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Hello,

First of all, a great forum and we've enjoyed reading all the posts.

We have 3 major questions, and will apologize in advance if they are long winded!


Question 1: How to deal with the RRSP's

After reading quite a few books and doing a lot of research on line, we are convinced that it has come time to part ways with our financial "advisor", and strike out on our own. So now we need your collective help!

Just so everyone know where we're coming from, I'll describe our situation. We live in a typical small town in Eastern Canada. We're a married couple, early 30's, no kids, and no plans for kids. We both have stable jobs with a combined pretax income of ~$160,000, no debt, we own our home and have no mortgage. We've both been investing since our late teens, have ~$150,000 in lackluster RRSPs, ~$50,000 in a self directed company plan, and we have about $20,000 per year available to invest in RRSPs. (Now, I know some of you are thinking, jeez, these guys should be able to buy some good advice, right?) Well, you'd be surprised. We've talked to people in our small town, and to people in bigger cities, and the truth of the matter is, because of our age, once we can get someone to believe our situation and take us seriously, it seems like everyone we've talked to so far is just rubbing their hands together with visions of huge trailer fees dancing in their heads! Even among the fee only planners we've talked to, their opinions of what we should do, seem to swing wildly from one end of the spectrum to the other.

So here's the conclusion we've come to. Its our money, we've worked hard for every penny of it, so we would like to be the ones taking care of it.

We would like to set up either a Global Couch Potato or the High Growth Couch Potato using the Moneysence examples.

Option #1 ("The Global Couch Potato")

Canadian equity (20%) - XIC
U.S. equity (20%) - XSP
International equity (20%) - XIN
Canadian bond (40%) - XBB


Option #2 ("The High Growth Couch Potato")

Canadian equity (25%) - XIC
U.S. equity (25%) - XSP
International equity (25%) - XIN
Canadian bond (25%) - XBB

We want to move our RRSP mutual funds (now scattered across a number of companies Trimark, Templeton, Fidelity etc…), into some iShares ETF’s that we want to manage (once a year) through the RBC Direct discount brokerage. The problem is that most of the mutual funds we currently own were bought with a DSC that has not “expired” yet. Would it be advisable to move the money out in “chunks” as it becomes freed up, or bite the bullet, pay the fees, and just move it all now? Also how hard will this process be?

My next question is, would yearly rebalancing of a portfolio like the Global Couch Potato be appropriate for us as our portfolio gets larger, say in the $500,000 range? How about in the $1,000,000 range? How about $2,000,000? How about as we approach retirement?

Now our last question for you all. Is it really feasible for a couple in our situation to implement a plan like this, (which seems to us, fairly sensible and supported by some quality research), and make a go of it totally on our own without any professional advice?



Question 2: What to do with the TFSA?


So here's my idea. I'd like to set up a couch potato within my TFSA account. Since I'm only going to be investing (rebalancing) once per year, I'd like to split up my money in this manner between these iShares funds through RBC Direct.

Option #1 ("The Global Couch Potato")

Canadian equity (20%) - XIC
U.S. equity (20%) - XSP
International equity (20%) - XIN
Canadian bond (40%) - XBB


Option #2 ("The High Growth Couch Potato")

Canadian equity (25%) - XIC
U.S. equity (25%) - XSP
International equity (25%) - XIN
Canadian bond (25%) - XBB


If my compound interest calculations are correct, if I start with $5000 this year, and this account grows at 8.0% per year and I add $5000 of new money to it every year, in 31 years (when I'm 65), I can withdraw $720,406.03 tax free?

Can any one see any problems with this?


Question 3: What to do with the equity in the house?

As I mentioned before, our mortgage is paid off, and we could comfortably remove $320,000 of equity from our home. With a 31 year time line and being able to deduct the interest charges, what is the general feeling in pulling out that $320,000, putting it into one of the couch potato models (non-registered) and rebalancing it once a year? What would be the tax implications of a plan like this?

Once again a great forum, thanks for reading, and we are looking forward to your responses!
 

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If my compound interest calculations are correct, if I start with $5000 this year, and this account grows at 8.0% per year and I add $5000 of new money to it every year, in 31 years (when I'm 65), I can withdraw $720,406.03 tax free?
A bit more actually. Remember the $5000 limit increases with inflation (rounded to the nearest $500), so at 8% growth and 3% inflation it will make around $809K. Mind you 8% is a tad ambitious IMHO.
 

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Jug, welcome to the forum and congrats on your financial success thus far.

IMO, I think that the best way to look at your accounts is to treat it as one giant portfolio structured in a way to optimize taxation. For example, I wrote an article about portfolio allocation, where you would keep fixed income within your RRSP or TFSA, foreign equities within your RRSP (TFSA will have withholding tax on foreign div), and Canadian equities in a non reg account. However, within the total portfolio, you will set your own asset allocation.

The problem with having a "balanced" porfolio non registered is that interest and foreign divs are taxed at the highest investment rate (ie. your marginal tax rate).

Hope this helps!
 

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A bit more actually. Remember the $5000 limit increases with inflation (rounded to the nearest $500), so at 8% growth and 3% inflation it will make around $809K. Mind you 8% is a tad ambitious IMHO.
I would prepare for much higher inflation than 3% for the next several years and I agree that 8% yearly on average is not that easy to achieve.
 

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Hi Jug
We are also trying to figure what to do with our mutual funds and there DSC trialing fees. We feel maybe this is the time to pull the trigger and bite the bullet because of the recent rally and maybe there is a pull back coming. After the (maybe) pull back jump back in by buying ETF's. If the pull back is 5-10% then we will have paid for our fees with the savings of being out of equities. What bothers us is the amount of time until we get back in. Hope this makes sense!
 

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First of, congratulations on being insanely ahead of the curve. Now, on to the opinions...

Cashing out mutual funds: You can afford to lose some money, and you can afford to wait, so if I were in your shoes, I would compare the difference between the MERs times the length of time remaining to the fees charged to withdraw early. So if the mutual fund is 2.5%, the ETF fund is 0.5% (for a difference of 2%) and there's two years left, as long as the fees to withdraw were 4% or less, I'd switch now, otherwise I'd wait. At least the odds are in your favor that you're timing it right that way.

Balance/Rebalance: Personally, I'd move the money over in chunks as they are available or cost effective to move. You don't really have to worry about having your portfolio at 25/25/25/25 every moment, especially not when you're starting out, so assuming you were moving $100,000 and your first chunk was $30,000... I'd just fully buy one of the 4 funds and start working on the second while you are moving your funds across. Later, instead of rebalancing, you can just use new contributions each year to top up whichever one is the low man on the totem pole. May as well save the fees. So it wouldn't matter if you had $500,000 or $2,000,000.

Feasibility: We're in the same boat as you (in our 30's, no kids coming) although with a smaller income, we're a fair bit behind you, we still have the mortgage and have less savings, but this is exactly what we're doing (although we're skipping bonds completely and replacing that 20% of our portfolio with laddered GIC's (multiple Gic's, not those fake bank ladder products) spread across banks so they're fully insured... personally I find bonds correlated enough with equities, especially corporate bonds, that my opinion is GIC's (when you shop for the best rates - not local bank rates) are a better fixed income portion.

TFSA: You're totally right, there is nothing wrong with what you are suggesting at all, except the way you phrase it I should point out you don't HAVE to withdraw it at 65, unlike RRSP's which become RRIFS, TFSA's are for life, so you can just take out what you need when you need it and leave the rest in there growing tax free.

Home Equity: Why? Sure, upside might be you make some more money, and you can afford the downside that if your stocks underperform you're paying out of pocket, it won't ruin you, but what do you need that little bit of extra return for? Are you concerned you won't meet your savings goals without it? Now, if you're talking about waiting for the market to hit a real bottom and then jump in with everything you can grab to make huge returns, ok, I can see it, but if you're talking about just going in now, it doesn't make a lot of sense to me... there was a huge discussion in one of the threads about REITs about whether an 8% yield was sustainable... but let's say that's your return... I'm not sure what your tax rate would be since it would probably be heavy dividends (to get the tax break you have to be earning income, not banking on future growth - which also means not using that coach potato portfolio), but let's say 25%... so you lose 2% of the top to taxes, and right now with prime+1 you lose another 3.25% in interest (less .8125% from the interest tax deduction)... so you're left with a return of 3.5625% under fairly optimum conditions, which would only make you $11,400 a year... Again, this is all my opinion, but personally once my house is paid off, that's it, I'm leaving it paid off and just worrying about savings without taking on the risk of leverage, since we started planning far enough ahead that we don't need to.
 

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I'm not 100% sure you are actually asking this question, but in case you don't know, you can bring all of your assets (including your DSC funds) over to your RBC account without cashing them in. When completing the transfer funds, you would indicate to transfer the funds to RBC "in kind," as opposed to "in cash" (which means they would liquidate for you).

It will be easier for you to manage one account, rather than multiple accounts across different fund companies and brokerages.

Also: as has already been suggested, I would develop a spreadsheet to calculate your break-even point.

I would also bring all your fee-free units over. Each of your funds will have an "anniversary date" on which new fee-free units are generated and the DSC schedule changes -- I recommend plotting all of this on your spreadsheet so that you can pull various triggers when the time comes due.

And, if it is already all in one account, you can simply make the sale when you are ready, as opposed to going through any other intermediary.

Hope that helps! Welcome to ETF investing! The world needs more people like you. :)
 
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