The provincial securities regulator says TRID has encouraged Alberta investors to place funds in offshore accounts in order to access a new investment product that promises high returns with low risk.Getty Images/iStockphoto
It's been a while since I looked into the Q&A inbox and it's starting to fill up, so let's get to some of your questions.
iShares ETF
Q – I would like more information about the iShares Conservative Allocation ETF (NYSE: AOK), which is a fund of funds. Are there MER charges on each fund or only on the entire ETF? – G.L.
A – This U.S. based exchange-traded fund invests in a portfolio of 10 other iShares funds. The emphasis is on bonds, which make up about 60 per cent of the portfolio, with 37 per cent of the assets in Treasury issues. Stocks account for 35 per cent of the mix, including some exposure to small-caps and emerging markets. Results have been very dependable with a five-year average annual return of 7.3 per cent to June 30.
Although this is a fund of funds, you pay only a single fee for the whole package. Based on 2013 results, the management expense ratio (MER) is 0.43 per cent. However, BlackRock Fund Advisors, who run the fund, have agreed to waive a portion of the management fee (0.14 per cent) until Nov. 30. That means the current MER is 0.29 per cent but that will increase later this year unless the waiver is extended.
Short-term investment
Q - How would you invest $275,000 short term (3 months)? I've sold my house and have the cash in hand but may not purchase a new house for two to three months. – Brian W.
A – Obviously, you don't want to put your money at risk. You're going to need it for that new house before long. So don't be greedy. Put the money into a high interest savings account (or three of them at different financial institutions if you want to be fully protected by deposit insurance). You won't make a lot of money but the principal will be safe.
According to highinterestsavings.ca, rates of between 1.3 per cent and 1.95 per cent are available from smaller financial institutions. However, you can sometimes find special promotions at the big banks. For example, CIBC is currently offering 2 per cent until Sept. 30 on new deposits to an eAdvantage Savings Account when the balance is $5,000 or more. That time frame seems just right for you.
CPP benefits
Q – How many years do you have to contribute to CPP to receive the maximum amount? – Marie B.
A – The number of years you contribute is just one of the factors in determining the amount of a Canada Pension Plan retirement benefit. The amount you receive will also depend on your income over the years, whether you took some years off work (for example to raise a family), and the age at which you start to draw a pension.
If you want an estimate of how much your pension will be and have 30 minutes to spare, Service Canada has an online calculator.
Struggling with debt
Q – I am 54 years old with an income of $80,000. My workplace takes little tax from my pay ($10,000 only) so for the last couple years I have contributed $20,000 annually into my RRSP, trying to catch up and at same time reduce taxes. I currently have about $280,000 in the plan. At year-end I usually still owe a couple thousand in additional taxes.
My budget is extremely tight due to the RRSP! I have been thinking maybe I should reduce the RRSP contribution and pay more in taxes to help free up some funds to pay down bills such as the mortgage ($220,000) and $50,000 credit line. The way things are going the credit line will never go away. I have managed to double up on my mortgage payments and my goal is to retire without a mortgage or come close. Any suggestions? – Ken R.
A – I rarely advise people to pay more taxes – it goes against my grain. However, in your case it may make sense because of your debt load. For starters, you can ask your employer to withhold more tax from your pay so that you don't end up with a large bill at year-end. All you'll have to do is to fill out a form making the request. Your take-home pay will be reduced but you won't have to worry about having money to pay the Canada Revenue Agency when tax time comes around.
Once that is done, focus on paying off the credit line – the interest rate on it is probably higher than on your mortgage. You have a fairly sizeable RRSP so it won't be the end of the world if you don't contribute for two or three years. Once the line of credit is paid off, resume your RRSP contributions. If you end up with a tax refund at year-end, direct it to paying down the mortgage.
Renewing GICs
Q – I am a widow. I own my own home, which is mortgage free, value about $300,000. I have $200,000 in mutual funds, which give me an income of $1,100 per month. I have two GICs coming due in the amount of $150,000. Right now I receive an income of $450 a month on these. I am on CPP and will begin collecting OAS in November when I turn 65. I have an annuity pension of $998 per month.
I am trying to decide whether to renew the GICs or put the $150,000 in mutual funds also. I am talking with my bank adviser who thinks I should switch the GICs to mutual funds but I am scared to put everything in one basket. Do you have any suggestions? – Linda K.
A – It's not surprising that the adviser would recommend mutual funds over GICs. He gets more commission if you choose the funds. But you need to act in your best interest, not his.
You say you're receiving $450 a month from the money in the GICs. That translates into an interest rate of 3.6 per cent. Currently the big banks are offering 2 per cent on five-year GICs. You may be able to get a little more but you won't match 3.6 per cent, which means that portion of your income will drop if you renew the GICs.
You say you are worried about putting all your eggs in the mutual funds basket but keep in mind there are many different types of funds. Some invest exclusively in stocks, some focus on bonds, and some offer balanced portfolios. Some of the monthly income funds, which fall into the balanced category, offer yields in excess of 4 per cent annually (but not guaranteed, of course). Ask your adviser about them.
If you want to set up a brokerage account, you could invest in a portfolio of high-quality, low-risk preferred shares, some of which have yields in the 4.5 per cent to 5.5 per cent range.
So there are plenty of options available. Consider them carefully before you renew your GICs at 2 per cent.
If you have a money question you'd like me to answer, send it to gpape@rogers.com and write "Globe question" on the subject line. I can't promise to provide personal responses but I'll answer the questions of broadest interest in future columns.
Gordon Pape