My husband and I are both 42 and we have a 14-year-old daughter. Our house is worth $590,000. We only have $37,000 left on our mortgage, but $250,000 on a secured line of credit at 4%. We have about $110,000 in RRSP savings and add about $10,000 each year, but we have no other pension. We have a combined household income of $133,000 per year and we’d like to retire at age 60 with 80% of our current income to spend. Some days I feel like we’re okay with a net worth of $443,000, but then there are other days when I freak out about our debt. We’ve thought of several options, including rolling the line of credit into our mortgage or downsizing and paying off the debt. What would you suggest?

Answer

Take a deep breath. Freaking out is not very helpful when it comes to getting a handle on your money. And it is also premature—we don’t know if you should be freaking out yet. I’ll be sure to let you know when it is time, but first I’m going to restate your question. It sounds like what you’re asking is this: “Based on what we’re saving, are we on track to retire at age 60 with 80% of our current income to spend? And if not, what can we do about it?”

Pull up a retirement calculator online: The first part of your question is easily answered—as long as you understand that you’re making some big assumptions. For starters, you may not need 80% of your income in retirement to maintain your lifestyle. (See “Retirement calculation pitfalls” for more things to consider when setting your retirement assumptions or read “How much do you need to retire well“)

For now, I’ll stick with your assumption of needing 80% of your income in retirement. I put the information you gave me into an online calculator and assumed a 2% rate of inflation, a 6% return on your investments and the need to fund 30 years of retirement. (After that point I’m assuming that you’ll be living in that all-expenses paid, all-inclusive, luxury resort in the sky.)

Digest the results: It is still not time to freak out, but you’re not going to like these results. To retire at that age with that amount of money to spend, you will need to have saved just over $3 million. On your current path you’ll have just under $700,000, which is, of course, nowhere close.

Are you still with me?

Play with your assumptions: If you increase your retirement age to 70 and decrease the amount of money you have to spend to 60% of your current gross income then you will get a heck of a lot closer to a match. You’ll have about $1.5 million saved versus $2.1 million needed. If you were to increase the amount you put into your RRSP every year from $10,000 to $17,000 then you will reach that new target of $2.1 million. But I bet that won’t be easy with a teenager who just might want to head off for some post-secondary education.

You’ll note that your house didn’t enter into these calculations. Until you sell it, the equity you’ve built is tied up and you can’t use it to put groceries in your fridge. This is where your downsizing idea might come into play. Say you move to a less expensive home and eliminate your debt; you’ll be able to increase the amount that you contribute to your RRSP every month, which needs to be your top priority.

Increase RRSP contributions: Your RRSP savings are what will allow you to pay for groceries, golf and goodies for the grand kids. And right now you are not on track based on the lifestyle you want in retirement. There are two levers you can play with: increase your income or cut your spending. The latter can yield faster results: to improve cash flow by $60 you can either cut spending by $60 or increase income by $100, assuming a 40% tax rate.

I have come up with an approach I call “Sustainable Spending.” It uses the ABC method—analysis, brainstorm and commit. Start by analyzing your monthly cash flow and then brainstorm ways you can improve it. Once you’ve done that then you have to commit to the two-to-three things you are going to change to reach your goal. Improve your cash flow and use the proceeds to beef up your RRSPs and then put the higher tax refund you generate back into your retirement savings.

Maximize your investment returns: Once the money is safely in your RRSP you need to make sure you make the most of it. That means getting the highest return for the lowest cost.

Time to freak out: The bottom line is that you are not on track to get what you want. Now that you know that you can freak out for five minutes, but only if you promise me that when you’re done you’ll take the steps that I’ve outlined above to get a handle on your money. Your daughter needs you to get it together so you’re not begging for a clothing allowance and ride to the mall when you’re 75.

Our mutual funds have not increased in value hardly at all over the last 15 years. We have finally decided to transfer the money to our discount brokerage account and manage it ourselves. My question is: Should we transfer all of the funds at once? We are concerned with transfer fees from the fund company to our discount brokerage account and more losses in terms of deferred service charges. We have numerous mutual funds, which adds to the confusion.

Answer

No return in 15 years? Ouch. It’s no wonder that you’re looking at making a big change. Global stock markets have had tremendous volatility over that period of time, but they are generally higher than they were back then. The S&P 500, for example, is up 63% since 1997 which is a much better increase than the ‘hardly at all’ you received.

The simple answer on whether to go “all at once” is yes. As painful as it is, you don’t really want the stress of moving day to last for three months. Here are some other things to think about:

Don’t worry too much about transfer fees: Transfer fees may apply to move your portfolio over to a discount broker but they won’t likely be more than $100. Don’t delay your plan because of these fees—instead ask your discount broker if they will give you a rebate to cover them. Representatives often have discretion over these types of fees so be your most charming self when you meet with them.

Transfer your mutual finds in kind: For simplicity, I would recommend that you transfer your funds all at once, and if the discount broker offers the funds that you currently hold, you might transfer them over “in kind.” This allows you to decide later which you want to sell and when. If the funds are propriety to your current firm, or they belong to an “adviser” series versus an “investors” series that may not be possible—you will have to sell them as you move to the discount broker. A quick phone call will sort that out what’s what.

Minimize the cost of deferred sales charges: Before you tell your current firm you’re leaving, ask them to calculate the cost of the deferred sales charges on each fund you own. If you bought the funds recently, the DSC will be at its highest and if you bought them years ago the DSC may have even worked itself out already. Here are some ways to minimize the cost.

• Free: Many funds allow you to sell 10% of your holdings “free” every year.

• Matured: In some cases you can also sell the fully matured component without charge. How much of your portfolio does this apply to?

• Family: Consider whether it makes sense to transfer your fund to another fund within the same family as you wait out the DSC. For example if you own a small, high cost, underperforming sector fund you might transfer it into a lower cost, better performing Canadian equity fund.

• Benchmark: I did a non-scientific poll amongst advisers for a rule of thumb on when to sell and the consensus was that if the DSC was 3% or less than it makes sense to sell. Higher than that and you should consider the fund performance to see how bad it really is.

Cut your losses and move on: I have illustrated a few different ways to minimize the hit of deferred sales charges. But from the tone of your question, it sounds like you are more than ready to move on. It may be time for you to cut your losses, sell your underperforming funds and kick-start your new plan. My one caution is to avoid getting caught out of the market—unless you’re an expert in market timing (as if there such a thing). For example, you want to avoid selling your mutual funds in market weakness, sitting on cash for three months, and then buying back into the market after it has already rebounded, locking in your losses.

Create a simple, low cost portfolio: It is a big project to move out of mutual funds and into a portfolio that you manage yourself. MoneySense has a ton of resources on how to create a simple, low-cost portfolio so do a bit more reading to figure out your plan.

Good luck. May the next 15 years deliver you a more enviable return.

My wife and I have two kids and we are both students. We have been unable to make payments on certain debts and as a result around $7,800 has been turned over to collections. Besides this debt, we owe $7,000 on our car, plus we have student loans, which luckily don’t have to be paid until after graduation. How much of a hit to our future are we taking by keeping this $7,800 in collections? It’s unrealistic for us to pay this debt off until after we graduate and find jobs. We would like to own a house someday, but I’m scared this debt will damage our credit report and that we may never see this dream come true.

Answer

Never is a very long time. Your situation may seem dire, but believe me, I have seen far worse. As you say, you are taking a hit to your future having debt in collections, but it is a hit, not a fatal blow. It is going to take some time and hard work to get your finances back on track. But if you do a few things right you’ll be on top of it long before never arrives. Here’s the basic plan:

Make an appointment with a not-for-profit credit counsellor
You may be ignoring the phone, hoping that the collections agency will just go away. While that is a common and understandable response, it is better to be proactive. Get in touch with a credit counselor to develop a plan and then give the collection agency a call for a change. (For more on how a credit counsellor can help please see Debt relief.) Jeffrey Schwartz, the executive director of Consolidated Credit Counseling Services of Canada, says a counsellor will be able to “help you negotiate a reasonable repayment structure with your creditors based on your income and expenses.” He adds, they will also typically provide money management education and work with you to create a budget you can live by.

Focus on the basics of cash flow management
The credit counsellor will have tips on how to credit a budget. But for starters I would recommend that you put your credit cards away and go strictly with cash. And be sure to live within your means, even they are meager right now. Use your creativity to find ways to increase your income and decrease your expenses between now and the time you graduate. This might include choosing to have one of you pause school for a year to work full time, taking in a boarder, cancelling cable, etc.

Make a plan to rebuild your credit
Once you have both graduated from school, get back to using credit so you can demonstrate to lenders that you know how to use it responsibly. “There are programs available which are designed to help rebuild credit by developing a positive history of borrowing and repaying a fixed-payment loan and a revolving line of credit,” explains Schwartz. Find out about how to access a program like this.

Set up a pre-authorized contribution to savings
Once you graduate and have some stability to your income and expenses, set up a pre-authorized contribution to a Tax Free Savings Account—even if it is only $50 a month in the beginning. This will get you into the habit of saving, which is critical as you work on building up a downpayment for your house.

Right now it seems like your dream of owing a house will never come true. But that’s not the case. Debts that are sent to collections and then settled are usually off your credit report in six to seven years. During that time you can be rebuilding your credit, save for a deposit and spend lazy Sundays touring open houses in neighbourhoods you will be able to afford.

Is there a good portfolio tracker on the web? I want to be able to input the stock, the price I paid on the date I purchased it, commission, etc. and then track when I sell it to see how much I made or lost.

Answer

Yes. In fact there are many “good” portfolio trackers on the web.

I would love to be able to tell you that there is one “great” portfolio tracker out there, one that outperforms all others by a country mile, does it for free, and is therefore the default choice. I’m willing to be proven wrong, but from what I can see, the ultimate portfolio tracker doesn’t exist quite yet.

The functionality that you mention in your question is fairly common—you can find them on a bunch of sites, some of which I’ll mention below. The key attribute that is missing, in my opinion, is seamlessness. You can set up a portfolio tracker on a site like Google Finance, but you have to import your portfolio and/or your transactions using a CSV file or keying the data in manually.

It doesn’t seem like the discount brokers have figured this out yet either. Mine shows me book value versus market value, by security, but not the specific transaction details you’re looking for. I have the option of setting all that up, but it is done on a separate part of the website and I would have to do it manually. The thought of this makes me want to have a beer, then take a nap, which would put me further behind on the task at hand.

Here are some of the leading contenders for Canadian investors:

• Google Finance: The functionality you asked about, but not much in the way of pretty.

• Morningstar.ca: More functionality than you probably need, and visually appealing. The challenge is the premium features come at a premium price of $24.95 a month and the free portfolio tracker doesn’t allow you to track profit and loss on individual securities.

• GlobeinvestorGold.com: As with the Morningstar Premium site, you’ve got to fork out some cash for this one: $15.95 per month. But you get access to their investor site as well as the Globe’s electronic edition and archives.

• Discount brokers: Go to where you already have an account and see what they have on offer. I was surprised that I couldn’t find a seamless portfolio tracker so I actually picked up the phone and called them. Alas, the friendly call centre could only point to the one that I mentioned above, which is no better than Google Finance.

This is clearly not meant to be a comprehensive list; a quick search will yield many other sites with portfolio tools with varying degrees of functionally and sophistication. What portfolio trackers do you use? What do you love about them? What drives you mad? Perhaps you can argue convincingly that I’m wrong—that there is, indeed, the ultimate portfolio tracker already out there.

I am investing in U.S. Exchange Traded Funds in my Tax-Free Savings Account. Will I have to pay withholding tax?

Answer

Ever since we finished with the messy business of the War of 1812, Canada and the U.S. have gotten along fairly well. We have signed many trade agreements and treaties to help our two economies work better together.

But none of those treaties will prevent you from paying withholding tax when you invest in U.S. ETFs that pay you an income in your tax-free savings account. You are a non-resident so you have to pay the withholding tax, regardless of the fact that the ETF is held within you TFSA. Adrian Mastracci, a portfolio manager with KCM Wealth Management, points out that “the withholding taxes amount to 10% on interest and 15% on dividends from U.S. sources.” That is not an insignificant amount.

Of course the income earned within the TFSA is not subject to Canadian income taxes—hence the tax-free moniker. But you can’t claim a credit for taxes withheld in the U.S. You can however minimize the rate, lowering it from 30% to the 15% mentioned above by filling out a W-8BEN form with your financial institution to verify your non-resident status.

If you’re concerned about the tax then you might want to consider holding your U.S. ETFs either in your RRSP, where you aren’t subject to U.S. withholding tax, or in a non-registered account, where you can claim a credit for the withholding tax when you file your return. If the sum of your U.S. ETFs holdings is substantial then I would recommend a visit to your friendly tax accountant for a full analysis of the tax implications and to review the various options.

What types of income are not considered taxable? I understand that “awards for damages” in a human rights settlement are not taxed. Is this correct and are there other things that are not subject to income tax?

Answer

If you think the government is after a piece of every penny you put into your piggy bank, you’re only partly right. Most sources of income are indeed taxable, but there are a few exceptions, including the one you mentioned in your question.

Damages in a human rights settlement are not taxable, according to Cleo Hamel, Senior Tax Analyst at H&R Block Canada. He adds that if the settlement is not taxable, then legal fees associated with it are not tax deductible.

Other types of settlements can be a little more complex. For example, in the case of a wrongful dismissal settlement Hamel says “there may be a portion of the award that represents a severance package or lost income, and that portion would be taxable.”

Different countries have different rules about which types of income are taxable. For example, lottery winnings are not taxable in Canada, but they are in the United States. It is best to assume that all your income is taxable and then see if there is an exception that would apply here at home.

Here are some other examples of income that don’t have to be included on your tax return from the Canada Revenue Agency (you can see the complete list by clicking here).

• Gifts
• Inheritances
• Lottery winnings
• Winnings from recreational betting or gambling.
• Life insurance—amounts received from a life insurance policy following someone’s death
• Compensation paid by a province or territory to a victim of a criminal act or a motor vehicle accident

There is one other thing to keep in mind though. The Canada Revenue Agency will tax you on the income you earn from that income. For example if you invest your lottery winnings in government bonds, the income that investment spins off is taxable, except for the amount that you smartly put into your Tax-Free Savings Account.

My wife and I have about $50,000 to invest. I have been reading about ETFs and I want to know if you can purchase them inside an RRSP?

Answer

It wasn’t so long ago that a cell phone was as rare as a slender billed vulture—and about as large as one too. But the cell phone has kinda caught on and now no one under the age of twenty can imagine life before its ubiquity.

ETFs or exchange traded funds have caught on too, though not quite as broadly. More and more people like you are reading about them and considering adding them into their portfolios. And for good reason: they are a low cost way to match the performance of a given index and are super simple to buy and sell.

To answer your question directly—you absolutely can purchase ETFs inside of an RRSP. An RRSP is simply a basket that can hold lots of different things—ETFs, mutual funds, stocks, bonds, cash etc.

Let’s look more closely at what the term ETF means, starting with the “fund” part of an exchange traded fund. An ETF is a fund that is comprised of a variety of securities. Often those securities track the performance of an index like the TSX 60. “Exchange traded” means that you can buy and sell an ETF on a stock exchange, just like a stock.

There are a number of advantages and disadvantages when you compare ETFs to mutual funds. I go into these in greater detail in my book Moolala, but here is a quick overview.

Advantages of ETFs:

• Low fees: The average management expense ratio (MER) on a Canadian Equity ETF is 0.3%, compared to an MER of 2.3% for a Canadian Equity mutual fund. And the commission to buy or sell them is generally under $20, through a discount broker.

• Benchmark performance: ETFs that track a benchmark index deliver the performance of that index minus the MER. An equity mutual fund is less likely to do as well as that index. (See are Are index funds adding value?) Why? First, because the higher MER eats away at your returns and second because it is really hard to outperform the index by figuring out which stocks will rise and which will fall.

Disadvantages of ETFs:

• Financial advice: One of the reasons that a mutual fund has a higher MER than an ETF is that it includes compensation to the financial adviser who sells it. That compensation is so they can afford to provide advice and pay for their overhead. While many financial advisers are able to buy ETFs on your behalf they generally add a fee, say 1.25% of assets, so that they still make money.

• Trading costs: ETFs are super cheap to buy and sell if you’re buying in large amounts. As I mentioned, if you buy through a discount broker, the fee is under $20 per trade, which you’ll pay when you buy and sell the stock. If you’re buying $1,000 worth, that works out to the equivalent of a 2% fee as soon as you buy into the ETF—and that is in addition to the MER. But if you’re buying only $100 worth, that is a 20% bite out of your investment. If you invest your $50,000 all at once into one ETF (which isn’t advisable) then the trading costs won’t be an issue. But the trading costs could be the costs might be prohibitive if you want to invest a small amount each month. If that’s a concern then there are alternative ways to index outside of an ETF that you may want to consider.

Some investors use ETFs to trade actively. But most use them for what’s called passive investing: simply buying and holding the index for a long period of time. If that is what you’re thinking of doing, check out the Couch Potato approach for an easy way to start.

My employer offers the option for both a contributory pension plan and a non-contributory pension plan. What are the advantages of each? I understand that with a non-contributory plan I have more room for my own RRSP decisions, but I am not sure if there are inherent benefits to either plan. What factors should I consider when deciding which plan to join?

Answer

I am grateful to live in a country that values free speech. And I’m equally grateful to live in a country that mandates the use of seat belts. Some freedoms are fundamental to our democracy, and some enforced behaviours are fundamental to save us from ourselves.

Recent data on retirement saving suggests we could use more help saving us from ourselves. Traditional pensions are on the decline in the corporate world and contributions to RRSPs are dismal: in 2010, only 26% of tax filers contributed to an RRSP.

For those not familiar with these types of pensions they work like this: contributory pensions require its members to put money into the plan, which is then matched by the employer; in non-contributory plans the employer contributes to the pension based on a formula, regardless of whether the employee puts money into the plan.

When it comes deciding between a contributory pension and a non-contributory plan every situation is different. But there are a couple of reasons why a contributory plan may be a more compelling option.

Making the most of the employer match

One of the advantages of a contributory pension plan is that in order to benefit from the matching program from your employer, you to have to make a contribution to the plan. In other words, it forces you to save for your own retirement. This match is usually up to a maximum percentage of annual income, say 6%, which is a very compelling benefit.

The non-contributory plan, on the other hand, calculates the employer contribution based on a formula—the employee doesn’t have to make a contribution to qualify for it and the match typically isn’t as rich.

A typical non-contributory plan might offer a guaranteed 3% of employer contribution while a contributory plan might match 100% of employee contributions, up to a maximum of 6% of annual income, says Melanie Jeannotte, the managing partner at Vital Benefits, a Calgary-based benefits consulting firm.

The question is, which is better? “The contributory plan is going to result in a larger benefit from the employer,” she says. “And the employee will have 12% applied to their RRSP’s contribution room as a result of both their and the employer’s contributions.”

Over the years I have talked with many people who didn’t make the most of employer-matched contributions and lived to regret it.

Say you make $50,000 per year and your employer will match any contribution you make up to 6% of your salary. But instead of maxing out the benefit, you sign up for a 3% withdrawal from your paycheque. Your contribution to the plan would be $125 per month, while your employer would chip in another $125. If you took full advantage of the employer’s matching program, then both you and your employer would contribute $250 per month towards your pension.

The difference between these two examples is $125 a month or $1,500 per year. If you compound that extra amount over 30 years, growing at 5%, it would be worth $105,000. No surprise then that I would strongly encourage you to make sacrifices in other areas to qualify for the juiciest employer match possible.

Saving you from yourself

Non-contributory plans, on the other hand, put the onus on the employee to maximize their RRSP contributions because there is no the incentive to encourage you to save on your own “The reality though is that most Canadians do not maximize their annual allowable RRSP contributions so have room to save in addition to the annual maximums,” says Jeannotte. “If that is the case for this individual, the 12% that will go into RRSP’s in the contributory plan are going to get them closer to their retirement savings goals.”

She adds that most companies do not require an employee to choose between contributory and non-contributory plan, but rather allow participation in both which is ideal to maximize employer contributions. “If the employee has to choose then the plan formula becomes important as an evaluation tool,” she says.

Other factors to consider

Other circumstances: Do you have a spouse who will be earning significant pension income in retirement? If the answer is yes, that may mitigate the risk somewhat of your choices.

Investment savvy: Are you interested in self-directed investing? Because you have more control of your retirement savings with a non-contributory plan, there are more choices to make and therefore more work involved. If investing isn’t of interest to you, a contributory plan might make more sense.

Willpower: Can you rely on yourself to keep the money invested in a non-contributory plan? The ability to direct funds to other needs can be both a blessing in an emergency and a curse if you don’t have the willpower to stay focused.

Choosing between a contributory or non-contributory pension plan is a big choice. Sit down with your human resources contact and go over the details to ensure that you make the right choice for you.