Talking to David Chilton

David Chilton podcast

Hi, my name is Sheryl Smolkin. I’m a lawyer and a journalist. Today I’m pleased to be continuing the Saskatchewan Pension Plan’s new series of financial expert interviews with the Wealthy Barber himself…David Chilton.

The Wealthy Barber has sold more than 2 million copies in Canada, and last year — some 20 years later — The Wealthy Barber Returns was published.

I recently heard David speak at the Human Resources Professionals Association conference in Toronto and was delighted when he agreed to do an interview for the Saskatchewan Pension Plan Financial Expert podcast series.

Welcome David.

Q1. In your first book The Wealthy Barber, the well-to-do barber Ray Miller’s first and most important rule is take 10 per cent off every pay cheque as it comes in and invest it in safe interest-bearing instruments. Why do you think so many people have so much difficulty overcoming their inertia and taking that first important step?

A.1 It isn’t necessary to invest only in interest-bearing certificates. If you are a long-term investor building for retirement, Miller was fine with allocating some of the money towards growth-oriented vehicles like equities or mutual funds that have equities in them, but the basic thrust of saving 10% of every pay cheque is absolutely the key.

The problem today is that we love to spend, and so we resist any savings technique that limits our ability to go out and buy things. Also, society has taken on so much debt that it has squeezed our ability to save. It’s tough for people to set aside 10% of their net or gross income because they’re servicing debt now. We love to spend we love to keep up with the Jones’s, but to some extent, we’re sacrificing our future.

Q2. You acknowledge that it’s only human for the desires of Canadians to run well beyond our stream of “needs” into our pool of “wants,” but still maintain that many people have too much stuff. Do you think people should be making sacrifices today in order save for the future?

A.2 I do. And I hate the word “sacrifice.” It has such a negative connotation. I would argue after seeing thousands of people and their personal finances, that people who are saving successfully are happier, because they’re less stressed about their financial future. They are not caught up in that race to consume as much as they can.

Remember, nobody is suggesting massive cuts to your spending and an austerity budget. Let’s be realistic here, let’s set aside at least 10%, hopefully more. It’s doable. It doesn’t require major cutbacks – just spending a little less here and there to force savings.

Q3. How can people resist the temptation to buy more clothes, or jewellery or electronics – whatever discretionary spending is distracting them from saving for the future?

A3. It’s interesting. People who read my book say even reading about the psychology of spending has helped them have a little bit of a mind shift. But there are some safeguards that you can put in place. The problem in the last 20 years has been the ubiquitous availability of credit. It’s so easy to mindlessly swipe your credit card or write a cheque against your line of credit. If you want human nature to have less ability to sabotage you, take it out of the equation.

So you are seeing more people staying away from lines of credit now and I notice a lot of people going back to a cash-based spending system. They are taking out cash on a Monday and saying, my budget is $450. That money is in their wallet for everything from groceries to gas. When the money runs out, so does the spending. I love that approach because when the money leaves your wallet you feel a little pain and realize it is a finite resource.

When you are swiping debit or credit cards mindlessly, it’s too easy to spend and hard to keep track of. Spending quickly increases to an unacceptable level.

Q4. Tell me about the four liberating words of advice you give to people who come to you for help because they are overspending. Do they really work?

A.4 That is the chapter I hear the most about in the book and it’s a very simple concept. People really expect deep advice from me, but what I say is you’ve got to start saying to yourself and to others, “I can’t afford it.”

It’s hard at first, but when you start saying it then you realize, it’s not admission of failure it’s just accepting the reality. In fact it’s stress reducing because you are accepting the reality, you’re no longer stretching beyond your needs.

I cannot believe all the letters and phone calls I’ve had from people across the country who say they love the chapter. They’ve become used to it, they are embracing it and they are actually enjoying it.

Q5. Home renovation is a bottomless money pit that many people get sucked into in the hope of improving their property value or keeping up with the Joneses next door. When it comes to renovating or anything else, what are the four most expensive words in the English language?

A.5 Since the book has come out, I’ve come to think that I understated the case of excessive home renovation. We’ve received so many emails and letters from people saying if you think your examples are bad, look at mine.

I am not against home renovations. I renovated my own home a few years ago. The problem with home renovation is you do one room like your kitchen or your basement and the rest pale in comparison. And all of a sudden the cycle of renovation rolls on. With lines of credit making cash available, it’s very difficult to resist the temptation. I think of all the people I see who have line of credit problems, about 50% got that way through excessive home renovations.

Q6. The cost of housing has gone up tremendously over the years in Canada. Can homeowners depend on the value in their homes as a source of income in their retirement?

A.6 Well, not really. Seniors don’t necessarily want to sell their home in retirement. They like the neighbourhood. Many don’t move because they want to have the extra space at home so the grandkids can come and stay over. These are the kind of real life things that enter into decisions that so often are forgotten in financial books.

Many people do have a fully- paid home that has in fact risen significantly in value, but they can’t turn it into a financial asset or split an income off from it. They could take out a reverse mortgage, they could take out a line of credit but of course, those have their risks. You’re turning compound interest into your enemy instead of your friend, and a lot of people are hesitant to do that even when it does make some sense.

You have to be well diversified. And I am not against home ownership. In fact I’m very pro home ownership. But I think it is unfortunate how many Canadians I cross paths with who have emphasized home ownership exclusively as they built up the asset of their net worth statement and that’s a tough one because they don’t have any other assets to fall back on or to generate an income in retirement.

Q7. I know from your talk at the HRPA conference and your book that you live in a modest 1300 sq ft. home and granite counters don’t turn you on. What do you like to splurge on?

A.7 Probably more experiences than stuff. I am not a stuff guy at all. I can’t remember the last time I bought anything significant on the stuff front. But I do like to go to sporting events and playoff games, especially of my beloved Detroit Tigers and I’ll take the odd trip and bring my kids along.

I tend to be not a big spender, not because I am cheap. In fact I am quite the opposite. It is more because I don’t get a big kick out of stuff. I like relationships. And my hobbies are relatively inexpensive. Golf, is a little bit expensive, but I’m into a hockey pools and I love to read.

When I do splurge it’s probably on a trip. A second big weakness I have is that I eat out often because I travel so much. I am always on the go, and I don’t know how to cook so I eat out a tremendous amount. I did a spending summary in the process of writing the second book and I went “holy smokers.” It’s not just the sodium content that’s killing me here, it’s the cost too.

Q8. When do you plan to retire?

A.8 Never, I love what I do. I like to travel. I don’t want to travel as much going forward as I get older because it’s a bit of a burden being in an airport every day. But I really do enjoy my career. There are a lot of new things I want to try. I honestly don’t see ever retiring, particularly from speaking. Speaking is a favourite part of my job and I don’t know why I would ever leave it.

Thanks David. It was a pleasure to talk to you today. I know our listeners will be delighted to hear your common sense advice. And if they haven’t already done so, I’m sure they will want to get their hands on a copy of your new book, The Wealthy Barber Returns.

My pleasure. Thank you for having me.

August 2012 returns

SPP posted a return of 0.20% to the balanced fund (BF) and 0.04% to the
short-term fund (STF). The year to date return in the BF is 4.05% and in the STF is 0.31%.

Market index returns for August 2012 were:

Index August 2012 return (%)
S&P/TSX Composite (Canadian equities) 2.65
S&P 500 (C$) (US equities) 0.41
MSCI EAFE (C$)
(Non-north American equities)
1.11
DEX Universe Bond (Canadian bonds) -0.10
DEX 91 day T-bill 0.08

Can my spouse join SPP?

By Sheryl Smolkin

If both you and your spouse have individual RRSP contribution room of at least $2,500, each of you can contribute up to the annual maximum to your own Saskatchewan Pension Plan accounts. You can also each transfer $10,000 a year from individual RRSPs to your personal SPP accounts.

However, if you have sufficient RRSP room and your spouse does not, your spouse can open an SPP account to which you are the contributor. You can contribute up to $5,000/year in total ($2,500 for each of you) into the two accounts and get a tax deduction for the whole amount.

When it comes to RRSP transfers to SPP, your spouse can only make a transfer from an RRSP in his/her own name. You cannot make a $10,000 transfer from your RRSP to your partner’s spousal account.

Two major advantages of a spousal SPP account are that you can contribute double the amount each year and income split at retirement. Also, if both of you elect annuity options and one of you dies first, the surviving partner will still have a stream of income.

Also check out:

Derek Foster: Idiot Millionaire CBC Radio Saskatoon interview – August 13, 12

A pension solution for your business Saskatchewan Broker – Winter 2011

Roseman: Want to save tax? Look to SPP Moneyville.ca – March 6, 2012

Talking to Gordon Pape

GordonPape podcast

Hi, my name is Sheryl Smolkin. I’m a lawyer and a journalist. Today I’m pleased to be continuing the Saskatchewan Pension Plan’s new series of interviews with financial experts. My guest is Gordon Pape.

Gordon is an author of over 40 books, a newsletter publisher, journalist and all around financial guru. He writes regular columns for the Toronto Star and moneyville.ca among dozens of other media publications.

At age 75, he has just released a new book called Retirement’s Harsh Realities and it doesn’t look like he is planning to retire anytime soon. Today we are going to talk about annuities, and why an annuity purchase can be an important strategy for making your money last as long as you do.

Q. Everyone contemplating retirement has two key questions. How much will I need and how can I be sure I won’t run out of money? How would you answer these questions?

A. How much you need depends on the individual and the type of lifestyle you want to lead after retirement. A study done by Statistics Canada a few years ago found that people in their 70’s were spending about 95% of what they spent when they were in their 40’s. Yet conventional wisdom says you only need about 70% of your pre-retirement income if you want to maintain your standard of living. Based on those numbers it suggests that in fact you need more.

You need to look at your expenses in retirement and your sources of income such as CPP, OAS, an employer-sponsored pension plan if you have one and personal savings. There is no magic number.

You need to plan for the fact that people are living longer. Something to consider especially after the age of 80, is putting some money into a life annuity. It’s not a great place to put your money right now because interest rates are so low, but once the economy starts to pick up again and interest rates start to rise that’s the time to lock in a life annuity that guarantees you an income for as long as you live.

Q. Tell me how an annuity works.

A. You’ve saved money in a RRSP, you’ve converted it to a RRIF at 71 and the government requires that you draw down a minimum amount from that fund each year. As the years go by, unless you’re able to invest at a rate that keeps up with the rate of the minimum withdrawals, the value of the fund is going to eventually drop.

By the time you get to your early to mid 80’s, the depletion rate is too fast. You might consider using a chunk of you RRIF or all of it to purchase a life annuity from an insurance company, in exchange for a flow of income for the rest of your life.

The down side is you don’t have the money anymore. You won’t have an estate you can leave but it will be cash flow for the rest of your life

Q. Why have annuities fallen out of favour recently?

A. Low interest rates and the fact that people don’t like the idea of giving up their capital. They like to be able to control their money, so they can leave something behind for their children. When you buy an annuity you lose that possibility. However, you can buy annuity that guarantees the income for a certain period of time so if you die within the period your children will get some money.

Q. When is the best time to buy an annuity? Why?

A. The longer you wait, the more money you’ll get from the annuity. The company will pay you less money at 65 than 80 because your life expectancy is longer. If you can maintain a rate of return in your RIF around 6% then the optimum time would be within your 80’s.

Q. What questions should retirees and prospective retirees ask when they are shopping for annuities? What different kinds of annuities are available?

A. Research the amount of money that the various insurance companies are offering. There are tremendous variations in the rates that they are offering for the same kind of plan. There are annuity brokers who will do this for you and find you the best offer. There is no one company that consistently pays more than others. Desjardins has come up quite often, but not all the time.

It also depends on the type of plan – i.e. one company may offer money for a straight annuity with no guarantees, where as another company may offer a better rate for a joint and last survivor annuity which means it carries on until the last spouse dies

You also need to give some thought to the company itself – the solvency of each financial institution. There is an insurance fund that covers people in the event that their insurance policy goes belly up, but the fact is that you don’t want that to happen and don’t want to be forced on a fund that has limitations on it.

Q. What does it cost to use an annuity broker and who pays them?

A. The fee will be paid by the insurance company that you eventually do the business with. It’s like a mortgage broker.

Q. If someone came to you for financial advice, what portion of his assets would you advise that he put into an annuity?

A. It will depend on the individual and how large an estate they want to leave.

Q. What are the downsides of annuities?

A. The solvency of the company. Also, if you don’t get inflation protection, over a length of time obviously the purchasing power of the income that you receive is going to decline.

Inflation protection is expensive, in the sense you will get a lower monthly payment than if you do not have inflation protection. On the other hand it will guarantee that as the rate of inflation rises over the years, so will the annuity.

There are also “impaired annuities” for annuitants with a terminal illness. The annuity pays more because the purchaser has a shorter life expectancy.

Q. Would you invest in one yourself?

A. No, not at this point. I am managing my money well enough, and my wife and I have sufficiently large RRIFs that we don’t feel we need to buy that kind of insurance at this time of our life. Down the road when I am in my 80’s I may take a look at it.

Thanks Gordon. It was a pleasure to chat with you. I think Saskatchewan Pension Plan members will be very interested in your comments about annuities. They have the option of purchasing a competitively-priced annuity from the plan until age 71.

Why transfer RRSP funds to SPP?

By Sheryl Smolkin

In addition to maximum regular contributions of $2,500/year, SPP members can annually transfer up to $10,000 into their SPP account from existing RRSPs, RRIFs and unlocked RPPs. In 2012, over 200 members have already transferred $1.5 million into their SPP accounts.

Since these are direct transfers between plans, there are no tax implications. As part of the transfer process, members are asked for investment instructions directing money to either the balanced fund and/or the short-term fund.

Once funds are transferred into the SPP, all of the member’s assets benefit from the plan’s low investment fees (about 1.1 per cent) and competitive returns (7.8% since inception 26 years ago).

Furthermore, contributions are creditor-protected and cannot be seized, claimed or garnisheed in any way except in the event of a court order under a marital division or Enforcement of Maintenance Order.

Both regular contributions (up to $2,500/year) and additional amounts transferred into the SPP are locked-in and are used to provide you with a pension or lump sum at retirement.

If you have money in existing RRSPs or unlocked RPPs, consider transferring up to $10,000 each calendar year to your SPP account. It’s a cost-effective, stress-free way to enhance the benefit you receive when you retire from the plan.

SPP members may begin receiving benefits from the Plan any time after age 55 and must be retired from the Plan by the end of the year in which they reach 71. At SPP, “retirement” simply means you are receiving pension payments. You can still be employed and receive pension from SPP.

You can use this form to an initiate a transfer of funds to SPP.

 

Also see:

Backgrounder – Saskatchewan Pension Plan and Income Tax Act Changes

Roseman: Want to save tax? Look to Saskatchewan

MoneyTalk interview with Derek Foster : February 13, 2012

July 2012 returns

SPP posted a return of 0.18% to the balanced fund (BF) and 0.05% to the short-term fund (STF). The year to date return in the BF is 3.84% and in the STF is 0.27%.

Market index returns for July 2012 were:

Index July 2012 return (%)
S&P/TSX Composite (Canadian equities) 0.80
S&P 500 (C$) (US equities) -0.32
MSCI EAFE (C$)
(Non-north American equities)
-0.57
DEX Universe Bond (Canadian bonds) 0.66
DEX 91 day T-bill 0.06

Last chance to hear Canada's "Idiot Millionaire"

Canada’s “Idiot Millionaire”, Derek Foster, is coming to Saskatchewan!

Derek writes about SPP in “The Worried Boomer”

At age 34 Derek Foster left the workplace and has become Canada’s youngest retiree. Investing in simple stocks he has become know as an “idiot” millionaire. In is book “The Worried Boomer” Derek dedicated an entire chapter about Saskatchewan Pension Plan.

Join Derek, the Idiot Millionaire, at one of the following events to learn about his simple investment approach and how it can be a part of your journey into retirement.

Regina: August 13 – 11:30 am

Hosted by: Regina Chamber of Commerce
Lunch at Conexus Arts Centre Theatre lobby
200A Lakeshore Drive

Register: online at reginachamber.com or 1-306-757-4658
Costs:
Members: $35 pre-registered/Door: $40
Non-members: $50 pre-registered/Door: $55

Saskatoon: August 17 – 7:30 am

Hosted by: North Sask Business Assoc & Saskatoon Chamber of Commerce Breakfast at Saskatoon Club
417 21st St E

Register: by email info@nsbasask.com or 1-306-242-3060 register by 10 am August 16
Costs: All attendees $18

Bestselling Books:

  • Stop Working
  • The Lazy Investor
  • Money For Nothing
  • The Idiot Millionaire
  • Stop Working Too: You Still Can

Each attendee will receive a $10.00 coupon towards the purchase of one of Derek’s book available at the event.

Talking to Jonathan Chevreau

Jonathan Chevreau podcast

Hi, my name is Sheryl Smolkin. I’m a lawyer and a journalist. Today I’m pleased to be continuing the Saskatchewan Pension Plan’s series of financial expert interviews with Jonathan Chevreau.

Jonathan was the personal finance columnist for the Financial Post from 1996-1998 and then for the National Post since its launch in 1998 until this year. He has recently been named Editor of MoneySense magazine.

Although he has authored or co-authored seven non-fictional financial books, his most recent work is “a novel about one couple’s turbulent journey to financial independence” called “Findependence Day.” And that’s what we are going to talk about today.

Welcome Jonathan.

Q. Is the expression “Findependence Day” a Chevreau original or has it been used before by others?

A. I would say it is a Chevreau original although at one point there was an unrelated film called Findependence Day. I just looked at the American Independence Day, played around with financial independence and came up with “Findependence Day.” The title came first, and then I thought I should write a book to go with it.

Q. You are known as a financial writer who writes serious articles and books about complex financial matters. What made you decide to write a novel?

A. I think like a lot of journalists there was always a secret closet novelist lurking because it seems like a more creative, long-term project than bashing out daily columns. Then there is always the example of David Chilton’s The Wealthy Barber.

Q. Although Findependence Day is clearly fiction, some of your characters and concepts seemed very familiar to me, so I have to ask you:

  • Is Didi Quinlan of the television program Debt March based on Gail Vaz- Oxlade’s show ‘Til debt do us part?

Well like most fictional characters it’s a composite, I would say she’s was certainly one of three or four people, keeping in mind the book was also written for the US market. We have a lot of financial reality TV shows now. When I talk to American journalists they’re convinced I am talking about Suze Orman. But I would say that Gail is probably the single closest model.

  • Were you thinking of Stewart McLean’s Vinyl Cafe when you created “The Vinyl Cave?”

Actually, that was based on Kate Dunn’s Vinyl Museum around the turn of the century. Then Peter Dunn had two Vinyl Museum stores in Toronto – one was close to where I lived on the Lakeshore.

  • Did you draw on Finance Professor Moishe Milevsky’s characterization of people as either “stocks” or bonds” as discussed by the financial advisor Theo in the book?

I think I actually did credit Moshie’s book in the fine print or in “Theo’s library”at the end of the book.

Q.  In the opening chapter, television host Didi Quinlan tells the young couple Jamie and Sheena Morelli that she is going to drill two words into their skulls: guerilla frugality. Is this phrase also a Chevreau original and what does it mean?

A. Yes it is original. I came up with that expression in a column long before I wrote the book. To me it’s like guerrilla warfare. In order to save and invest you have to first get out of debt, and then you have to continue to be frugal in order to build wealth. What I mean by the term is “guerrilla warfare on the economic consumption front.”

Q. Another thing Theo, the financial planner in the book advocates is developing different streams of income on the road to financial independence. Does that mean moonlighting or working at more than one job? Is that practical for hard-working, busy parents?

A. Ideally you can always give yourself a raise. You can get a raise from your boss or change jobs and earn a higher amount. You can aIso take on extra work to earn another $10,000 or more on nights and weekends but this may be stressful and perhaps not the optimum approach if you have a young family.

Ultimately as you know anybody who is a retiree probably does have multiple streams of income – two or three pensions, government benefits and private savings in a RRIF. But when we’re in the wealth accumulation phase, if both partners are employed we tend to be dependent on one or two different sources of income.

You have to go from one or two salaries to these multiple sources of income when you become financially independent and ultimately when you are in full stop retirement.

Q. If you could identify one or two key messages in the book for people striving to achieve financial independence, what would they be?

A. If your goal is financial independence or findependence, the means is guerilla frugality. The two go together. So be frugal first to get rid of your debt and second to build wealth. These are the key takeaways in order to achieve what I call Findependence day.

Q.Have you reached your Findependence day, and if not what is the magic number?

A. I used to put anywhere from 57-64 on my blog, the Wealthy Boomer. Right now I’ve joined MoneySense magazine at 59 years old. I guess my partner and I have achieved financial independence of sorts, but we want to achieve a higher level. I am at the stage of working now because I want to, not because I have to. And as you know everything gets better the longer you wait.

I enjoy what I do and I don’t find there’s a big distinction between what I do evenings and weekends and what I do during the day. I’m up reading all this stuff on twitter and social media and I might as well get paid for it as long as I enjoy it and I’m healthy. The thing is, at some point, I may not have a willing client, or a willing employer even if I want to work to 70 or 75. At some point we all must have financial independence because our body or our minds won’t permit us to earn the single employment stream that most people rely on.

Thanks Jonathan. It was a pleasure to talk to you today. I read your book cover to cover and learned a great deal. I actually joined the SPP to get “another stream of income” although I have an employer-sponsored pension plan. If they haven’t already done so, I’m sure many SPP members will be interested in ordering the book from your website.

It was a pleasure Sheryl. There’s actually a question and answer about the Saskatchewan Pension Plan in the June issue of MoneySense.

Canada's "Idiot Millionaire" visits Saskatchewan

Canada’s “Idiot Millionaire”, Derek Foster, is coming to Saskatchewan!

Join Derek, the Idiot Millionaire, at one of the following events to learn about his simple investment approach and how it can be a part of your journey into retirement.

Regina: August 13 – 11:30 am

Hosted by: Regina Chamber of Commerce
Lunch at Conexus Arts Centre Theatre lobby
200A Lakeshore Drive

Register: online at reginachamber.com or 1-306-757-4658
Costs:
Members: $35 pre-registered/Door: $40
Non-members: $50 pre-registered/Door: $55

Saskatoon: August 17 – 7:30 am

Hosted by: North Sask Business Assoc & Saskatoon Chamber of Commerce Breakfast at Saskatoon Club
417 21st St E

Register: by email info@nsbasask.com or 1-306-242-3060 register by 10 am August 16
Costs: All attendees $18

Bestselling Books:

  • Stop Working
  • The Lazy Investor
  • Money For Nothing
  • The Idiot Millionaire
  • Stop Working Too: You Still Can

Each attendee will receive a $10.00 coupon towards the purchase of one of Derek’s book available at the event.

June 2012 returns

SPP posted a return of 1.58% to the balanced fund (BF) and 0.063% to the short-term fund (STF). The year to date return in the BF is 3.65% and in the STF is 0.218%.

Market index returns for June 2012 were:

Index June 2012 return (%)
S&P/TSX Composite (Canadian equities) 1.10
S&P 500 (C$) (US equities) 2.48
MSCI EAFE (C$)
(Non-north American equities)
5.32
DEX Universe Bond (Canadian bonds) 0.01
DEX 91 day T-bill 0.10