Your Interview

I'm watching my retirement fund shrink and would like to know if I should take it out and buy gold.
thank you,
Wendy

Judith Cane: Wendy, Larry and Emmanuel, it’s understandable the desire to run to a safe place during a storm, however storms pass and this market volatility will too. We have seen this happen over the last few decades and while market declines are part of investing they are typically followed by even greater gains in the long run.

Gold can be a part of a well-diversified portfolio and if I were to recommend it, I would ensure you bought bullion and stored it in a safety deposit box, or a mutual fund or ETF that physically had the gold. As for paying off your mortgage, if you had non-registered investments there may be an argument for that strategy, however I would need to know more before recommending de-registering investments.

Hi,

My name is Remi and I'm a recent graduate. As I'm saving money for a downpayment for my first home, I am worried about giving an offer on something that might lose a lot of value over time. Would you have any recommendation on what I should do?

Kind regards,
Remi

Judith Cane: Hi Remi, stocks and real estate have always been the best investments to hold over the long run. What you really need to decide is if you are buying your home to live in for a long time or as an investment. The more time you have in your home the better the chance for a gain on the value of your house. To be sure, when I’m doing a financial plan for someone, I always recommend buying over renting.

I work for the federal government and am planning on retiring early (age 53 with 30 years service)and will defer my pension to 55. I have invested in RRSP's which I am planning to use live off of to bridge the gap to 55 so I won't get hit with an age penalty. How can I better protect my RRSPS as they are dropping rapidly in the current environment? I am with ING Streetwise low risk Fund.

Judith Cane: Debbie, I think you need to go back a few steps to look at what your expenses will be once you have retired. Then look at whether your RRSPs will support you for 2 years. Remember, when you withdraw the money you will be taxed. Because you didn’t mention how close you are to retirement, it is difficult to recommend a strategy for your RRSP investments. I suggest you begin a savings program now, that you could draw on for retirement before your pension starts. You may want to consider one of the new Tax-Free Savings Accounts. This will allow more time for your RRSPs to recover.

Hi,

My RRSP and non-RRSP investments are now in bank-managed mutual funds, which are now obviously losing money because of current events. I'm not close to retiring (37 ys old) but am wondering if I should a) sell these investments, take my losses now and invest in GICs until the turmoil subsides or b) given these are long-term investments, not sell anything and weather out the storm?

Judith Cane: Hi Bill, as I mentioned in the answer above, we have seen this type of market decline over the last few decades. And they have typically been followed by even greater gains in the long run. Bill, you have the time to sit and wait for those gains to happen.

Hi Judith,
Does it make sense for me to divert the $120.00/month I currently contribute to RSP's to paying down a $20,000.00 home equity loan instead? The loan is just over 1 year old and I have yet to make any payments on it (other than the interest).
Thank-you,
Kara

Judith Cane: Hi Kara, when I work with a client to create a financial plan, debt management is always a key fundamental of the plan. I recommend determining what your monthly expenses are and then applying as large a payment as possible to pay off the home equity loan. I would likely still recommend contributing to a savings plan but without knowing your age or whether there are other forms of income available at retirement, I wouldn’t be able to go into any more detail.

I am a Federal Government employee as well 29 years old), and I am wondering if I should be making my maximum RRSP contributions every year? I am worried that I may get taxed too heavily in retirement when I combine my pension and convert my RRSP to a RRIF.

Thanks,

John

Judith Cane: John, we are lucky in Canada to have the opportunity to invest in a program like an RRSP. I always recommend maximizing your RRSP room each year as long as your short-term debt has been paid off. Whether or not you use that credit depends on your income each year. If you are only 29, it’s likely you are not in your peak earning years and you may want to carry forward your RRSP credit to when your income is significantly higher and would have a greater effect at a time when your expenses are also likely higher.

The theory about RRSPs is that when you convert them to a RRIF and start to draw down income, your tax bracket is lower than when you took the credit. I have to say John, that you are only 29 and anything could happen over the next 25 or 30 years and while you are able to do so, I would continue contributing to your RRSPs. However, I would also be contributing to some sort of non-RRSP savings program for emergency or short-term financial goals.

I work in I.T. and it looks like my work will be offshored in the next year. Management isn't saying I will be out of a job - just the classic lines of "times of new opportunities."

I'm wonder if it makes more sense to jump ship, start at the bottom and maybe just end up at another place that may ultimately offshore the job or stay in place, hope I'm wrong about my job and if I'm not get a package of some sort and live on that while searching for a new job?

Are the advice places on what a fair break down of my budget should be like? I've heard your house hold should only be about 30-40% of your budget. What about transporation? Or Food? Entertainment?

Finally, the more you save the better. However, I don't have an idea if I'm at a good level of saving for my age, average or I need to do more.

Judith Cane: Stephen, I wish I had a crystal ball for you. I can’t tell you what to do as far as employment is concerned, however I can tell you that if you are worried about your job, the best thing you can do, while still employed, is ensure you pay off your short-term debt and start saving as much as possible in a high-yield bank account. Ensure you have identified your monthly expenses and indicated areas you could easily cut back on if you are unemployed. If you can put away at least 3 months worth of expenses, that may allowing you breathing room while you look for another job.

As far as expense breakdown, my preferences for clients are to stay around the 25% - 30% mark for housing expense (including mortgage, taxes, maintenance and utilities). Transportation including gas and maintenance should be approximately 10%. As for discretionary spending, that depends on what your financial goals are and what you are willing to sacrifice to achieve them.

My husband and I have a mortgage coming up for renewal next month. I would like to increase the mortgage from 123K to 223K to have money for renovations. We will be retiring in 8-9 years with good government pensions and will be likely moving after retirement. Is it a good idea to increase our mortgage to renovate even if it means the house likely won't be paid off at retirement?

Judith Cane: Pat, before I went ahead with the renovations, I would discuss with a real estate agent the return on investment you would get on selling your house in 8 or 9 years. Would you increase the market value of your house by at least $100K if you made those renovations? I would recommend looking at what your expenses are now and what you anticipate they will be in retirement, to determine whether you could afford to support a mortgage payment.

If you decide to go ahead with the increase in your mortgage, and you need both of your pensions for your after retirement expenses, I would recommend looking at an individual insurance policy to cover the death of either you or your spouse. At that point, the survivor’s income will be reduced and may not be enough to cover the monthly expenses.

Is it possible to transfer RRSP Mutuals into Term GIC mutuals?

Judith Cane: Shannon, just to clarify, GICs are not mutual funds. They are Guaranteed Investment Certificates issued by financial institutions like banks, that guarantee a set interest rate at the end of a prescribed term. You can have most financial instruments as RRSPs including bank accounts, stocks, bonds (government and corporate), mutual funds, GICs, segregated funds, mortgages, etc.

I am also a Federal Government employee that is set to transfer to the Province in Feb. We will be receiving severance packages as well as workforce adjustment money(lump sum). Which path do I take for retirement in 3-4 years. Pay off credit cards, line of credit or put it on our mortgage. Is there a rule of thumb for debt reduction???

Judith Cane: Bob, my rule of thumb for debt reduction is to do it as fast as possible. Seriously, people are carrying the highest debt load in Canadian history. Your severance is taxable however you will likely be able to roll some of into your RRSP without tax implications. I would check with your HR staff to confirm how much you can rollover. I would then calculate how much you needed to pay off your credit cards and line of credit.

If you are 3-4 years away from retirement, I would definitely recommend paying off your short-term debt first. It likely has the highest interest rate and is costing you the most money. I would look at moving the balance into your RRSP. I would then recalculate your monthly expenses and begin saving to make annual lump sum payments on your mortgage.

We just sold my Mother's condo and after paying off the mortgage we have $130,000 that we are presently holding in a daily interest savings account that pays 3.2%. Should we move these funds to another safe interest bearing account? Accounts only insured to $100,000 should we open another account and move the other $30,000?

Judith Cane: Kathy, you didn’t mention whether you mother is still alive and requires the money or she has passed away and you have inherited it. If your mother is still alive and requires an income, then you may want to consider an annuity that will pay a guaranteed monthly income and takes away the requirement of managing an investment. If the money is now yours, then I would create a plan to determine what you would like to do with the money.

Are you saving for children’s education, or for a cottage or just for retirement? Once you have determined what you will use the money for, then you can determine how to invest it.

I currently have a variable mortgage. With interest rates on the decline this is advantageous right now. Once rates turn around though I may be looking to lock in on a fixed rate mortgage. But my dilemma is that banks are increasing fixed mortgage rates despite prime rates dropping recently. Would it be a wise financial decision to stick with the variable mortgage in the face of future interest rates hikes once the economy/market recovers from the credit crunch?

Judith Cane: Paul & Jeremy, because I help create financial plans for clients, I believe in having as many fixed costs as possible. This helps determine the financial risks of illness or job loss. Mortgage rates are still quite low and you may want to work with a mortgage broker to find you the best rate.

The general feeling is that gold is a good place to be going forward. Would you recommend
gold stocks or a gold bullion based ETF for the best return?

I presently have retiremnt savings in GIC's
If I watch the markets and assume they have bottomed out, should I then buy into a medium growth mutual fund in the hopes that the market will make a recovery thus giving very good returns?
Thanks

Judith Cane: Hi James. You don’t mention your age so it makes it a bit more difficult to answer your question. One thing I can say is that I believe a client’s portfolio should be diversified. In other words, we’ve seen what can happen when someone has everything in one sector, like technology, and having everything in GICs can be risky because the interest paid on them may not keep up with inflation, so in real dollars you are actually losing money.

Could you tell me about self directed RRSPs and how I can put them into my mortgage? We need to remortgage to pay debts and we have about $45K in RRSPs which is also our approximate debt total. Is this a good idea?

Judith Cane: Hi Nancy. If you are going to move your mortgage into a self-directed RRSP you need to have more money in your RRSP than the total amount of your mortgage. It sounds like you don’t meet that criteria, however to ease up on your cash flow and reduce the amount of interest you are paying, I would recommend remortgaging.

For those who do qualify, you can hold a mortgage within your RRSP. And your monthly payments are made to your RRSP instead of a traditional lender. There are set up fees of about $1,000- $1,500 and annual fees charged by the institution holding your self-directed RRSP. In addition you must purchase mortgage default insurance regardless of your loan-to-value ratio.

You can also set your own interest rate, however it must be at fair market value and don’t think of defaulting on your mortgage payment to RRSP because the financial institution has the option of forcing a power to protect your RRSP. Still interested? Well if this is your only RRSP investment, you have not diversified your investment; it’s as if you have invested everything in fixed income, similar to GICs.

I have a car loan ($1500), and credit card debts ($4000). I can afford $750 extra for payments and/or savings. My question is, whether I should pay off the credit card debts or keep the extra as cash for emergency funds. I do not have any money in savings, and I have two dependents (wife and a 1.5 year old daughter. If I pay the credit cards and keep available credit on the card, I may not get the money for emergency, if the credit provider disappears. If I keep the money, I will be unnecessarily pay interest every month. FYI, My company is small and shaky too. Thank you in advance for your advice.

Judith Cane: Kumar, it sounds like you need to sit back and look at your spending habits. Take some time to figure out where this debt came from and create a plan that allows you to live within your means and in the same time, pay off the debt and begin an emergency savings fund.

Start by opening a high yield savings account and depositing $100/month into that account. Make it automatic, so you aren’t tempted to not make the deposit. Next, figure out the interest rates on your credit cards and your car loan. Make the minimum payments on the debts with the lowest interest rate and put the balance on the debt with the highest interest rate.

Once you have paid off that debt, continue to pay the minimum payment on the lower interest debts and use the balance to pay down the debt with the next highest interest. Once you have paid off your short-term debt contribute the $750/month to your savings account.

Is it a good idea to invest RRSP or cash in MIC (mortage investement corp) at this time ?

Jaga

Judith Cane: Jaga, it is always good to have a diversified portfolio and not have all of your eggs in one basket. Mortgages are a good component in an investment portfolio but I would also include foreign and domestic equities to round it out.

My RRSP investments have not fallen with the recent market downturn as I moved all of them into GICs and yielding money market accounts. I am concerned given the instability of banking institutions worldwide and am considereding converting my entire portfolio to gold or paying off the mortgage. Would you consider either of these wise?

I currently have retirement savings in a segregted fund within one of the Canadian life insurance companies. Is this a safe financial decision at this time?

Judith Cane: Dwight, segregated funds have been used as investments because they can provide creditor protection and capital guarantees. If you are asking if your guarantees could be compromised because of the market downturn, I don’t think so. Segregated funds are an excellent product and serve their purpose well. In terms of what you have invested your funds in, if they are equity based you have likely seen the same down market as the mutual fund industry.

How will the goverment's $25 billion mortgage buy out effect my current mortgage?

Judith Cane: The program announced last week by the government will have no effect on your current mortgage. For more information on this announcement please click on http://www.cbc.ca/money/story/2008/10/10/flaherty-banks.html.

Hello: I'm in my mid-thirties, with my money in savings, CDs, and mutual funds. Is there a rule of thumb for how money should be split into each category? Thank you.

Judith Cane: Ed, your investment strategy should be based on your financial goals. It’s fine to want to get the highest return but at what cost? If you don’t need any of your investment money until retirement you could have everything in a good diversified portfolio of equities. As you move closer to retirement you may want to move some of your portfolio into fixed income, however, if you need your money to continue to grow during retirement, you would still need a portion in equities. I would also suggest you should have an emergency fund in a high yield savings account.

With all the uncertainty surrounding interest rates/global markets etc, is it wiser to go with a fixed rate mortgage or a variable mortgage. It's my understanding that the fixed rate mortgages are being kept artificially high by the banks currently.

I am currently living in the USA, and The exchange rate is going from bad to worse.
Should I convert a larger ammount into USD now, Or do you think it will stabalize and maybe even reverse and gain some strength again.
I would really appreciate your advice regarding this.
Thank you,
John.

Judith Cane: Hi John, I’ll assume you are not earning an income in the USA and are living on savings in $CDN. I don’t see the dollar getting much higher while this market turbulence is happening. The price seems to be attached to oil prices however when oil was moving higher this summer, the dollar didn’t follow. All this to say, I think it makes sense to convert your money as you need it, on a regular basis, to take advantage of the ups and downs the dollar is going to take over the next few months.

Given greater instability of banks in other countries should I be concerned that our mortgage is through an Australian investment company (Macquarie Financial)? Are we exposing ourselves to greater risks by mortgaging our home through them?

Judith Cane: Kirsten, although Macquarie Financial is an Australian company, your mortgage is with the Canadian office and they must follow all of the regulations of our mortgage industry. Our mortgage industry is highly regulated which is one of the reasons we didn’t suffer from the problems with the sub-prime market that happened in the US.

Is this a good time to get into the market? I think that pharmaceuticals, boeing and 3m are smart choices. What do you think?
I presently have no stocks. My savings are in 18 month GICs with ING - 10 increments of $10,000 so that I can use some without compromising the lot.

Judith Cane: Michael, I’m not sure what your age is, however if you are in your 20s or 30s you should have a diversified portfolio of equities. The interest rate on your GICs is not likely to keep up with inflation over the long run and you will not achieve the returns you are probably looking for.

Upside down car loan, extremely high interest, credit getting back on track, but still not great. Want to get some savings happening so would love to sell the vehicle and pay off the difference but any research says this is most likely impossible. ANYTHING I can do?

Judith Cane: – An upside down loan means you owe more to the creditor than the car is worth. This can happen when you have a long loan term and the car has depreciated faster than anticipated or gas prices have gone up decreasing the value of vehicles like SUVs and trucks or another debt has been rolled over into the car loan. It is a difficult loan to get out of because even if you were able to sell the car, based on your credit history, you are unlikely to be able to finance the balance left on the loan. I’m not sure what your debt repayment plan is, but if you have other debt with a higher interest rate, I would pay that off as soon as possible. Once you have paid that debt off, double up the payments on the car loan.