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Should You Get a Reverse Mortgage?

A reverse mortgage is a loan against your home where you don’t have to make mortgage payments.  The lender gives you a lump sum or regular payments that are limited to a percentage of your home’s value, typically 20-60% depending on your age, and you get to stay in your home.  The mortgage balance grows until you die, leave your home for some other reason, or choose to pay it off. In a typical case, you or your estate pays back the lender from the proceeds of selling your home.  For most reverse mortgages, you get to stay in your home even if the debt grows to more than the home’s value.  The best information I could find is that this happens less than 1% of the time, which is hardly surprising given the extended real estate boom in Canada. House prices have been appreciating fast enough to keep ahead of the debt. The number of reverse mortgages held by Canadians is still just a tiny fraction of all mortgages, and even fewer reverse mortgages have run to completion....
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Should People Invest in Real Estate?

One of the contentious questions David Chilton, The Wealthy Barber, asked me on his podcast is whether people should invest in real estate.  This is an emotional subject for many, and all of us come to the discussion with different experiences and skills. We are really asking three different questions here: 1. Should you own your home or rent? 2. Should you own rental properties? 3. Should you invest in REITs (real estate investment trusts)? Should you own your home or rent? There are many factors to consider.  Let’s focus on money first.  Are you better off from a purely financial point of view to own your home or rent a comparable home?  If you’re an emotionless robot when it comes to investing and saving, and you understand low-cost index investing, then the answer is usually that renting is better financially.  In rare markets, this can flip, but renting wins most of the time. But people aren’t emotionless robots.  They often invest their savings terri...
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Applying Personal Finance Principles to FIRE

The subject of FIRE (Financial Independence Retire Early) has captured the imaginations of many.  Some love it and some hate it, because it’s a good strategy for some and not others.  Many variants of FIRE have evolved over time to suit people’s different needs and desires.  This makes it hard to speak generally about FIRE, but there are principles that we can use to judge a particular FIRE plan. Here is a general personal finance principle: Don’t cheat your future self by indulging your present self. The fact that we tend to discount the future too much makes this principle difficult to follow for some.  Roughly speaking, this principle means you should plan for your future consumption to match your current consumption.  In some cases, a carefully thought out plan can have some higher consumption in the present than in the future.  The key here is having a sensible plan rather than just living for today and ignoring the future. FIRE enthusiasts don’t have ...
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Should Young People Invest 100% in Equities?

Another great question David Chilton, The Wealthy Barber, asked me on his podcast is should young people invest 100% in equities?  Opinions on this point change with the times.  In the late 1970s, popular opinion was that it was crazy to put any money at all in the stock market.  By the late 1990s dot-com bubble, people believed that stocks were the path to great wealth. Stock markets have been performing very well for a long time, so it’s not surprising that popular opinion favours stock investing today.  Ironically, investing 100% in stocks is best when popular opinion is against stocks.  At today’s elevated stock prices, the case for 100% stock ownership is weaker than it has been in most of the past. But this doesn’t mean that investing in stocks today is a bad idea.  It just means that expected future returns are lower than usual, and the odds of a stock crash are higher than usual.  But if you can hold for the long term, you can ride out the sho...
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The Value of Delaying RRSP Withdrawals

We’ve heard that melting down an RRSP early can be valuable when it lowers your future tax rate on RRSP withdrawals later in retirement.  But we’ve also heard that delaying RRSP withdrawals so the RRSP can continue growing tax-free is valuable.  But not everyone agrees that longer tax-free compounding is valuable.  Who’s right?  Let’s dig in. We can make mistakes when we try to measure the value of some portfolio choice in isolation.  We have to consider all of its effects to draw a correct conclusion.  Here’s an example: Scenario 1 (RRSP meltdown) : You withdraw an amount M from your RRSP today.  If your average tax rate on the withdrawal is T, you get to keep M(1-T). Scenario 2 (no RRSP meltdown) : In a second scenario, you delay RRSP withdrawals for a decade.  Your RRSP grows by a factor of R in that decade, and you withdraw MR then.  If your future average tax rate on that withdrawal is U, you get to keep MR(1-U). It’s important to note t...
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RRSP vs. TFSA vs. Paying Down Debt

When Canadians have some money available, a big decision they face is whether to invest it in an RRSP or TFSA or to focus on paying down debt.  Dave Chilton, The Wealthy Barber, asked me how I thought about this choice on his podcast .  Here I give a fuller answer to his question. This is really two separate questions.  The first is whether to invest savings or pay down debt.  The second is whether to put savings you’ve decided to invest into an RRSP or a TFSA. It never makes sense to invest ahead of paying down high-interest debt.  We could make a case for starting to invest a little, just to start the habit, but paying down high-interest debt should be the initial priority.  This leaves the question of whether to invest or pay down your mortgage. Invest or pay down your mortgage A popular answer to this question is that you expect to make about 7% per year on your investments, but your mortgage is only 4%, so you should always invest.  This is right ...
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Cognitive Decline and Your Finances

One of the talking points of financial advisors is that even if right now you’re able to handle your own investments, tax planning, and other aspects of personal finance, you may face cognitive decline later in life.  The implication is that maybe you should get a financial advisor now before it’s too late. The challenge here is that many people who hold themselves out as financial advisors are little more than sellers of expensive mutual funds.  Some might even be inclined to take advantage of your cognitive decline to churn your account and generate excess fees. What you may need is a good financial advisor.  Some financial advisors are excellent.  They range from those who charge by the hour for advice only to those who manage your investments directly for you.  However, if you’re in cognitive decline, it won’t help to just get the occasional portfolio checkup.  The advisor would have to directly manage your investments.  But it’s hard to get this ...
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