Author Topic: where to start? ($150,000 to invest)  (Read 4501 times)

scrubbyfish

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where to start? ($150,000 to invest)
« on: January 23, 2014, 10:10:18 AM »
I am posting this now, so I don't end up losing several more weeks, but I do have an email in to my bank to ask a couple more questions, and will add info in red if there is more.

Circumstance:

• Canada
• Single adult, one child with disabilities
• Sole provider
• Multiple streams of income, all reasonably secure, but not cement (i.e., I view no income source as entirely secure)
• Intentional action by a much larger business cost me $20,000 last year; even though their claim ultimately proved bogus, they subsequently killed over half my income by establishing a duopoly (my point is that business craziness can happen any time, with sudden and massive financial impacts)
• Savings to date were gained primarily by house sale and good business years; I can't assume those will repeat themselves. In my current circumstances, I do not see me replenishing current savings if they disappear in poor investment planning.
• Because my income is wildly variable, I do not feel comfortable committing a dollar amount to investing each month; rather I see what's available year end and allocate that

Current Income ~$29,000/yr
Annual living expenses ~$24,000 (this includes some buffer)

Goals, in this order:

• Continue living a simple life with sufficient income to avoid working a crap job while caring awesomely for my son

• Set my kid up for financial security in case his disabilities interfere with his ability to work a crap job/invest/etc in adulthood and I am dead

• Own property one day; this could happen anywhere from 1 year from now if I move to another region, up to 10 years from now if I stay near relationship. Although my dream is a sweet little cottage in a silent area, my primary interest in owning is so we have something "real" if the economic system goes buggy. This said, I did get out of home ownership previously because my property taxes and home insurance both tripled in the first three years; this led me to believe home ownership is also quite tenuous an investment. I am generally extremely happy to rent, so long as I can find cheap little places with a little yard (so far so good).

• Find a way to invest monthly rather than annually, so I can hit cheap points in a given stock's year

Some investment vehicles available, and considerations:

• Registered Disability Savings Plan - This one is critical, as the government of Canada matches the first portion of contribution by 300%. It also serves my kid in his adulthood, while protecting his option for federal and provincial disability benefits if those end up being needed. Currently in BMO; could talk about its details and potentially moving this after we come up with overall plan.  I have completed all our catch up years, so optimizing this plan is $1500/yr going forward.

• Registered Education Savings Plan - This one is excellent, as the government of Canada matches the first portion by 20%. Currently in BMO; could talk about its details and potentially moving this after we come up with overall plan. Government strongly limits how many catch-up years we can do, so to gain the 20% on all available years I plan to put in $5000/yr for another 10 years.

• RRSP - I have nothing in this so far, and $55,000 in room. This is valuable and should be used in my case not for tax reasons, but because any amount over $100,000 that I have outside of Registered accounts leaves me ineligible for various supports. i.e., If I have $199,000 in Registered accounts, only the $99,000 is viewed as assets and I am eligible for supports. If I have $199,000 in non-Registered accounts, the entire amount is viewed as assets and we are ineligible for various supports. I had originally set up this account because my income was finally over $45,000 and rising. But within a month of setting up the account, the other business took me down.

• I can put additional amounts into the other Registered accounts (RDSP and RESP) any given year, but there would be no additional government contribution.


• Tax-Free Savings Account - I have nothing in this so far, and $25,500 in room.

• I'm always keen to have money in real estate, and am very interested in REITs.

• Because my income is low, we are eligible for some things -unless we receive interest income. Last year's interest income of $110 killed our eligibility for $800 in benefits, so interest is the opposite of helpful.

Considerations for savings:

• It is impossible to know when the same or another business may pull another bogus action, triggering legal costs to unknowable amounts.

• My work has always been in the social service sector, very low paying.

• I am willing to go to school 1/4 time at this point, to build a new (high paying) skill set.

• My kid's life (and mine) is infinitely better when he can homeschool, so it's ideal that I work from home and we are not sent into the trenches.

Available for saving/investing:

• $120,000 (currently in a wildly expensive annuity product)
• $32,000 savings
• Currently in RDSP: $38,210 Note: Only about 1/3 of this is accessible to me. The govt contributes for my son's adult needs, so if I take my contribution out early, the govt gift goes back to the govt.
• Currently in RESP: $13,097 Note: Only a portion of this is accessible to me. The govt contributes for my son's adult needs, so if I take my contribution out early, the govt gift goes back to the govt.


I would like to ensure I have accessible:

• two years of living expenses (so $24,000 x 2) plus
• five years of RESP contributions (so $20,000) plus
• enough to float the business should another business disaster occur ($30,000)
« Last Edit: January 23, 2014, 02:33:39 PM by scrubbyfish »

grmagne

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Re: where to start? ($150,000 to invest)
« Reply #1 on: January 23, 2014, 11:00:51 AM »
You should definitely invest in a TFSA. This money is accessible at any time and will grow tax-free forever. Also, the interest growth will forever expand your contribution room if you decide to withdraw it (for example, if you deposit $31k and it grows to $38k, then you can withdraw $38,000 and then re-deposit $38,000 the following year, plus the additional $5,500 contribution room that everyone gets). There’s no reason you shouldn’t have a TFSA. Your maximum limit should be $31,000 if you’ve never contributed before and you were born prior to 1991.

Signing up for a CRA account is recommended because it will allow you to see all your previous tax returns, your TFSA contribution room, your RRSP contribution room, etc. Here’s a link in case you don’t have this already:
http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html
(select CRA Register)

It usually doesn’t make sense to contribute to an RRSP unless you’re in a higher tax bracket. If you’re ever above $45,000+ of employment income, then you should start contributing to an RRSP and if you’re above $90,000+ then you should be heavily investing into RRSP, using some of the unused contribution room you’ve already built up. Based upon your current income you were right not to contribute to an RRSP, and the RDSP, RESP and TFSA should definitely be higher priorities.

If you want to invest in mutual funds with a low-MER that you can easily access then a TD Online Brokerage account would be recommended because they have their e-series with a ~0.4% MER. Here’s a model portfolio of e-series funds (Option 2 in the link):
http://canadiancouchpotato.com/model-portfolios/
 
Since you sound conservative with your investment plans, you should probably go for a higher bond fund proportion than 40%. A little over 50% for your TFSA would be something like $16,000 in the Canadian Bond index, and $5,000 each into Canadian, U.S., and International Index funds (assuming that you max out the $31,000 TFSA contribution which is very highly recommended). Bond funds held up well in 2007-2008 (-1% to 2% RoR when everything else dropped 30%) so they’re pretty safe during recessions, but only grow about 5% over the long-term. The 3 equity funds are riskier but over the long-term (decades) can be expected to grow 7+%.

If you’re more interested in making regular contributions to an ETF and you want a fund that allows low-cost ETF purchases, your options are: Questrade, Qtrade, Scotia iTrade, Virtual Brokers. This link compares them in more detail:
http://www.milliondollarjourney.com/top-canadian-discount-brokerages-with-commission-free-etfs.htm

Since you’re interested in REITs, here are some major ETFs offered in Canada. If you have your commission-free ETF account set up then you can start making regular purchases.

BMO Equal Weight REITs Index ETF (ZRE)
Vanguard FTSE Canadian Capped REIT Index ETF (VRE)
iShares S&P/TSX Capped REIT Index Fund (XRE)

Another thing you might consider for diversification is a dividend-producing income stream in the financial sector. Canadians below $40,000 income pay very little tax on dividend income, so a good dividend stream would be highly recommended in your situation. The following ETF should be really good for your situation. XFN invests in all the banks and insurance companies in Canada so the investments are quite solid and they pay regular dividends:

iShares S&P/TSX Capped Financials Index Fund (XFN)

scrubbyfish

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Re: where to start? ($150,000 to invest)
« Reply #2 on: January 23, 2014, 11:31:47 AM »
Thank you, grmagne!!!

I will work slowly through your post and see what I can understand and what I need to ask further about here. Much appreciated!

Also, I updated the original post (red) to indicate the value of an RRSP contribution in my case.

scrubbyfish

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Re: where to start? ($150,000 to invest)
« Reply #3 on: January 23, 2014, 03:23:44 PM »
Am I understanding the following correctly:

• If I want a low-cost, yet managed, account in mutual funds, I could go with TD Online Brokerage.

• If I want EFTs with low transaction fees on each purchase, I can go with Questrade, etc, but that would be a separate company and account from anything I do with TD Online Brokerage.

• If I want REITs, I can do that through my account with Questrade (or whichever one I choose).

• In my low tax bracket, dividends would be taxed at a very low rate, so dividends are an option.

Questions:

If I don't need them to live on, what is the advantage of my receiving dividends vs increased growth?

I currently bank at VanCity and would be inclined to set up my TFSA there. I also love my banker there. On the other hand, moving my business account to RBC would create additional income in that PayPal would stop charging me that weird, extra conversion fee (RBC is the only exception to this oddity). Finally, I like to make everything as simple and one-stop as possible. Are all the investment options available through one place, such as TD?

Revelation:

I didn't realize/know that a TFSA can hold investments. I thought it was just a savings account in which the interest from the bank wasn't taxed. I couldn't see how that would be worth even the effort of opening it, because "how much interest do banks give us"? Maybe this is why so many other Canadians haven't opened one either!

grmagne

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Re: where to start? ($150,000 to invest)
« Reply #4 on: January 24, 2014, 10:12:24 AM »
Am I understanding the following correctly:

• If I want a low-cost, yet managed, account in mutual funds, I could go with TD Online Brokerage.

Yes, the TD e-series are by far the cheapest MER mutual funds in Canada. I like them because they’re convenient and I already have an account with TD. You need an Online Brokerage account because they won’t let you invest in the e-series if you just have a regular bank account with them. Note that the e-series are index funds, not actively managed. So they’ll track the Toronto Stock Exchange, S&P 500, European & Asian markets, Canadian bond market, but are less managed than many other mutual funds (hence the low cost).

Quote
• If I want EFTs with low transaction fees on each purchase, I can go with Questrade, etc, but that would be a separate company and account from anything I do with TD Online Brokerage.

• If I want REITs, I can do that through my account with Questrade (or whichever one I choose).


Yes, the Questrade and TD account would be separate and you’d have to deal with two companies. REIT ETFs, Stock ETFs and Bond ETFs, etc. can all be purchased through a brokerage whether it’s TD, Questrade, Scotia iTrade, QTrade, or any other. If you want to consolidate everything with one brokerage so that you don’t have deal with two companies then you should decide how you plan to invest:

-   If you want to buy REIT ETFs twice per year, for example, that would cost you $10 per trade ($20/year) with TD, but you’d also be able to invest in the TD e-series with no transaction costs. By the way, you’d need more than $50,000 household assets invested with TD to get $10 transactions. Below $50k it’s $30 per trade.
-   If you’re planning to buy REIT ETFs with regular monthly contributions then TD would cost you $120 in transaction fees, since it’s $10 each time. In that case, you’d be better off putting your money into Questrade where they give you free ETF purchases, but you’d pay a transaction cost when you sell them. You need to have at least $5,000 in Questrade to get the best rates.
-   If you’ve never bought or sold an ETF before, they’re just like buying & selling individual stocks. You look at the price and decide how many you’d like to buy. Then you place your order and the brokerage executes the trade for you when a seller(s) are found that match your price/qunatity. Otherwise, ETFs are like mutual funds in that they’re bundles of various stocks, bonds, real estate, etc. ETFs have way lower fees, though, that’s why it’s worth the effort to open the brokerage account, especially since you have six figures to invest.

Quote
• In my low tax bracket, dividends would be taxed at a very low rate, so dividends are an option.

If I’m correct that you live in BC, then dividends are even better for you.
http://www.taxtips.ca/taxrates/bc.htm

The link above shows the marginal tax rates in British Columbia. Notice that in your province the marginal dividend rate for incomes below $37,606 is -6.84%. Yes, negative. That means that you can collect dividend income and not only will you not pay taxes on them, you’ll actually get a tax reduction. The BC government won’t send you a cheque but you can use dividend credits to reduce the other income tax you pay.

Even if you lived in a different province, dividends have virtually no cost. The key advantage, is that once you’ve filled up your RESP and TFSA limits, your extra money is invested in a taxable account. By collecting dividends you’re building your net worth without paying any taxes. However, if the money accumulates in a growth stock, then you’ll pay capital gains.

As a comparison, let’s say you invest $50,000 in a growth stock that grows 6% per year and then you sell it 12 years from now for $100,000.  Your capital gains are $50,000 but the government only requires you to report half of your capital gains. So you’d report $25,000 income in the year 2026.

As an alternative investment, let’s say you invest $50,000 in a stock that grows 3% in value but also pays you 3% in dividends. Assuming you re-invest your dividends, this fund also grows at 6% per year but you’d be reporting your dividend income each tax year (in your case, paying essentially no tax). At the end of 12 years this fund is also worth $100,000 but since half of the earnings came from previously reported dividends, then you’ve only got $25,000 of capital gains. In 2026 you’d only have to report $12,500 of income.

Dividends also give you a cash flow for future RESP and TFSA contributions. In 2015 you’ll have another $5,500 of TFSA contribution room. If you like to invest with monthly contributions, that works out to $458.33 per month. Regular dividend flows from a taxable account that get re-invested into a TFSA is a nice way to always have money for TFSA contributions while minimizing taxable gains.
Quote


Questions:
If I don't need them to live on, what is the advantage of my receiving dividends vs increased growth?

I currently bank at VanCity and would be inclined to set up my TFSA there. I also love my banker there. On the other hand, moving my business account to RBC would create additional income in that PayPal would stop charging me that weird, extra conversion fee (RBC is the only exception to this oddity). Finally, I like to make everything as simple and one-stop as possible. Are all the investment options available through one place, such as TD?

For your TFSA, all income is tax-free so it doesn’t matter whether it’s capital gains or dividend payments, all growth is treated the same. But the money invested outside of a TFSA is taxable. So in your situation it’s best to collect your dividends in a taxable account (where you’re not paying taxes on your dividends anyway). Then put bonds and stocks inside your RESP or TFSA where they’ll grow tax-free. If you have bonds or GICs outside of a tax-free account then all the interest income is taxable income.

If you use PayPal a lot and want to bank with RBC to save money, then RBC has some Index funds that have a 0.72% MER. They’re basically the same as the TD e-series but with MERs about 0.3% higher. However, the 2 advantages are that they’re very simple (a regular bank account is enough, you don’t need an Online Brokerage account) and also you’d be saving on PayPal costs. If you think the PayPal savings are worth more than 0.3%, then consider investing with RBC.

I don’t know anything about Van City but if you want to invest with them, ask if they have an online brokerage, or whether you have access to low-MER mutual funds. If you’re investing $150,000 then saving 1% on your MERs will save you $1,500 per year and that savings will grow as your investment portfolio grows. So always make sure that your investments have low MER and make sure you're investing with a company that meets your investment needs.

Quote
Revelation:

I didn't realize/know that a TFSA can hold investments. I thought it was just a savings account in which the interest from the bank wasn't taxed. I couldn't see how that would be worth even the effort of opening it, because "how much interest do banks give us"? Maybe this is why so many other Canadians haven't opened one either!

A lot of people think that, probably because of the “Savings Account” part of the name. Banks also advertise TFSA GICs a lot, and that reinforces the belief. RRSPs, RESPs and TFSAs can invest in stocks, bonds, mutual funds, REITs, GICs, etc.

Because of the unlimited potential for tax-free growth, TFSAs should actually have your most aggressive investments. That’s my philosophy: anything in an emergency savings account is taxable (since there’s so little taxable income being produced on low interest rates) and I use the TD e-series funds for my TFSA. I like aggressive investing so I’ve only got 15% bonds, 85% Canadian, US & International Equity. For my RRSPs I invest in U.S. ETFs.

And, lastly, if you still don't feel confident about any aspect of investing, there are financial advisors that can help you out.