Debunking David Trahair’s Smoke & Mirrors: Myth #1

Canadian Capitalist recently had an article discussing the “smoke & mirrors” guy’s “Myth 1: If I had a $1,000,000… I Could Retire”. I hate guys like Mr. Trahair who rant about the financial services industry and their “vested self-interest in telling people they need more” and flame about how the banks try to scare people into putting more money away for retirement. All the while ignoring the fact that the individual also has a vested self-interest in saving for retirement. It’s the stupidest reason to not invest as much as possible that I have ever heard. It’s like taking a lower salary so you can receive the GST credit.

He talks about how once you retire your expenses are much lower because you will hopefully no longer have a mortgage to pay down, no more kids’ education to pay for, etc… So what? Your expenses could go up too if you want to travel more than before you retired. You could go out for dinner more. You might want to go buy a dream house, buy a cottage, a boat, hire a maid when you are 60, hire someone to help you out when you have a stroke at the age of 70, etc… But no, Mr. Trahir tries to explain how you’ll be just fine with 40% of what you made in your 40s.

The question of how much you need when you retire is irrelevant (if you can easily satisfy your needs). The question is how much do you want? For most people, the more the better. Of course you need money now too, but no one will instinctively starve themselves now to have more money later. Nor will you ever starve yourself now by putting away too much for later. You can always take money out of later if you need it now. One thing I don’t need is Mr. Trahair telling me that I can “get by” on only 30% of my current income in retirement. I’d rather have some balance between now and later. Maybe do some travelling and enjoy the money when I am older on a boat or a condo at Whistler or on Vancouver Island. Not scrape by on 30% of my current income.

It seems his only reason in debunking this “myth” is to “start relaxing a bit.” I think saving up more for retirement than I would actually “need” is a perfect way to “relax a bit.” The stock market and/or interest rates might go through a bad slump and your investments won’t compound as much a your thought/predicted they would. Targetting 100% of your present income (in tomorrow’s dollars) in retirement is playing is safe.

The Canadian Capitalist adds “of course, those planning an early retirement need a larger nest egg.” Another perfectly good argument for saving as much as you can. The more you save, the earlier you can retire.

Smoke and mirrors “is a metaphor for a deceptive, fraudulent or insubstantial explanation or description.” Describes Mr. Trahair very well.

Why I Probably Won’t Ever Pack a Lunch

Here’s why I won’t start packing a lunch any time soon (except if I have leftovers that is). This article on “Save $988 per year by packing your lunch.” $1000 saved by packing a lunch!? That’s a lot lower than I thought. If you’re making $50,000 gross that’s only 2% of gross income. Make $100,000 and that’s 1%. That seems pretty insignificant to me. I used to think about bringing a lunch to save money but I’m not so sure anymore. There are some big advantages to going out for lunch with coworkers: Networking, talking about work-related ideas but outside of work, and socializing, and if the difference is only $1000 per year I don’t have any huge motivation to change. You also have to factor in the extra time spent preparing decent-tasting lunches and extra grocery shopping. As far as efficiency goes, leftovers are a smarter idea because you just have a cook a bit more than usual the night before which doesn’t take any more time.

My Investment Advice for Young Adults

Rather than just bash Rob Carrick’s advice for young people, I’ll offer up my own advice:

  • Start investing as early as you can. The earlier the better.
  • As soon as you have some money, invest some of it. If you have a paper-route or a part-time job, invest 10-20% of it for the long term. Get in the habit. Invest monthly. You won’t miss that money.
  • If you are babysitting for cash, tutoring for cash, earning tips, basically if you earning ANY employment income, file a tax return and declare all your income to build up RRSP contribution room.
  • If you have RRSP contribution room, start an RRSP and contribute to it. Find a company that will not charge you any annual RRSP fee. I recommend something like TD’s Mutual Fund Account. Set up an automatic monthly contribution if you have steady income. Max out your available contribution room every year.
  • Set up one or more ING Direct Savings accounts or one ore more savings accounts at your bank. If there is anything big that you want to save up for, use that to save up for it.
  • Don’t get a credit card unless you have to. Keep your credit card limit low. Pay off your balance every month. Don’t be dazzled by rewards plans.
  • When you get a large chunk of money from a birthday, a scholarship/bursary, a tax refund, don’t put it in your chequing account or convert it to cash. Deposit it into a savings account. Sit on it for a bit. Don’t make an impulsive purchase.

Think any of my advice is bad? Think I am missing something? Let me know.

New President’s Choice Interest Plus Savings Account

I just read about this new PC Financial account, the Interest Plus Savings Account. Their interest rate is quite a bit higher than ING’s (my current high-interest savings account provider) at 4% vs. 3.35%. More importantly though, our chequing accounts are at PC already so moving to PC for high-interest savings accounts may mean that transfers between the accounts will be faster, or at the very least it means one less statement per month, one less account, and one less user name/password to worry about.

The one feature that ING has, which I hope PC also has, is the ability to give nicknames to the accounts. Right now we have nicknames like “Christmas,” “Vacation,” “Car,” etc. . . The other thing that is nice about ING is that we have 8 accounts, 4 for me and 4 for my wife and they are linked to each other because we made both our accounts joint. ING direct doesn’t have joint accounts in the normal sense. They have individual accounts, but you can essentially “share” it with another person.

Tax Refund Finally Applied to Loan

Our tax refunds have finally arrived. It took over a month but that’s to be expected since we filed in April and filed paper returns (printed out from software of course). Over $4700 for the two of us. I have transferred the entire amount against the principal of our student loan. That makes a small dint in the loan but it will reduce our interest payments by about $20 per month. That is not huge, but that is $20 per month for many years to come, not just this year. My wife will also be receiving a one-time retroactive hiring bonus of on the order of $4500 so that is another $20/month savings on interest and next year we can get another $20/month from another tax refund. It will feel good to lower those monthly payments, leaving more room in our monthly cash flow for something like a mortgage payment in the future.

Currently we are just paying interest on the student loan every month. The reason is that our monthly cash flow is pretty tight now. All our money is going somewhere, whether it be RRSP and savings and the amount of disposable cash we have available is very limited. Rather than using the one-time debt payments to lower our interest payments and thus increase the amount of principal paid down every month (ie. constant monthly payments) thus shortening the amortization period, we have decided to take the $20/month savings and we will allocate that to one of our ING savings accounts. Ideally, if we could afford it, I would love to be able to pay interest and principal on the loan every month but it just cannot be done right now. Maximizing our RRSPs is our #1 concern, and I think that is the right thing to do as I expect the return in my RRSP to exceed the interest rate on the loan and secondly, the tax refund every year can be applied towards the loan’s principal anyways.

Use Your Tax Refund (a.k.a. savings) To Build Your Wealth

Great article from Clearsight called “Use Your Tax Refund To Build Your Wealth.” I have not really found many of Clearsight’s articles to be that insightful but this one was. I particularly liked their discussion about the different types of expenditures:

Three types of expenditures
Ultimately, whatever you do with your money can be broken down into three basic categories of expenditures.

No-value expenditures
For some expenses, once your cash is used the money is gone. Things like food, utilities, clothes, entertainment, etc. These expenditures do not contribute to building wealth. This category includes necessary expenditures (like food) but sometimes also far too many unnecessary expenditures (like entertainment). Filling your cash flow with too many unnecessary things is often fun — but not productive.

Depreciable expenditures
In this category, the item you purchase may have value, but that value depreciates over time. The most common depreciable expenditure is a car. Most of us consider a car an asset because it has value, but every year, the car we own has less and less value. Cars depreciate, and often faster than we would like them to. Obviously, a depreciable asset is better for wealth building than a no-value expenditure because it at least contributes to our net worth.

Appreciable expenditures
Using your money in this category is the most productive for wealth building. Assets like GICs, real estate, stock portfolios and bonds, go up in value over time. Using your cash flow for these types of investments will be the most fruitful use of your money. Often, they are not as fun or exciting as spending money on that new big-screen TV or fancy car, but it is the best for improving your financial picture.

This is a great read for anyone. A tax refund is an asset and you can transfer than into a appreciable asset, a depreciable asset, or an expense. They left out a fourth option, which is to transfer it into a liability, but this is similar to “appreciable expenditure” above. They go on to talk about net worth,

A key benchmark in your financial planning is your net worth. Your net worth is simply what you own minus what you owe. A primary goal of your financial planning should be to increase your net worth year over year.

As for the tax refund and what you should do with it:

The answer should be the same answer to, “What should I do with my cash flow?” The best thing to do with your tax refund is to use it productively — towards building your net worth. You may think all of this is really simple and full of common sense. If that’s the case, then why don’t more people do it? It’s not easy to do. Financial planning is all about trade-offs and discipline. The people who succeed are the ones who just do it!

It seems like a no-brainer to transfer your tax refund into an appreciable asset (see “Appreciable expenditures” above) first. Maybe even just an ING Direct Savings account. You can always make a “no-value expenditure” from that asset later. For me just getting money out of my hands works wonders. Any incoming cash flows I receive, gifts, tax refunds, web design work, adsense revenue goes straight into some form of savings account. Once the money is in the savings account, I think carefully about making expenses from it because I have saved up that money and I do not want it to go to waste. I become attached to that money. This thought process is completely bypassed when I cash a cheque or deposit it directly into a chequing account.

Vacation Time

It’s almost vacation time again for us. I just bought 2 flights to Havana last weekend for June. The flights are expensive, about $1000 each. We will be going budget once in Cuba though, staying in Casa Particulares, eating in Paladares, and taking the bus. It will be cheaper than an all-inclusive resort. I decided not to use Air Miles for our flights by the way (even though I said I might), because I decided to assume the higher $0.16 or $0.2 valuation for the Air Miles. I think they will get used for sure within the next year for flights to Calgary. We already know we will be going to a wedding in Canmore next January for a weekend and Air Miles are worth about $0.23 on flights to Calgary.

Since our last vacation, in October 2005, we have been saving about $600-700/month towards vacations. That amount is automatically transferred at the middle of every month from one of our chequing accounts into an ING account. We did this because we both have full time jobs and we both get 4 weeks of vacation per year now and we want to be able to use it. We have no kids right now, but we will eventually, and we want to make sure we take advantage of this post-marriage pre-children period. We are maximizing our RRSPs and slowly but surely paying off the student line of credit and putting away some more money for a rainy day so I think we can afford it. Last but not least, we just need a vacation!


Saw an interesting ad on my site today. It was to a sign-up page for an ICICI HiSAVE Bank account. I have never heard of them before, but they offer a high-interest rate savings account (HiSAVE) paying 3.5% (ING Direct Canada is currently paying 3.0%) and they offer a one-time $20 credit for signing up. Here is the fine-print on the $20 bonus:

$20 Bonus Offer valid only for new HiSAVE Savings Account opened online, by phone or by mail. Accounts opened through branches are not eligible. Limit one bonus per new account (including joint account). Minimum initial deposit of $100 required. Deposit bonus for U.S. Dollar HiSAVE Savings Account is paid in U.S. Dollar. Bonus will be credited within 30 days from the date the initial deposit is cleared and the account is officially opened by ICICI Bank Canada in its sole discretion. Application criteria apply. Offer may be modified or cancelled at any time. May not be combined with other offers. Only Canadian Dollar deposits are covered by CDIC.

What is ICICI bank? Apparently ICI is India’s second largest bank. You can read all about ICICI and its history here. Will ING Direct soon outsource it’s customer service department overseas in an effort to compete with a company like ICI, based out of India? Or does ICICI have a customer service department based in Canada?

Pay Yourself First

Every month we have been transferring $400 to an ING account that we call our “one-time expense” account. This is for things beyond the money we need in our chequing on a daily basis for things such as food. ING accounts are great. You are allowed a maximum of 4 accounts per person, so all told my wife and I could have 8 accounts if we wanted. Since we made each of our INGs joint, we can both access all 8 accounts. Right now we are really only using 2 accounts, our one-time expense account and our vacation account. You can give your accounts nicknames too. Over the last few months since we re-organized our finances and switched over to PC Financial, we haven’t had to use our one-time expense account that much. But recently we started running out of money in our chequing account. A few times, the $350 I transfer in to our chequing account every week for daily expenses hasn’t been enough to get through the week. So a few times we had to transfer anywhere between $50 and $150 additional money from our one-time expense account at ING to our chequing account at PC, in order to make it through the week. Just last week I purchased a bike for $352 and that also came out of our one-time expense account. In order to stop the bleeding and prevent us from spending all of the money in that ING account, I decided to transfer $500 of it into our ING “Christmas” account which has been sitting at $0 since last Christmas. It is far less likely that we will dip into the Christmas account, most likely we will completely forget that that money is there, just like we have forgotten about all the money that has been piling up in our vacation account. That is the beauty of paying yourself first. You put money away in an account that is less liquid than your chequing account, give that money a specific purpose so you won’t be inclined to spend it on something else, and you will completely forget about it. I do not think I have every saved up for Christmas this early before. We will probably need another $200 for Christmas, but it is so nice to start getting that out of the way early as it means we don’t need to think about it and can save up for other things.

Regrets of the Retired: Didn’t Save Enough!

According to a survey done last year, “98% of retirees surveyed by Oppenheimer regret how they spent their money before retiring” according to this article, “Regrets of the retired — didn’t save enough!’.”

Of course, Oppenheimer is using these numbers to boost their own business (they are another company with baby boomers on the brain), but I think think the first statistic about regretful retirees it is something that everyone should consider, regardless of your current income. The lifestyle you enjoy when you are in your 50s and still working may take a drastic turn in your 60s when you decide to retire and have only your retirement savings, existing non-retirement assets, and social security to depend on.

In order to ensure that I do not have the same regrets when I retire, I have made retirement our #1 savings goal. Eventually we may get to the point where we have enough saved up such that we will have more than enough money at 65 without making any more contributions (and assuming a conservative return on investment). Until that day arrives though, saving for retirement is our #1 savings goal. My wife is not that happy about it. We could have more cash to spend on our “wants” every month if we contributed less towards retirement, but ever since I saw those typical examples of compound interest (and learned the compound interest formula in school) I have been hell-bent on the belief that people should start saving up for retirement as early as possible. This maximizes the compounding effect and takes cash out of your hands so you will not waste it. One of the comments on the blog post above had something to this effect:

I suspect that these retirees regretted spending money on things they didn’t need. At work I constantly hear my colleagues breathlessly talking about the flat screen TVs they have, plasma vs. LCD, etc. The big ones cost thousands, and even smaller models can cost between $600 and $900. I am pretty happy with the 25″ tube-based TV I bought last year — it cost $190 and does the job just fine!

We also have a 29″ tube-based (CRT) TV. We actually got it free as a hand-me-down. With so many people upgrading to the latest technology these are easy to find! I am no longer concerned about keeping up with the Joneses. An investment in retirement savings will grow. And investment in a new TV will depreciate. Either you invest a little bit in your retirement now (and let it grow) or invest a lot in your retirement later. I am pretty confident that by choosing retirement over TVs now means that others will be trying to keep up with US later.