Ever since Neil and I paid-off our consumer debt, and have since funded an emergency account in case anything happens to either of us or our jobs, we’ve been working on how to make our money do the most for us. I work hard, it should too!
An interesting perspective we got from our investment manager had to do with the amount we’re paying on our mortgage. The first thing a lot of people think of when it comes to money management is being mortgage-free. Us included.
Our current mortgage has a number of accelerated repayment options, including the option to up to double each payment. With the record-low interest rates, we’d easily been doing this, and because anything above the required payment goes directly against the principle, we were down to about 9 years (at current rates anyhow) to be mortgage free.
But is that getting us the best return right now?
Housing is, admittedly, a shit investment in terms of growth. Most of the time it keeps up with inflation, and there are all sorts of other soft benefits to owning a home, but in terms of cash in the bank at the end of the day, it’s not often your best choice.
In the meantime, we’ve got a big backlog of RRSP contribution room from our years of being young and much less responsible than we are now, and try as we might, we can’t find a better place to put our money than in the government sponsored tax deferral accounts. And then into TFSAs. Even at a modest rate of return, it’ll far outpace any “investment gain” we’d achieve on our house, and we get to take advantage of the additional tax savings now.
So, back up to 20 years left on the mortgage, but at least it’s happy, party, fun times with our big! new! refund cheques! right? Not so fast.
One of the things we always wondered a bit about while watching yet another episode of Till Debt Do Us Part was how these average people in financial ruin were going to have oodles of money by the time they retired if they followed the plan Gail set out for them.
We currently put more money into retirement savings each month than many of these families were told to in the show, and according to our calculations, were being quickly outpaced by people putting half as much into their savings. What were we missing?
Thanks to the magic of TV editing, we finally caught an episode where Gail said “and if, once you’ve paid off your debt, you take that monthly amount and put it into retirement savings, and reinvest your tax returns every year, you’ll have ‘thismany’ dollars when you retire.”
Ah Hah! Reinvest the tax return!
When we met, Neil hadn’t even filed his taxes for the previous three years. I had always gotten modest returns, and used them to either pay my Visa bill, or as some sort of bonus “play money” windfall to be squandered. Even last year we used our returns partly for fun stuff and partly for debt repayment.
This year though, it goes straight back into the RRSPs. Which, combined with our new, higher contributions, will net us a return that’s (stunningly) more than the salary I made my first year out of University. Which goes back into the RRSPs again, and so the circle continues until we’ve maxed out our backlog (about 3 years from now).
Before making those two changes we were pushing hard and really hoping for a market turnaround that would give us a favourable average rate of return by the time we turn 50 (which is when we’d like to retire) to have enough to retire on. We were aiming for a million 2030 dollars, which would see us through to 99 (we both come from long-lived families) if you included selling our home if it also appreciated enough to keep up with inflation.
Now, we’re on track to have a little over 2 million at retirement, not counting our house, even taking into account a much lower average rate of return over the life of our investments. It seems immensely cool, and I still can’t quite believe it, but so far I haven’t been able to break it.
It’s kindof amazing that in just a couple years I’ve gone from being so detached from money that I didn’t even open some bills, to being this active in what we do with it and trying to make the most of it. And it’s super rewarding to see that paying off!
This might be too personal, but… do you have pension plans provided through your workplace, or is your personal retirement savings it? 🙂
.-= Renee´s last blog ..the posty-postish post =-.
Neither of us have ever worked for an employer who provided a pension plan – so this is all personal savings.
Although for the past 5 or 6 years, Neil has had employer-sponsored RRSP savings – 3% of his salary is put into a group fund, and his employer matches it. That account makes up about 15% of our total retirement savings right now.
Apparently Consumer Reports did a comparison study a while back of whether you should take any “bonus” cash and invest it into an index fund, or use it to pay down your mortgage. The index fund won.
I’m curious how you have calculated how much you will have at retirement. I have money in RRSPs, pension & TSFA, but I haven’t a clue how to estimate what it will all be worth when I’m 65.
.-= Beth´s last blog ..This is how dedicated I am =-.
We’ve got a very big spreadsheet, and Neil’s an excel wizard.
First off, we’ve assumed a rate of return of 5% per year, compounding annually.
We’ve also assumed a rate of inflation of 2% per year, increasing our planned deposits by that amount, hopefully off-setting the constant devaluing of dollars as time goes by.
Our $2m portfolio in 2034 would be the equivalent of 1.2m 2010 dollars – hopefully we’ve guessed wisely at what inflation will do, and the 2% averages out.
I think this is an excellent plan IF you are happy with your current home. If, however, you want to upgrade your living situation, putting money into RRSPs isn’t going to help much, whereas by putting money into your mortgage, you’re avoiding that interest and essentially banking it away for a larger down payment for a future home upgrade. Of course, ideally, we’d all be able to do both!
Also, I think it’s easy to forget that you’ll always need a roof over your head. So, I’m glad to see that your long term plan doesn’t involve selling your home. Unless the sell was for a downgrade to release some cash, I’m assuming you’d be taking on some additional rent payments where there were no payments before. Either way, it sounds like you’re in great shape. Congrats!
One more thing… I just want to say that I admire your willingness to talk openly about finances. I think it’s become an unnecessarily taboo subject. I’m certain that part of the current debt problem in North America stems from people not being willing to discuss money, or even acknowledge that it needs to be properly managed. Also, it’s really useful to learn from the successes and failures of other people. Thanks 🙂
Thanks 🙂 It’s actually been a great experience sharing. I’ve learned a lot by opening up the discussion, and people have been incredibly kind about the whole thing.
As for being happy with our current home, yes – that’s a big part of why we’re going this way. We don’t have any plans to purchase anything more expensive in the next 3-4 years, which is how long it would take us under this plan to pay down our RRSP & TFSA backlog.
Once that’s done, it’s back to making our maximum contributions each year, and redirecting anything extra back onto extra mortgage payments.
Oh sure, this will all be very useful when the clima/2012/wrath-of-God-pocalypse comes and everyone’s sealed in their zombie-proof bunkers with their home-made blunderbusses and cisterns of rain water. THEN where will your Excel spreadsheet get you?!
Actually, my financial planning has always been crappy, but having stage 4 metastatic cancer has put retirement planning surprisingly low on my priority list. So checking out your stuff about it is, for me, like reading fun stories from another world entirely.
.-= Derek K. Miller´s last blog ..Derek the cowboy =-.
Thanks Derek – glad you’re enjoying the posts anyhow 🙂
Although I must admit, if the end-days come and I find I’ve got an outrageous bank account instead of having plied myself to exhaustion with liquor and whores, I’m gonna be pissed!
You should just convert it all to gold. Or ramen noodles.
.-= Derek K. Miller´s last blog ..Movable Type’s static files really work =-.