•MoneySense contributor Preet Banerjee writes about the pros and cons of the digital wallets in the Globe and Mail.

•Morgan Stanley and Mark Zuckerberg are facing lawsuits for their role in Facebook’s lacklustre IPO.There are concerns the bank selectively informed clients of an analyst’s negative report about the company before the stock started trading. Other reports suggest it was the Facebook founder himself who told analysts to slash revenue and earnings forecasts.

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.

On Lexington Street, I was surprised to find myself outside the Jill George Gallery, a place my husband much admired but had never been able to visit. Knowing his interest in its artists, I went inside. What I found there changed me.

We are not, as a general rule, covetous people (well, except in the matter of books). We don’t drive an impressive car; we were happy in our small three-room apartment. Our vices lack extravagance. So the greedy passion I felt when finding myself face-to-face with a certain drawing left me stupefied, moved, and more than anything, unsettled.

The artist in question, Alison Lambert, is an English painter who in recent years has devoted herself to large-scale drawings of human faces. Utterly complex and mysterious, their expressions are impossible to pin down in a single word, and reflect back a strange and always changing combination of emotions that depend entirely on the mood of the viewer. Lambert’s drawings are almost sculptural in their textures. She uses a unique method of drawing and erasing and pasting on torn paper, until the ravaged face that emerges appears out of the duress and struggle of the making itself.

Though I’d seen several of Lambert’s drawings online and in books, I had never until that moment seen one in person. And I wanted it.

The drawing that the lovely Jill George put up on the wall for me was titled Pyrrhus: a 35-in. tall image of a calmly troubled young man staring distractedly. (I almost wrote “searchingly” and then deleted it and wrote “beatifically” before finally changing that to “distractedly.” It is this impossibility of emotions that Lambert captures. You find yourself fumbling to figure out exactly what it is you’re seeing, even as on a deeper level you’re already responding to it.)

By all accounts, the price of Pyrrhus was more than fair. But it was nearly everything my husband and I had saved up until then. We spoke at length, I in Europe, he in Canada, about the beautiful possibility of owning such a picture.

In the end what interests me is not how we got the picture. (We did get it. We tightened the proverbial belts, spent what savings we could, sold off valuable items we had sitting in storage; we paid it off very slowly and deliberately and with the greatest care possible.) What really fascinates me is that extraordinary impulse to possess it I felt upon first seeing Pyrrhus. There is such a strong critical gesture in our society against acquisitiveness, even as more and more is produced, and a greater and more pervasive craving is created. And yet it struck me—and strikes me each time I look at Pyrrhus—that there are different kinds of greed.

The purchase of art is unlike the purchase of any other object. You don’t buy it with an awareness of its function, its ultimate use in the household. It serves no practical purpose; rather, it furnishes the mind. It slows our days and jolts us out of our routines, and reminds us, above all, in those frustrating, difficult times when things are just not going well, that there is life beyond the details. And Lambert’s beautiful faces perfectly exemplify this.

Some possessions are held in trust, and only in trust, as things borrowed from the world. We are creatures who measure and mark out the passages of our lifetimes through accumulations, whether those be keepsakes or memories. For me it is the memory of that first electric encounter with Pyrrhus that I really purchased on that day. And it is that original excitement that I return to every time I see him. The heat of a London June, the smell of traffic in the streets, the blinding white sunlight in the windows. This is what I see when I look at Pyrrhus as much as anything else.

Esi Edugyan’s most recent novel, Half-Blood Blues, won the 2011 Scotiabank Giller Prize for Fiction. She lives in Victoria.

•The OECD wants Canada to hike interest rates. The Bank of Canada should resume raising rates this fall to help cool the country’s hot housing market and allow the bank to reach its inflation target, the Paris-based think tank said.

•Thinking of selling the cottage? The CRA seems to be targeting cottage sales and reviewing additions to the original adjusted cost base (“ACB”) of the property.

Q: The Global Couch Potato has one-third of the equity allocation in Canadian stocks, but Canada makes up only about 4% of the world markets. Aren’t you guilty of home country bias? – Jeremy D.

I’m actually pleased that I’ve received this question several times in the last few months. Not long ago, it wasn’t unusual for investors to ask why anyone would invest in any country but Canada. Our domestic market was one of the world’s top performers during the first decade of the new millennium, but that’s changed: Canada has now lagged the MSCI All Country World Index by 3.4% annually over the last three years, and we’ve trailed the US over the last five.

That’s a reminder that the long-term expected returns in any developed country are more or less the same. (Since 1970, the average return on Canadian, US and international stocks are almost identical.) However, since each country’s stock market moves along a different path, a globally diversified portfolio should have lower volatility than any single country, and it should boost returns by providing opportunities for rebalancing.

It makes theoretical sense to build an equity portfolio that assigns weight to every country based on the size of its stock market. That would mean allocating about 46% to the US, about 8% each to the UK and Japan, and just 4% to Canada. Why, then, does the Global Couch Potato allocate equal slices to Canada, the US and international stocks?

I’ll admit there is some home country bias in my model portfolios. This simply acknowledges that investors all over the world feel safer holding domestic stocks, and Canadians are no different. A recent survey found they concentrate 74% of their equities in Canadian stocks, which is in line with investors in other countries. So recommending that investors go from 74% to 4% would make the Couch Potato an awfully tough sell. But there are more compelling reasons for Canadians to overweight their own country:

Less currency risk. Holding foreign stocks introduces currency risk into a portfolio. Some currency exposure is a good diversifier as it lowers overall volatility, but investors who plan to retire in Canada should probably not have 96% of their equity investments in foreign currency. You can use currency hedging, of course, but this strategy is expensive and imprecise: over the long-term, currency hedging is a significant drag on returns.

That said, it’s important to consider your overall asset allocation when measuring your currency exposure. Most investors hold all of their fixed income in Canadian dollars, with good reason. So if you have a large bond allocation in your portfolio, you can afford to take more currency risk on the equity side.

Lower costs. Canadian equity ETFs and index funds are generally the cheapest to trade and to own. All Canadian ETF providers charge much more for US and international equity funds. While Canadians can (and should) use US-listed ETFs with very low management fees to get exposure to foreign stocks, the cost of trading in US dollars can be high. If you go this route, you certainly to make an effort to reduce the cost of currency conversion.

A fund’s internal trading costs are also higher in some international markets (especially emerging countries) where stocks may not be as liquid as they are in Canada and the US. This helps explain why the tracking error on international equity ETFs are often higher.

More favourable tax treatment. Because of the tax credit on eligible Canadian dividends, there is an excellent case for overweighting Canadian stocks in a taxable account. Foreign equities are not only ineligible for this credit, they are also subject to withholding taxes on dividends that range from 15% to as much as 35% (these may be recoverable).

If you’re investing in an RRSP, you probably know you’re exempt from the withholding tax on US securities. However, if you use one of the many Canadian-listed ETFs that are simply “wrappers” for a US-listed ETF—the iShares S&P 500 Index Fund (XSP) is an example—you will still pay the withholding tax, even in an RRSP. It’s also important to know that RRSP investors are not exempt from the withholding taxes of countries other than the US, so the returns on international stocks will suffer slightly in an RRSP.

Simplicity. Remember that asset allocation is not about precision. It’s important for Canadians to get significant foreign equity exposure because our market is so poorly diversified, but the exact proportions are not that important. The equal allocation in the Global Couch Potato is a simple solution that gives you plenty of diversification and still keeps rebalancing easy.

What does that mean for the unsuspecting user of these “convenient” credit card cheques? First, interest starts to accumulate immediately since there is no grace period on cash advances. Second, cash advances often come with a much higher interest rate than normal retail purchases made on a credit card. With a higher interest rate, costs go up and the time it takes to get to debt-free forever lengthens, both of which make the folks who fall prey to these cheques extremely profitable.

The federal government has been promising to stop these credit card cheques from being sent to customers if they haven’t specifically been requested. And yet they keep arriving. Have the feds dropped the ball? Or are credit card companies simply not following the rules? Or is it a case where the feds dragging their feet serves the special interest groups that would like to see this proposed new legislation take a long time to become law?

The promise to regulate a ban on credit card companies sending unsolicited cheques to customers came in the 2011 federal budget. How long can it possibly take to implement? Is the government being lobbied so hard that it’s using delay tactics to let credit card companies get their last licks in? Perhaps.

According to the Department of Finance website (as seen on May 13, 2012):

“The Government proposes to ban the distribution of unsolicited credit card cheques by federal financial institutions… These proposed regulations will be published for consultation in the coming weeks.”

What’s to consult? Either they are going to ban the suckers or they’re not. Of course, every time they get a little closer to the actual ban, the media picks up the story and talks about what progress this is, and the feds get more positive airtime. Meanwhile, I’m still getting those damn cheques.

In most cases, you no longer can. Since the first edition of Chilton’s book appeared in 1989, the wages of typical Canadian workers (barbers or otherwise) have not kept up with the rising cost of houses, especially in larger cities. In my view, the slow and steady 10% savings rule just isn’t realistic for most young homeowners these days. So what should you do instead?

Consider an alternative strategy devised by Malcolm Hamilton, partner at Mercer, a human resources consultancy. You might call it the 20% strategy. He suggests earmarking 20% of your income for either housing payments or retirement savings throughout your life: “The entire 20% goes to the mortgage until the mortgage is gone, then the whole 20% goes to the RRSP,” says Hamilton.

I agree this strategy should help a lot of young Canadians afford a home and save for retirement. But Hamilton and Chilton agree it’s not for everyone. Will it work for you?

Different ways to build wealth. The beauty of the 20% strategy is that it allows you to successfully achieve two of life’s biggest financial goals. Early in life you can focus on buying as nice a house as you can afford, and you’ll pay off the mortgage as quickly as possible as your salary grows. Next you save for retirement in an intense, concentrated period. In my experience, this approach fits well with how most people naturally set their priorities.

Saving for retirement just isn’t important to most Canadians in their 20s and 30s, who are often desperately eager to buy a comfortable home in a good neighbourhood. But after buying that home, they chafe under the mortgage and want to get it off their backs as soon as possible. Then finally they turn their focus to building their retirement nest egg at a stage of life when that becomes increasingly important. It can all work out perfectly well, since paying off your mortgage and building up your investment balance are just different ways to build wealth.

To show how the 20% strategy could work in practice, I have developed a fictional scenario for a typical middle-class Canadian couple we’ll call Eric and Jennifer. Starting in their mid-20s, Eric and Jennifer set aside 20% of their income in order to accumulate a down payment on a home. Then in their early 30s they’re able to buy a $325,000 house with a mortgage of $260,000 (in today’s dollars). Each year they increase their mortgage payments in proportion to their growing salaries in order to pay it off in 17 years, just before they turn 50.

With the mortgage gone, they turn to building up their nest egg by applying 20% of their income (plus RRSP tax rebates) to savings. That allows them to save $525,000 (again, in today’s dollars) by the end of the year they turn 65. That’s more than adequate to provide a comfortable retirement.

Customize the strategy. Adopting this mortgage and savings plan at the 20% level should suit Canadians in average circumstances, says Hamilton. But to sustain their lifestyle in retirement, affluent Canadians should save more, while low-income Canadians will need less, he says.

Other circumstances may force you to tweak the strategy. Many young people are hobbled with enormous student debt and can’t start saving for a down payment immediately after graduating, although a good education might help earn bigger salaries later on. The plan also assumes you will have virtually no savings until you’re in your late 40s or early 50s, which isn’t the case for many people. Few Canadians outside the public sector enjoy good defined benefit pensions anymore, but many will by then have significant amounts in more modest employer-sponsored plans, or RRSPs and TFSAs. For better or worse, you’ll probably need to adjust the numbers accordingly.

Do you have the discipline? While Hamilton’s strategy should ease the path to home ownership and retirement savings for many Canadians, that doesn’t mean it’s easy. Like the slow and steady 10% savings approach, it too requires discipline. To do it properly, you first need to increase your mortgage payments as your salary increases in order to pay off the mortgage quickly. As a rule of thumb, if you have no other substantial savings or pension, you need to pay off your mortgage 15 to 20 years ahead of your retirement date, says Hamilton.

Then when you’re mortgage-free, you need to have the discipline to change gears: after decades of putting it off, you will need to suddenly embrace investing. That means socking away the full 20%, and avoiding the temptation to buy a larger house with a new mortgage, or ramp up your lifestyle expenses. (In my view, most people should also save their RRSP tax rebates on top of the 20% to make the most of the strategy.)

This is harder than it may sound. Chilton talks to a lot of people about their finances, and he says that while many Canadians are good at paying off their mortgages, he finds a large proportion don’t subsequently save enough when the mortgage is gone. After all, unless you’re willing to let the bank foreclose, you don’t have any choice when it comes to your mortgage payments. But you can come up with a dozen reasons not to invest regularly.

“I have no issue with people doing Malcolm’s approach as long as they avoid the behavioural issues,” says Chilton. Hamilton himself agrees that if you think you may lack the discipline to save large amounts late in your career, you’re probably better off sticking with the traditional approach.

Slow and steady wins some races. Indeed, while the 20% mortgage and savings rule should work well in many cases, it’s not for everybody. If you can start early and save a steady 10% of your income without jeopardizing your dreams of home ownership, then do it. The 10% rule recommended by Chilton is a proven strategy. Consider the fictional example of Hannah, a single woman who earns $50,000 a year (in today’s dollars) throughout her career. By saving 10% plus RRSP tax rebates over 40 years, she’d accumulate $450,000 nest egg in today’s dollars (assuming a conservative 5% return with inflation of 2.5%). That should provide her with a comfortable retirement if she also owns her home mortgage-free.

But the slow and steady strategy has potential pitfalls of its own. In particular, you’ll need to save more if you start late. “If you start at 46—or even 35—you have to save more than 10%,” says Chilton. “This is something we haven’t driven home as well as we should.”

Consider the example of Sergei, who has the same income as Hannah, but only starts saving at around age 40, leaving him just 25 years before retirement. Sergei has to save about 20% of his income to accumulate about the same nest egg as Hannah did by saving 10% for a longer period. In addition, if you’re a renter, you should probably save more than 10% to compensate for the fact that a paid-for home is a valuable asset that reduces your accommodation costs in retirement compared to equivalent rental properties.

Plan for the unexpected. No matter how good your plan, you never know how things will work out. With luck, the pleasant surprises (bigger salary increases, better investment returns, an unexpected inheritance) will at least offset the bad (maybe rising mortgage rates or falling housing prices after you purchase, or personal misfortune such as divorce, business failure or job loss). As Hamilton says, all you can do is “steer up the middle” and adjust when necessary.

That’s easy if the good surprises exceed the bad. But what if events turn out unfavourably? One thing to realize is that saving 20% of your income after your mortgage is paid off often leaves room to save more if you need to catch up. My sense is that saving 20% represents a moderate level of frugality for Canadians who are mortgage-free (see “How much can you save?”) If need be, you can probably save about 25% of your income, or more if you set your mind to it, especially late in your working life if you have no children, or if your kids are financially self-sufficient. And that’s not counting RRSP tax rebates. If you save those as well, that could bring your overall savings rate to 30% or more. So even if things don’t work out as you hoped, there’s a lot you can do to catch up.

While Chilton and Hamilton recommend different saving strategies, they hold each other in great regard. They also wholeheartedly agree that the best general advice you can follow is live within your means, pay down your mortgage and other debt as quickly as you can, and steadily build up your savings for retirement as soon as you can manage it. Do that diligently and you should enjoy a comfortable retirement—whatever strategy you use.

Like stock options, there are no tax implications when RSUs are granted to an employee. At the time of vesting, the FMV of the RSU grants that vested is considered as employment income. Starting in 2011, the Canada Revenue Agency requires employers to withhold taxes on employee stock benefits, including RSUs. Therefore, your employer will likely sell a portion of vested restricted stock and remit it to the CRA. The FMV of restricted stock and taxes withheld will be added to the Employment Income (Line 101) and Income Tax Deducted (Line 437) of the T4 slip for the financial year.

The employee has to keep track of restricted stock FMV at the time of vesting. If there are multiple vesting events, the adjusted cost base of the stock must be calculated. When the stocks are eventually sold, the difference between the proceeds of the sale and the adjusted cost base of the shares should be reported in Schedule 3 Capital Gains (or Losses).

Let’s take an example. Sue works for ABC Corp. and was awarded 600 RSUs on May 1, 2011. ⅙th of the award will vest every 6 months provided Sue is employed on the vesting date. Sue’s first batch of 50 units of restricted stock vested on November 1, 2011. ABC was trading at $10 and Sue’s employer sold 23 shares and remitted the withholding tax to CRA. Sue’s second batch of 50 units of restricted stock vested on May 1, 2012. ABC was trading at $12 and Sue’s employer again sold 23 shares and remitted the withholding tax to CRA. In both cases, her employer included $500 and $600 in employment income and $230 and $276 in income tax deducted in Sue’s T4 for 2011 and 2012 respectively. Note that, unlike stock options which are eligible for the stock option deduction and hence are taxed at 50 percent, there is no favourable tax treatment accorded to RSUs.

On May 15, 2012, ABC hit $15 and Sue sold the 54 shares of ABC Corp. that she holds. Sue’s adjusted cost base is $11 (27 shares acquired at $10 and 27 shares acquired at $12). Since she sold for $15, her capital gains are $216, which she would declare when filing her 2012 tax return in Schedule 3.

Related Reading:

• Reader Question on Restricted Stock Units
• Tax Treatment of ESPP Benefits
• New withholding taxes on stock option benefits
• Free ACB & Capital Gains Tracker in Excel
• Profit from Employee Stock Purchase Plans (ESPP) – II

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