Are you saving enough for retirement?

[Skaloper]

"Borrowing money was necessary for house, but paying the minimum and increasing the duration of interest paid for the convenience of debt is unnecessary."

I know everyone has a different situation but my wife and I just had our first child at 33 and 32. We did choose to buy a house after prices skyrocketed but didn't want to put our lives on hold. We both have decent jobs but paying more into the mortgage isn't really feasible especially with childcare on the horizon. So yes we are forced into paying minimum and don't think it's necessarily a bad thing. Definitely won't have the house paid by 45 as that is a pipe dream for most our age unless you're making crazy amounts. That being said we do have some put aside for retirement from pensions and RRSP.

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[Jason14h]

Originally Posted by Skaloper

"Borrowing money was necessary for house, but paying the minimum and increasing the duration of interest paid for the convenience of debt is unnecessary."

I know everyone has a different situation but my wife and I just had our first child at 33 and 32. We did choose to buy a house after prices skyrocketed but didn't want to put our lives on hold. We both have decent jobs but paying more into the mortgage isn't really feasible especially with childcare on the horizon. So yes we are forced into paying minimum and don't think it's necessarily a bad thing. Definitely won't have the house paid by 45 as that is a pipe dream for most our age unless you're making crazy amounts. That being said we do have some put aside for retirement from pensions and RRSP.

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Paying down your mortgage faster vs investing just comes down to math, peace of mind and more then anything - discipline

Your expected rate of return in the market and the tax situation of you investments vs your mortgage rate

But the discipline is the big factor . Can you be discipline and invest the same extra each month, and not get emotional or spend it on other things

For most of the last 2 decades paying your mortgage early vs putting into investments was a 'bad' investment choice. The interests rates vs ROR were skewed heavily in favor on investing.

With higher interest rates it becomes more of a choice. Especially if you have maxed out your tax deferred options and need to pay capital gains on any returns.

A 7% mortgage would require a non tax deferred return of ~9-10% to be equal. That is about at historical long term RoR for US Markets.

Paying down your mortgage is always the risk free way to force savings, but isn't always (or usually) actually the best long term way to maximize net worth

[Sylvanfan]

Originally Posted by Skaloper

"Borrowing money was necessary for house, but paying the minimum and increasing the duration of interest paid for the convenience of debt is unnecessary."

I know everyone has a different situation but my wife and I just had our first child at 33 and 32. We did choose to buy a house after prices skyrocketed but didn't want to put our lives on hold. We both have decent jobs but paying more into the mortgage isn't really feasible especially with childcare on the horizon. So yes we are forced into paying minimum and don't think it's necessarily a bad thing. Definitely won't have the house paid by 45 as that is a pipe dream for most our age unless you're making crazy amounts. That being said we do have some put aside for retirement from pensions and RRSP.

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Not that I should give financial advice given the mess my life is. But what you could try is taking the money you would need to spend on child care, and try saving that to put against your mortgage. Once you need it for Child Care, use it for that. Most mortgages do let you make a set amount of lump sum payments up to 15% of the value annually.

My wife had a coworker just come back from Mat Leave and she's paying 35% for two kids for what we used to pay for one. Granted her family is also in the you suck at life and have to live in Edmonton with your sub 180k family income bracket that helps qualify for subsidies. So if that's the case it will make that easier to deal with. At one point in time with two kids 5 years apart the CC expense was a lot more than the mortgage was.

[edslunch]

A question for the accountants and financial planners…. Suppose I cash in some investments to pay off my LOC. At current interest rates, investment returns, and tax rate I probably take a loss. If I turn around and borrow from my LOC to rebuild my investments can I deduct the new LOC interest from my taxes? I’d essentially be back to the same level of debt and investment but now not paying interest.

[Cappy]

Gear grinder and question for you financial gurus.

I am doing some unexpected home renovations and the estimated cost is higher than i originally thought it would be. I had previously planned to use money in a CASH.TO account and general savings over the course of the reno to pay it, but now that is looking less likely to cover the full amount.

No mortgage, so i could take out a small mortgage on it, but i suspect the rates are too high to be worthwhile.

I can take money out of my TFSA or a non-registered investment account to cover the difference. With the non-registered account, I would likely owe capital gains, but i do have tax loss harvesting in this account.

Any (non-binding internet) advice on potential best option moving forward?

[kevman]

If you do decide to cash out non-registered accounts, it's early in the year so any tax on capital gains won't be due for 14 months.

[Geraldsh]

Originally Posted by GGG

This really doesn’t knock a meaningful amount of time off your mortgage. In a constant payment per month scenario the difference in payment frequency has little affect

If you switch to biweekly and pay at 1/2 the monthly rate or pay biweekly at the semi monthly rate you pay it off sooner but that’s because you are paying 13/12ths more not because of the payment frequency.

It’s another payment that you wouldn’t have made otherwise and every little amount is significant, more so for anyone having difficulty budgeting.

[DoubleF]

Originally Posted by Sylvanfan

I have two of those...both renewed last year. I didn't add any extra years to the Amortization or money on either. Primary residence renewed in May, and the Rental was October. Both were amortized to 20 years. I was on variable for the primary residence and went to fixed in May as I could get out of the variable 3 months early penalty free and fix at 4.19 for 5 years. I also did up my payment by 15%. So on this house we are paying an extra $210 biweekly on the original principal. So over 5 years it will add up to 27 and change.

The rental was trickier due to lending options. Renewed it on the same prime-1% rate we had. Hoping that in two years rates might came back down. Unfortunately I could only squeeze for a $75 a month rent increase when the payment went up $460. So right now losing $250 a month on that property. But with a lease I really couldn't list until August, and that's when the market in St. Albert finally came to a halt. Next to nothing has sold since September in that neighborhood. So I think I'm losing less keeping it and waiting for the market to return to more normal conditions. If I listed it snd it was empty for 4 months not selling, I'd be out $10k instead of 1 and in a panic.

Than add in 6% increases in property taxes, insurance for the houses, plus vehicles. Utility bills going up at least that much, and food prices..the money I used to save is now keeping the things I used to have, and not getting saved. If the same cycle of events was to repeat itself in the next 2 years, that terrifies me...not a lot I can do about those costs other than move away from the rental property or downsize my family back to that house. If that happens I have to think it starts to hit a few more folks and really cause problems.

Damn, sorry to hear. Seems like you have a good approach though.

My only suggestion is to ensure that you pay down your rental slower as you can deduct the interest on your T1 (thus it is discounted) vs paying down your principal place of residence (non-deductible). I'd go as far as to do the absolute minimum payment on the rental to maximize the payments on your principal home.

I've chatted with many people and quite a few want to pay down their rental more aggressively. I think this is so that they can see their rental property cash flow positive and in their head justify the rental as a better investment than traditional investments. However, losing the interest deductibility while still maintaining mortgages costs you more money out of your pocket.

And don't refinance the mortgage on your rental if you don't put that money back into the rental (ie: renovations, repair etc.). That's a an easy trap and flag for the CRA who might investigate to deny mortgage interest deductions.

If that was already your plan, great. If no, just be careful of the trap. Some people think the CRA won't go after stuff like this. My response is that the CRA's plan isn't hiring someone to look into this stuff, they're getting software to do it and hiring someone to call you after the software automatically sends you the letter.

Originally Posted by Skaloper

"Borrowing money was necessary for house, but paying the minimum and increasing the duration of interest paid for the convenience of debt is unnecessary."

I know everyone has a different situation but my wife and I just had our first child at 33 and 32. We did choose to buy a house after prices skyrocketed but didn't want to put our lives on hold. We both have decent jobs but paying more into the mortgage isn't really feasible especially with childcare on the horizon. So yes we are forced into paying minimum and don't think it's necessarily a bad thing. Definitely won't have the house paid by 45 as that is a pipe dream for most our age unless you're making crazy amounts. That being said we do have some put aside for retirement from pensions and RRSP.

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That's the difference between a need and a want. In previous generations, look how little they spent on traveling and other things. "Living life" to them was a want, not a need. Now, I'm not saying that you cannot go on trips, have fancy dinners, have two cars vs put in the effort to figure out how to be a 1 or zero car household because it's unnecessary. I'm saying that if you want to spend on a want, just be aware of what you're exchanging time value of money wise by enjoying now vs later.

Like I said in my previous post. Many people don't think much about spending an extra $2.5-5K per year, but that could go a long way towards killing a mortgage and unlocking cash flow money diverted to the principal payments earlier. Many people are doing this to the tune of $15-25K+ a year and thinking certain goals are a pipedream. I've seen many $150-200K income per year w/ 2 kids + 2K sq ft house households complain there's not enough to get ahead. I've seen a $60K per year w/ 3 kids + 1600 sq ft house household survive just fine, and no, it's not a ramen every day type household. They eat vegetarian/vegan organic and do get to have about 2-3 trips a year. They choose to have those trips vs saving it. It was doing these exercises when I started realizing there many facets of financial literacy that are causing people to have this weird learned helplessness. "How is this family surviving on a third of the household income when that $180K family seems like it's barely getting by?"

TBH, your household sounds similar to mine. I get it. The child care number is daunting and often times it makes sense to throw money at the situation to get more rest and reduce the physical pain of chasing around a little one with infinite energy. But believe me when I say that at one point, I too thought mortgage free at 45 was a pipedream, but when I dug into the details, I realized that mortgage free at 45 was actually attainable with just minor (not major) tweaks to our current and constantly evolving lifestyle. With slightly more significant adjustments to lifestyle, even mortgage free at 40 was attainable, but I don't want to sacrifice that much to reach this goal.

I'm not saying that everyone has to be mortgage free at 45 or they're stupid. I'm just saying there's a significant element of learned helplessness for anyone who believes it's absolutely not possible. As mentioned, start putting an extra $2.5K to $6K into the mortgage per year in your 30s by bumping up your payments when you can afford it. The revised amortization numbers might surprise you.

[gasman]

Originally Posted by edslunch

A question for the accountants and financial planners…. Suppose I cash in some investments to pay off my LOC. At current interest rates, investment returns, and tax rate I probably take a loss. If I turn around and borrow from my LOC to rebuild my investments can I deduct the new LOC interest from my taxes? I’d essentially be back to the same level of debt and investment but now not paying interest.

There is no free lunch, if you take out a LOC for a non-registered investment you can write off the interest, yes, but that isn't the same as "not paying interest" its paying interest at a discount, so you save somewhere between 25% and 48% of your interest, depending on your tax bracket.

Also worth it to note, that you can't write off interest if the investment is going into any kind of registered account (RESP, RRSP, TFSA, etc.)

[DoubleF]

Originally Posted by gasman

There is no free lunch, if you take out a LOC for a non-registered investment you can write off the interest, yes, but that isn't the same as "not paying interest" its paying interest at a discount, so you save somewhere between 25% and 48% of your interest, depending on your tax bracket.

Also worth it to note, that you can't write off interest if the investment is going into any kind of registered account (RESP, RRSP, TFSA, etc.)

This also isn't taking into the account the risk that the CRA could try and pull a "business income vs capital gain" situation if you try and claim the interest deduction. You'll keep the interest deduction by get screwed on more taxes payable due to more inclusion without the capital gains. This is especially true due to recent rule changes where the investments are a primary source of income vs a very obvious secondary passive income (ie: Retirees vs mid career individuals with T4 slips/T2125). I don't think the CRA intended for that rule to hit retirees in that manner, but they've been quiet about the situation.

Originally Posted by Cappy

Gear grinder and question for you financial gurus.

I am doing some unexpected home renovations and the estimated cost is higher than i originally thought it would be. I had previously planned to use money in a CASH.TO account and general savings over the course of the reno to pay it, but now that is looking less likely to cover the full amount.

No mortgage, so i could take out a small mortgage on it, but i suspect the rates are too high to be worthwhile.

I can take money out of my TFSA or a non-registered investment account to cover the difference. With the non-registered account, I would likely owe capital gains, but i do have tax loss harvesting in this account.

Any (non-binding internet) advice on potential best option moving forward?

Answer is, it depends.

If you have a tax deferral bottleneck where sooner or later you're going to have some higher yearly income that might get taxed at the middle or higher tax brackets (ie: large RRSP/RIF looming, income from corporations slowly draining out, pregnant gains in non-registered accounts, steady income pre-CPP, OAS, pension/LIRA kick in etc.) then taking some of those registered investments in your lower tax bracket now might make sense.

But if you don't have such a deferral bottleneck coming up, then using the TFSA investments to save the cash taxes to reinvest makes more sense. (Because there is no deferral nor tax savings to realize).

However, this is all assuming that you first have exhausted other options like the greener homes grant, disability renovation tax credits or multi generation renovation tax credits. IMO, these three are better options to investigate BEFORE you do the work prior to investigating the taxable vs non-taxable approach to cashing out investments.