A Different Kind of Exit Plan

My wife and I had a death happen in the family recently. These occurrences are never overly pleasant for anyone, but this one in particular ended on a very sour note. The person’s spouse found out after death that there really wasn’t anything in the way of a financial plan. The spouse who died had been in charge of taking care of all of the household’s money stuff, and hadn’t really left any indication of how to carry on doing it. Besides this, there was no link to things like life insurance, a will, or anything like that.

My wife and I feel terrible for the surviving spouse – in an already stressful situation, dealing with the death of a spouse, they now have to deal with added financial battles. The entire situation really poked some holes in our current situation – we don’t really have anything set up for if one of us dies. Although this is not a nice thing to think of, after seeing what this relative is going through, this sort of thing has moved to the top of our list of things to do with our finances in the short-term. I’ve made a short list of items we are going to do in the next few months, a pretty morbid list:

Our bills are split up between the two of us – some of them have both of our names on them, like property tax and gas, while others are in one spouse or the other’s names. This really isn’t good for a “backup” situation at all, and should be changed.

We need to add each other as beneficiaries to our RRSPs. This will just make accessing the assets a little bit easier if anything were to happen.

My wife needs a full listing of where all my money is, and how to get at it. I have several accounts that she may or may not have noted when I have told her about them in the past. I find segregating money between accounts to be the easiest way for me to maintain whatever savings plans I am involved with, and therefore have 3 different banks with accounts that I have accumulated over the years.

We need a Will – we do not have one, and probably should have something written down in the event that one or both of us die.

Most of the problems that we have is that our finances are very split up, and have been since we moved in together. We each look after our piece for money stuff, and don’t have to think about the other person’s. For us, this system works, we don’t have to think about half the bills that come into the house every month.

The other reason that we haven’t done any of this stuff, is that we never really think about any of this stuff. Instead of spending the hour or two it would take to get a really organized binder together that would look after all of this stuff, we’d rather watch an episode of “Friends” on Netflix and not think about this kind of thing.

If you or your spouse died, would the survivor be able to easily keep up the “house stuff”?

Living Large, in a Small Way

When I first got interested in personal finance, I was probably not the best person to be around. From everything that I read over the first few years, my general understanding of an optimal personal finance strategy was to live cheaply and stay out of debt. I took living cheaply probably a little too far, and trimmed back my spending to what could be deemed an extreme amount. It was a somewhat unhappy existence, but allowed me to get out of the student debt I had at a rapid rate.

I made a lot of bad purchases during that time, by being so cheap (or “stingy”, as my wife calls it when I go a little overboard when I’m looking to buy something now). I would look to save $20 on a frying pan for example, between a good brand and a dollar store brand, only to have to replace my “money saving” purchase a few months down the road because the amazing non-stick surface was ending up all over my eggs in the morning.

Today, I look more at value of my purchases than the actual cost of what I am going to buy. I still keep a budget that I stick to fairly well, but I understand that sometimes it’s better to save for a couple more paycheques and spend the additional money on something that I want to last and will value more in the future.

I also look at purchases in a much more binary way. If, after research and probably too much contemplation I decide I actually want to buy something, I’ll spend extra money to make sure it’s something I will continue to enjoy. The best example of this line of thinking is a cell phone. My current phone (a Galaxy S3), was top of the line 3 years ago when I bought it. I had been stuck with “lemon” phones for years because I cheaped out on the initial purchase to save a bit of money. In reality, all cell phones in Canada are pretty close in cost, and I am still happy today with spending the extra money then. My initial decision was “Do I actually want / need a cellphone”? Once I decided yes to that, it made sense to me to spend money on something that would stay relatively up-to-date for a few years, and I would continue to enjoy.

My wife and I were in Mexico last week, vacations South being something that she enjoys quite a bit. After some groggy drives home from the airport on previous trips, we now budget in the extra hundred dollars or so for a car service to get us to and from the airport (compared to driving and parking our own vehicle). Our initial decision was whether or not we wanted to go on a vacation at all – after that, spending a small percentage of extra money to get picked up and dropped off right at our terminal in Toronto makes our trip more enjoyable.

There are many things that I decide not to buy at all. I realize that they are experiences or items that I really don’t value at all, and will either be a waste of time or space – it’s just taken a few years to sort out where the most effective places to spend the limited funds we have .

Is it Stealing?

This week, the CEO of a small credit card payment company made news by announcing he would be creating a minimum wage within his company of $70,000. In a world where CEOs are making 300 times more than the average worker, I love the move made by this company. While I’m not a huge flag-waver for “The 99%”, the wage gap and payments made to CEOs today just seem really out of line with their overall worth to the company. I may be somewhat jaded in my opinion, but I don’t know if anyone needs to make $20 million or more for a year’s work, no matter what they do. It just seems economically wasteful to either not disperse the money to shareholders, or even better to re-invest the money into making the corporation better.

Maybe one of the reasons why I disagree with such high pay is that it’s possible to live a very fulfilling life making significantly less money. My wife and are able to dream about retiring at a relatively early age specifically because we don’t spend a lot of money – we are able to save a large proportion of what we earn because our spending is so low.

One of the perhaps ethical issues that may arise when we retire is the tax situation that comes up. We are currently maximizing our RRSP contribution room, and anticipate significant tax refunds over the next few years (until we’re out of room to add there) because we’re doing that. At retirement, I’m projecting that our tax situation will be minimal – withdrawals from the RRSP may not make it much past the taxable minimum – this year the amount was $11,138, meaning our tax bill will be fairly low in comparison to now.

The ethical question that arises, is whether at retirement age, my wife and I will have paid enough taxes to warrant the services we would receive from “society” (for lack of a better word). If we are able to retire at age 45, is it fair that we never pay income tax again? In 10 years, if there is still Universal Health Care in Ontario, should I feel guilty for not paying the government around 30% of my wages to receive help after a freak golfing accident that took place when I celebrating too aggressively after my second hole in one for the day?

I don’t think I will feel overly guilty. The tax system is set up more for “big spenders” than my wife and I. If we’re both able to stay under the basic personal amount of income, I don’t think we’re the “big ticket” spenders that the government is going to make lots of money off of. I don’t know how many “moochers” the government could support if everyone tried to do what Early Retirement people are doing, but I don’t think most people would want to try to live on less than $30,000 for a household in North America.

Portfolio Insurance?

A while ago, I was listening to a podcast which featured Nassim Nicholas Taleb, the author who wrote about The Black Swan. A Black Swan event, is something that is wholly unpredictable to observers, but could have been seen if the data available were to be viewed in the correct manner. Taleb written about Black Swan financial events, such as the 1987 and 2000 market crashes, or the 2007 financial crisis. In addition, he has written about non-financial black swan events, like scientific discoveries, world war I, or the 2001 terrorist attacks.

To a somewhat pessimistic person like myself, I can get behind most of Taleb’s theories. While an optimist will never really look at the possibility of the downside of most things that are going to happen in the future, Taleb makes fortunes betting that some unknown terrible thing will happen, that will cause significant panic somewhere in the world. Taleb makes money by continuously shorting the market – betting that there will be a large enough negative event that people will panic and cause the market to decrease significantly. When the market drops, his way “out of the money” put options will become worth a fortune. The caveat is, there will not be that many “Black Swan” events over the long run.

While I’d love to say that I too have “insurance” for my portfolio, in the form of long-term, out of the money put options, I just don’t. It’s easier to be an optimist and hope that the market will continue to go up. If the market doesn’t go up, I’m currently at the stage of my investing “career” that dollar cost averaging would allow me to pick up the (hopefully short-term) dip in the stock market, which would provide significant capital gains once things get back to “normal”.

In retirement, I’m not sure what I’ll do. I’m not sure if it makes sense to spend a small amount of money to protect my portfolio if something like 2008 happens again. Relative to the feeling that would come about if I didn’t have any protection to the stock-side of the portfolio. Right now, the S& P 500 is trading at around $2,100. A put option for 100 shares of the S&P at $1,600 (which would be in the money if the market dropped 25%) expiring a year from now would cost me $4,000 ($40 per share). Would a few hundred shares of this let me sleep better at night, or would I just be throwing out money by being a super pessimist?

How do you think you’ll balance the possibility of a crash after the “accumulation period” of your portfolio?

Controlling My Impulses

I have a lack of impulse control when it comes to food. I eat (for the most part) 95% healthy food, with the rest of the stuff I put into my face being a menagerie of horrifically delicious and unhealthy food that if I looked at it all together would probably make me sick. I consider myself to be at a normal weight now, but it wasn’t always that way. When I got out of school, I went on a mission to lose all of the 60 pounds that I had put on while I was sitting around, drinking, and playing video games for the 4 and a half years while I got my degree.

I lost all of the weight I wanted to by eating less and exercising – the “super boring and works everytime” system that sucks quite a bit. Eating less food goes against most of what my body wants, and as I’ve gotten older, and gotten better at cooking, it’s gotten harder to eat reasonable quantities of food everyday. Besides being a pretty good cook, I am also excellent at talking myself into eating too much, especially too much bad food, especially when I’m not even hungry.

A couple of years ago, I got into fasting, after reading a book called “Eat Stop Eat”. Once or twice a week, I just wouldn’t eat for 24 hours. I would eat dinner on a Monday, and not eat until Tuesday at dinner. What I found, was that I can survive 24 hours without eating, and don’t really feel like I’m going to die. What I also found out was that I understood what it actually felt like to be hungry, something that most people that live in developed nations really don’t understand.

Healthwise, from reading various books and people who know more about this kind of thing than I do, fasting is pretty healthy to do once in a while, as long as the fast doesn’t extend past 30 hours and you eat a healthy “normal” quantity of food on days you’re abstaining from eating. “Forcing” a caloric deficiency on my system jars my thinking from “Lets continuously put food in my face all the time, even though I don’t need it”, to being conscious when I actually need to eat.

I’ve been successful with my finances over the years by taking all choice away from myself – shifting money to ING/Tangerine accounts so that I couldn’t spend it, or paying tons of money down on my mortgage every paycheque before I went out to buy a bunch of books or video games that I really don’t have time to read. I leave myself a relatively small percentage of my paycheque to spend, in order to stop myself from binging, setting a base of money available to me for the couple of weeks I have between paycheques. Much like just deciding not to eat for a period of time, having a more binary “yes or no” option to spending makes decisions on frivolous purchases (which realistically, are the totals of most of my spending).

Are you disciplined, or do you have a system of stopping your impulses?

More Fun….Now or Later?

I’m by nature a cautious person. I’m overly conservative when it comes to how I spend my money – I’ve kept a pretty strict budget since I actually knew what that was. I over-save, because I think too much about what could go wrong with my finances – broken furnaces, blown-up car engines, floods, or any number of things that would cause significant hardship to my wife and I. Although this is a “safe” way to live, it’s not necessarily the cheapest way to get by. This level of savings takes quite a bit of money and holds a large opportunity cost, due to the inefficient use of money.

Everyone needs a certain amount of money to live. My family of two tries to keep as small of financial footprint as possible, but we are still going to need quite a bit of money to survive in the near future as well as to survive into retirement when we either won’t want to work, or won’t be able to work. I look at people who choose to work part-time jobs at a subsistence level, in order to enjoy the hobbies they’re interested in now, and instead of jealousy, I get really stressed out. I really don’t understand how anyone would get by without planning for their future, when money isn’t as easily made.

I figured out that I worked around 1,700 hours last year (I’m sure that I’m not the only one who does these kind of calculations). I would prefer to be doing much different things than the current number crunching and report writing that I end up doing with most of the 40 hours per week I work, but I know that about a third of those hours are gaining me free time in the future, with the other two thirds being split between taxes and living today.

Because our house is paid off and our expenses are reasonably low, my wife and I could probably get by working 1,000 hours per year at minimum wage, or around half the hours we work right now. Our issue is that when we’re done working, we would prefer to be completely done working, and not have to keep going. This is the reason that we’re stockpiling money as quickly as possible, and why we’re continuing to work full-time jobs, even as hobbies that we enjoy doing more than work continue to pile up.

I’m sure there are more enjoyable uses of my time, but I’m too much of a “scaredy cat” to take the plunge at this point to enjoy it.

Total Investment, or Cash Flow?

The question of when to exit the workforce is something that will probably stress me out quite a bit as my wife and I near retirement. Making a decision when to stop working (and providing savings) is a large one – re-entering the workforce is possible, but is a little more difficult than just staying at a job a couple of years longer.

I read a lot of personal finance books, blogs and subreddits that have to do with money. There doesn’t seem to be a general consensus other than to have a massive amount of money. For me, there is a large opportunity cost to the extra years working – my preference would be to exit as soon possible so that I can enjoy more free time and focus more on the hobbies I do now when I’m not at work.

My wife’s and my thinking is that we would rather keep our expenses pretty low, requiring less investment income (and therefore initial investments) instead of living a “lavish” lifestyle that requires a lot more saving to support. Our seemingly boring lifestyle is relatively cheap to pay for, which is the main reason we can even contemplate making an earlyish exit from the workforce.

For me (who is the main “money person” in our family of two), the decision of when to exit is a little unnerving. Do we exit when our investment cashflows are greater than our low expenses? Do we wait until we hit a larger number to have a big cushion to protect ourselves from some unknown event, or significant downturn in the market? If we build in a cushion to the retirement calculation, how much of one is reasonable – 10% over our average expenses just in case? Maybe 25% extra? I’m not sure how to completely factor that in, or do I just shoot for a targe investment value and assume the “safe” 3 to 5 percent withdrawal rate from that is generally agreed upon by people who know more about this kind of thing than I do.

I’m not sure I’ll be 100% happy with any decision I make – possibly working an extra couple of years to build a possibly unnecessarily bigger nest-egg, or just making a clean break from work and enjoying the extra free time. Right now, it’s still nine and a half years away from my target date of my 45th birthday…maybe it will all work itself out for me?

Going International

My dad called me last week to remind me about going to see some “finance guy” that he had gotten free tickets for. I had agreed to go a few weeks before and had completely forgotten about it. We had a nice evening of father / son bonding – we hit a bunch of golf balls at an indoor driving range, before going to dinner and had massive hamburgers and “funnel cake fries” (which I would highly recommend if you ever have the opportunity to eat).

The guy we were going to see turned out to be pretty interesting. I don’t watch BNN a lot, other than the odd clip that someone links to on Twitter, but Larry Berman turned out to be a very interesting guy to listen to for a couple of hours. I researched him after the 3 hour seminar, and it turns out he’s a pretty big deal (I know, I’m like the guy who goes to the bar and touts the fact that he doesn’t have a television).

The main point that his discussion put forth was that Canada is a very small (less than 4%) of the world’s equity valuation. He used a confusing array of charts and tables to get this point across, but mainly he put into perspective just how undiversified most Canadian investors are by sticking with all Canadian stocks. His belief is that a Canadian investor is doing themselves a disservice by sticking with solely Canadian investments. In Canada, we are limited mainly to a concentration of companies in natural resource industries with only a few investment opportunities in rapidly expanding technology and healthcare industries.

Larry’s (I call him Larry now) second point was that he generally disliked fixed allocation portfolios, such as the super popular couch potato portfolios, in favour of more managed “defensive” positions that people could take. Based on the charts I remember, he would prefer to react to the reality of the market and avoid staying where there is no money to be made.

While the talk was “free”, it really wasn’t – there were people from Scotia iTrade, selling their trading platform, as well as a representative from BMO selling their ETFs. I appreciate the fact that these sales were made quite transparently by the head presenter (it was stated the presentations are not free to put on, just free to attend), it just ate into the evening. I’m sure all of the products sold were fine, I was just more interested in the message that the presenters were putting forth rather than hearing an advertisement.

There was a second presentation after Larry Berman was done, put on by his “Independent Investor Institute”. While this too was a bit of a sales pitch for a subscription to his Institute (at $49.95 per month), the presentation was a bit of a learning opportunity on “Opportunistic Swing Trading”. I’d read about this (and other forms of momentum trading) before, but it was interesting to see it put into practice by someone who understood the topic.

My main takeaway from the talk was to look outside of Canada. I get so insulated by just looking at Canadian stocks without looking outside of the country. Realistically, based on equity makeup, Canadian stocks should make up a very small portion of my portfolio. I will definitely be taking this into consideration when reviewing future purchases for my retirement portfolio.

How internationally diversified are you? Would you classify yourself as an active or “sedentary” trader?

My Private Mortgage Investigation

After learning I wasn’t rich enough to engage in peer to peer lending online, I went on a search for other alternative investment opportunities. It turned out there was a place that was right across the road from my house – a mortgage broker. I sent the broker’s office a general inquiry, stating I was interested in learning about private mortgages (for potential investments) and wondered if they had some time to discuss this with me. They booked an appointment a for a couple of weeks later, and I met this past Monday with a nice broker named Doug who went over all of the questions I had regarding the private lending business. I’ve listed the questions I had and the answers that were provided to me below:

How much are they (the broker) looking for individuals to invest?

The broker stated they really had no minimum – they were willing to work with investors with all levels of funds.

This was a good answer, because I don’t think I would make this a major part of my portfolio, I was just looking for an alternative investment outside of the stock market to get into.

What type of loans do investors usually get involved with?

A “normal” type of loan is a second mortgage on a home that is being used as a bridge until the first mortgage’s term has expired – usually in 1 – 3 years.

How safe are the loans?

The broker who I was talking with said that they won’t even touch mortgages that are below a Loan-to-Value rate of 75%. Loan-to-Value is the amount of the loan as a percentage of the property value, meaning that on a $100,000 home between the first and second mortgage, the maximum amount that would be loaned out would be $75,000. The 25% “cushion” allows for market declines without impacting the debtor’s asset to fall below the loan amount (hopefully reducing the instance of a market loss).

Full credit checks are carried out, along with property appraisals both paid for by the individual who is looking to be loaned money. In addition, legal fees associated with lending the funds are also covered by the debtor.

What kind of return is usually seen?

The vast majority of loans that this broker sees come across his desk, which is approximately 3 – 5 per month on average work out to a rate of between 8% and 12% returns. They have institutional lenders for loans below 8% and really aren’t willing to look at customers that would warrant an interest rate in this climate above 12%.

Conclusion:

Those were the main questions I was curious about, as there really isn’t a huge pile of information available for research purposes on this kind of investment. I haven’t really decided whether I will end up investing in this type of thing. I like the fact that the investment is secured by an asset (a house) that could be sold, so may not result in a complete loss due to non-payment. I also like that I can review the financial details of the loan before making a decision. I think I would have a better idea looking at an individual’s monthly cashflow, compared to a complex corporation’s. If I were to invest in this type of thing, it would probably make up no more than 10% of my total investments. The upside on the investment is high, but there is also the possibility of losing the entire amount.

Would you, or have you done this type of investment?