the public sector have gutted retiree benefits because taxpayers refused to subsidize them any longer.

Having said that, if you do retire with it, having a fat RRSP could cause tax woes in the hazy future – after you turn 71. At that time (if current rules hold), the retirement plan would convert to a RRIF, forcing you to withdraw a small amount annually (now about 5%) and add it to your income. That could pop you into a higher tax bracket – which is the chief risk. This is the Big Excuse many people with a DB plan (especially teachers) use for never opening an RRSP and, in fact, saving next to nothing.

So the best strategy is (a) TFSA first – fill it, invest it, then (b) a non-reg account for tax-efficient growth (dividends and cap gains) which can supplement retirement income, then (c) an RRSP for tax-shifting – to reduce the burden now while giving you a cushion for years when you might goof off, be laid off or check out. And you can use the RRSP refund to fund the TFSA. By the way, when you hit your 70s be sure to ask me how to melt down the RRIF and pay no tax. Ha.

Time for one more? Meet Derek.

Please allow me to begin with the requisite homily regarding your blog: it rocks and is a *must* during my daily reading regimen.

Let’s get to the point: I’m 44, work for Big Law (*not* a lawyer so please don’t sic the dogs on me) and I feel I’m spinning my wheels. For a number of reasons I’ve really only begun to be in a position to save and invest within the past 6 or 7 years (more than a decade of precarious contract work, a failed marriage and other lovely things prevented that from happening) and the more I read and research (am a librarian by training) the more I feel I’m missing out on something.

Income: around 75-77K after taxes. Savings/investments: 65K (TFSA), 27K (RSP), 8K (non-registered) with Investors Group: just received my statement, around 3% returns over the past five years which seems *really* bad to me. With that in mind I have a few questions:

– Stick with IG? My adviser…nice enough guy, buys me a few drinks every quarter, assures me I’m on the right track. My spider-sense is tingling about that, I’m not sure that track is leading anywhere other than to a tent under the Gardiner Expressway for my retirement.

– If not IG, where? The banks, no way (and this from someone who’s mom was a teller for 30 years). I’m too small-potatoes for larger investment houses/options either at the banks or elsewhere. Roboadvisor?

– ETF’s: in your experience, where is the best retail option for a small investor such as myself?

That’s all I can say for now. I suppose seeing that statement from IG was one of those “teaching moments”, and I am aware the markets have been a bit rough recently, and I do take your advice not to stress over the day-to-day, but it’s year-to-year and beyond that’s starting to concern me. And so yes, any advice, however brief, would be much appreciated.

Investors Group is trying desperately to rebrand as IG Wealth, for good reason. The mutual fund behemoth is on the wrong side of history, as people wake up to ridiculous fund fees which shrivel performance. Many of the advisors are really salesguys, and IG has been famous for locking people into a mutual fund prison called ‘deferred sales charges.’ If you’re an inmate, you know why.

But you’re right. The banks are little better. Big, fancy, Porsche-driving portfolio manager dudes like those I work with might not be an economical choice, while robos are truly scary since you’re handing money to an algo. So be simple about it – ask your existing advisor to sell off the mutual funds and place you into a low-cost 60/40 ETF portfolio. If the old IG is really the new IG, this should be an option. If not, man up and self-invest. Make your Portfolio Great Again.