How do single low-income / working-class Canadians save for the future?
March 16, 2015 4:53 PM   Subscribe

Hello all. I am a low-income mid-30s Canadian living alone, no dependents. Advice from bank staff and popular internet blogs confuse me and don't make sense in my world (e.g. ensure an 8-10% return - but how do I do that without jeopardizing my future if I retire in a decade the investment does poorly). I feel some investments I made were silly but am not sure if I am paranoid. Please suggest good directions to explore. I will give specifics about my situation below, with my specific question in the last paragraph.

I make under $30,000 after taxes (including tax refund) and receive aid from the government because I am considered low-income, which comes up to around $26,000 per year.

Regarding my financial situation: I enjoy my lifestyle and job. I am very happy and live luxuriously. I have no debt because I don't have the things most average people my age have like a house, car, vacations, student loan, costly hobbies/vices, children or pets. I have $500 on credit card that could be paid in full if I felt like it. I have no home maintenance issues because I rent. I have no dependents or family to worry about. That said, I have no savings beyond 12,000 in a cash RRSP; 500 in a moderate risk TFSA mutual fund which is doing poorly and makes me scared to invest; and 1,000 in a TFSA cash fund for major disasters only. I keep small bills in my home and like to keep things in cash because the popular mutual fund I "gambled" on a year ago is not impressing me. A lot of what I make goes to bills. Rent / utilities / transportation are about 60% of my income. The rest is food, savings, entertainment and paying the credit card.

Regarding what I was told to do: When I read popular advice I am told to save with an 8-10% rate of return but the only things I see that do that are very high risk things that scare me. What if I retire in a decade when the thing I invested in is doing badly? This happened to my uncle who invested high risk and sadly / luckily he died in a mishap a few short years into retirement and did not have to panic. My friends in a similar station of life have family who might help or won lottery payouts that gave them a lump sum to save/ pay debt in full, but I am not counting on that future for myself. The people at my bank suggest moderate to high risk mutual funds but they also suggest credit cards with annual fees and massive limits so they do not seem reliable. I don't want to pay a professional adviser to tell me what I should do because I don't have that in my budget. I believe I followed poor advice investing in an RRSP, but am not sure if maybe this is the right thing to do long term.

Regarding what I want for my future: I am really happy and have great friends who love me. If I can be retired surrounded by my books, wine, friends, art torn out of calenders and cool things to cook, just puttering about a lovely apartment like what I have now - basically what I already do - I am happy. My only goal is to keep doing what I do. I'm not worried about healthcare because I live in Canada.

Regarding my specific question: Can anyone offer suggestions based on what worked for them or good advice they received? I am especially interested in what other low income singles with no family in their older years have experienced. Thank you in advance for all your help!
posted by partly squamous and partly rugose to Work & Money (20 answers total) 19 users marked this as a favorite
You handle the timing issue by lowering your risk as you near retirement. An easy rule of thumb is 100-age = stocks and funds, age = cash and low risk bonds. So when you get close to retirement, you've already got most of your funds in a low risk vehicle.
posted by politikitty at 5:22 PM on March 16, 2015 [2 favorites]

You should consider paying off the credit card in full. It's better not to pay 22% (or whatever rate they're charging you) if you can afford it. Yes you'll be "short" the $500 right now, but over the long-term you'll be better off.
posted by sardonyx at 5:27 PM on March 16, 2015 [2 favorites]

As a general rule always, always pay off your credit card in full every month so you don't pay any interest. If you're not able to do this routinely, you need to switch to cash (debit, etc) until you can control your spending enough to pay off the bill every month. Otherwise you're throwing money down the drain - far more than you'll ever get back with any investment. Yes, there are exceptions to this rule, but that's advanced level credit card use, and if you're at that level, you already know what those situations are.

Another general tip: carefully track where your spending goes to see where you can cut back without too much pain, and think hard about whether you really need things that many people buy without thinking about it (e.g. cable, fancy smart phones/expensive data plans, restaurant meals, daily coffee, lots of new clothes, etc etc).

You might find /r/personalfinancecanada helpful. It is targeted more to the high-income crowd, but there are a lot of general tips there that are applicable to pretty much everyone. Given your parameters they'd probably tell you to (after paying your credit card in full) focus on a low-to-moderate risk index or mutual fund, and don't look at it all the time to see whether it's going up or down - a year is nothing in investment time, and yes, your money may actually decrease in that time frame. You want to leave it simmering for decades, and over that time frame, it's very likely to give you a return you'll be happy with.
posted by randomnity at 5:28 PM on March 16, 2015 [4 favorites]

Response by poster: Sorry to come back so early - I just want to clarify I do pay my credit card in full each month (no fee cashback card 2,000 limit ). I can afford to never use my card, though it would be a burden because it is purely for entertainment... Meals out, hard to find books that must be ordered online... And the cashback reward that results.
posted by partly squamous and partly rugose at 5:35 PM on March 16, 2015 [1 favorite]

So you need to diversify your investments to ensure that if one of them tanks your'e still OK. And as politikitty says as you get closer to retirement you move to more conservative investments.

If you want a simple suggestion I've been in the BMO Dividend fund for over a decade and it just chugs along. It basically buys stocks that produce dividends and pays them out to you. It's not the greatest returns by far, but it does OK. In 2008 it did terribly but then so did everything else mostly. If you're in cash you're basically losing money to inflation every year in real terms.

I suggest looking for low-risk mutual funds with low management fees and investing in those. It takes a little research, but it's not that much work - probably a day or two at most?
posted by GuyZero at 5:40 PM on March 16, 2015

You don't need to do anything, IMHO. You will get CPP, OAS and GIS when you retire, which will be comparable to what you earn now (but adjusted up for inflation). Low income Canadians usually see an increase in their standard of living after they turn 65 (you mention healthcare but you don't mention if your prescriptions are covered by your employer - depending on province/territory they may be covered by the government after 65, which could be hundreds of dollars a month).
Calculate your retirement income here:

The government has a lot of info about retirement planning and I would avail myself of that (as well as books from the library) before relying on the bank or a financial advisor.
posted by saucysault at 6:02 PM on March 16, 2015 [3 favorites]

First, I would suggest using the retirement income calculator suggested by saucysault to determine whether you need savings beyond OAS/GIS/CPP and how much to save.

Then, decide where to put your savings. This is a good explainer of RRSPs and TFSAs by Frances Woolley (an econ prof at Carleton who is generally awesome). One important takeaway is that TFSAs are generally better than RRSPs for low-income households because RRSP withdrawals may reduce your Guaranteed Income Supplement in retirement.

Next, decide what to invest in. I would suggest looking at investment options that are A) very well diversified (so your investment is spread across many companies/organisations and geographic locations) and B) low-cost. That usually means index funds. These are a type of mutual fund which essentially mirror what the market is doing - so they perform as well as the market average at a very low cost. Vanguard and iShares are the major players in this market. Most of their index funds are sold as exchange-traded funds (ETFs) and you will need a brokerage account to buy them. All of the major banks offer brokerage accounts, but you may want to shop around on fees and account balance minimums.

If you want a simple suggestion I've been in the BMO Dividend fund for over a decade and it just chugs along.

With all due respect, this is not good advice at all. The management expenses (1.8%!) are extremely high and will take a huge amount out of your savings in the long run. The performance information GuyZero linked to is meaningless without a comparison to a benchmark. It's also exclusively invested in Canadian companies which only makes sense if you have a crystal ball that tells you Canadian stocks will do better than their international peers.
posted by ripley_ at 6:11 PM on March 16, 2015 [3 favorites]

I would really recommend picking up a copy of The Wealthy Barber from the library or any used book store. New version, old version, it's all good. It will explain that 8-10% stuff and how people achieve that in non-high-risk ways in the Canadian context. (Basically, low-fee index funds over the long term.) It's a very approachable common sense book. So many of these questions are things that provoke a lot of anxiety until you have the base knowledge covered in The Wealthy Barber. I felt SO much more confident and reassured after reading it.
posted by heatherann at 6:12 PM on March 16, 2015 [3 favorites]

The trouble with investing in the money market is that you are going to have to follow the herd and the way the market makes some people rich is by skimming it off the herd. Without insider knowledge or the interest rates being sky high you are essentially gambling with your money. Somebody is buying low and selling high. Unless you can prove that somebody is you, it is statistically quite safe to assume it is not.

Most of this hype about investment is wish fulfillment fantasy crossed with advertising. They would have you believe that buying a luxury care is an investment. Mostly it is all flat our lies. Interest rates are low and given various factors like the declining birth rate in Canada and the rising standard of living in certain parts of the world being matched by the dropping standard of living in other parts of the world, you should only invest money that you are prepared to lose.

So what can you invest in? If you invest in a house you will have to maintain the damn thing, and pay taxes and so on. Meanwhile they keep building houses and the population is getting smaller and poorer... so theoretically the value of your house should be shrinking. This is why people say the housing market is a housing bubble. I don't think you should buy a house unless you don't trust there to be rental homes in future. The only reason you want a house is to ensure you have a place to live, not as an investment.

Pretty much everything you could buy will require you to sell it at a loss because a second hand one is worth less than a new one, or else you have to find somebody dumb enough to pay more money for it than you paid, which is not so easy and might even be ethically dubious.

So what can you invest in? Invest in yourself.

At some point you are going to get old and frail and not have the stamina to work hard all day long. There are two things you can do about this. One is to work on your health in order to prolong your active years, and the other is to increase your skills so that you will be able to transition to doing work that requires less stamina.

Invest in yourself by learning additional skills that are either immediately marketable or that enable you to do more things that could bring in an income. In other words, you could learn to do coding if you don't already know how, which would enable you to find alternative work, or you could learn to do fine finish woodworking and you could make marquetry boxes and sell them on Etsy. Or you could learn French if you are not already bilingual. Or you could learn to bake luscious cupcakes and open a catering business.

Look at your current occupation and try to figure where you could go from there if you had to get promoted out of the job, or if the industry collapsed and you had to go somewhere else. Plan ahead and get some skills and some connections so that if it happens you are not suddenly cast adrift.

Look at your health and figure out what you can do to keep yourself in the best possible condition. For example getting a dental cleaning twice a year can make a difference, as could taking up cross country skiing in the winter at a local park, or taking dogs for walks as a volunteer at your local SPCA. Healthcare is only one part of the picture. Actually being as healthy and fit as you can is an even bigger part of the picture in coming years.

The important thing is that you are investing in future potential happiness - and you are in a position to pay for it by enhancing your current happiness. Don't study coding if you hate coding. Don't do catering unless you enjoy cooking and delivering and working with customers. Work from the skills you already have and from the work you already do, but also branch out to learn things that are completely unrelated. It will be more interesting to you if all your new skills are not simply variants on using a computer, or variants on running a small office. The important thing is that you should enjoy what you are learning. If you don't enjoy learning it you certainly won't enjoy doing it for a living.

One piece of advice often given to people is not to spend on things but to spend on experiences. My advice is the same when it comes to investing. Do not invest in things that have to be resold somehow at a profit. Invest in your own experience so that you become more capable and better informed.

Well, what do you do with your surplus money? I'd sock it away for the time being in several different GIC's. You should be able to find out somewhere what the maximum deposit insurance is. In each institution, I'd put away no more than that maximum, so if the banks fail or default you will at least have some insurance. It will be a tiny bit harder to keep track of but not difficult. You are a ways from that figure yet, however, so there is lots of time.

A growing cushion of money can be used to prevent ever having to buy anything whatsoever on credit and pay interest on it. Never do that. It's the reverse of investing. A growing cushion of plain old money can help tide you nicely over bad blips in life, when you need to make an emergency trip somewhere, or are temporarily unemployed, or have to replace something expensive and important, like your hip, or your teeth or your glasses or all your furniture.

I would see what your maximum allowable yearly RRSP contribution is and make it into a guaranteed investment at the highest interest rate available. If I had more than that I would sock it away at the highest guaranteed interest I could find. But I wouldn't be afraid either to spend it on a French conversation course, or on a new computer so that I could learn Java and HTML - but of course if I didn't have to buy the computer to learn basic coding I wouldn't buy it either.

There are a lot of free or extremely inexpensive ways to get an education. For example, if you want an education in business management you could always go to university and take business, or you could work as a volunteer for your hobby group or some non-profit and learn the administration and management skills hands on instead. if you are smart and competent and self-disciplined they would be deeply grateful to get you. Investing for the future does not always require surplus money.
posted by Jane the Brown at 6:13 PM on March 16, 2015 [5 favorites]

I think you could do a lot worse than to plop your money into some sort of Vanguard-style fund with low fees - maybe the 500 Index or the Total Market Index. The advantage of this is that you're not gambling on one stock, since you're effectively investing in the whole index; additionally, since it's an index rather than an actively managed fund, the fees are far lower. E.g. for the Total Market Index fund, you're only paying an expense ratio of 0.17%, which reduces to 0.05% once you hit $10,000.

These funds obviously go up and down with the market, but if we're talking about retirement and you're in your mid-30s, you can think about making your portfolio less risky as you get closer to retirement. Ideally you'd start out with a diversified portfolio (bonds, etc.) from the outset, but you really would probably need to pay a financial adviser for that. Alternatively Vanguard also has some "Target Retirement" funds that I believe diversify your portfolio for you, and invest in less risky things the closer it gets to the anticipated retirement (e.g. here's a fund for those who want to retire in 2045).

Obviously investing your money in the market carries risk (as does listening to strangers giving you free financial advise on the internet - and for the record, I'm a grad student in the humanities, not an economist or a banker). That said, if you don't invest your money, your savings will go down in purchasing power over the decades because it won't be keeping up with inflation - so there's really no ideal "safe" option here.

Additionally, I would seriously recommend that before you begin investing in the market for retirement you should construct a significant financial security cushion that you don't expose to risk, in case you have unexpected expenses and need emergency money that can be drawn on immediately.
posted by ClaireBear at 6:40 PM on March 16, 2015 [1 favorite]

I want to echo what politikitty said above. You should transition your investments from riskier stuff to less risky stuff as you grow older to prevent the unfortunate circumstances your uncle faced. But now, you're young as far as these things go - really, investing is something people do from 25 to 75 years old, so ~35 is very much on the young end.

I especially want to echo what ripley_ said above; TFSAs are a better place than RRSPs for investing - especially with lower incomes - and funds with high management fees (especially over 1%) are a trap. The management fee is the one part of any investment's return that is guaranteed to happen, and it's the part that's guaranteed to take your money away, so it's really important to minimize it.

The second thing that ripley_ said that I concur with is the importance of a diversified portfolio; the best way to get a useful return and also minimize risk is to be invested in many companies in many countries. A truly diversified portfolio is close to investing in the global economy, which has historically grown over time. I think Jane The Brown is overstating the risk in financial investing (although I don't want to dismiss out of hand her idea of investing in yourself); particularly since you seem like you're already a pretty risk-averse/risk-aware person to me.

Vanguard is a fine company, as ripley_ and ClaireBear have mentioned, although ClaireBear is talking about the American division of Vanguard and they don't offer everything she talks about north of the border, particularly the target date portfolio. Something I would recommend for you to check out as an alternative are the Tangerine Investment Funds (Tangerine used to be ING; I bank with them and have no complaints.) They have four portfolios; from least risky to riskiest, they are Balanced Income, Balanced, Balanced Growth and Equity Growth. They invest in a combination of Canadian bonds (primarily those by the federal and provincial governments - mostly the safe end of the bond spectrum), the 60 largest companies in Canada, the 500 largest companies in the US, and about 900 large companies from other stable high income countries (e.g. Japan, UK, France, Germany, Switzerland).

The management fees are a little higher than what I would choose for myself, (1.07% all in - no trading fees, account fees, etc.) but I actually like thinking about this sort of thing. For your perspective, they are a single choice, fire-and-forget solution; you don't need a brokerage account, you don't need to rebalance; you need to make one single decision of which fund and that's it. This white paper [PDF] (from this blog post) does a really nice job laying out the benefits of a single fund solution, especially for a low-income novice investor, even walking through how to sign up. One author writes the Canadian Couch Potato blog, which I've always found to be a solid and neutral source of information.

I will point out that keeping money in cash (or GICs at current rates) doesn't mean you have the same amount of money in the future; it means you are losing money, roughly 2% per year, due to inflation. The balance stays the same, but what you can buy with it shrinks. You're guaranteed not to lose a bunch at once - but you are equally guaranteed to lose a little each year.
posted by Homeboy Trouble at 7:03 PM on March 16, 2015 [4 favorites]

I would see what your maximum allowable yearly RRSP contribution is and make it into a guaranteed investment

As mentioned above, RRSPs are often not the best option for people in a low tax bracket. Here's another article making that point by Michael Veall of McMaster.

I would be suspect of any financial advice from someone who suggests an RRSP without running the numbers on your exact financial situation.
posted by ripley_ at 7:06 PM on March 16, 2015

You will get CPP, OAS and GIS when you retire, which will be comparable to what you earn now (but adjusted up for inflation).

Isn't this making assumptions about the stability of those programs? I'm not convinced they'll necessarily all be around in their present form (or offer what they're offering now) in 20 years (if the current government makes it through another 90 elections, which I feel is entirely possible).
posted by cotton dress sock at 7:13 PM on March 16, 2015

I have no doubt those programmes will be stable and in existence in twenty years unless there is such a global catastrophic economic meltdown that the global economy is completely erased. Fear-mongering over stable government programmes is something that has been exported from American politics and it would serve us better to make rational decisions instead of acting out of fear as we are being manipulated to do.
posted by saucysault at 8:25 PM on March 16, 2015 [1 favorite]

saucysault: But CPP, OAS and GIS do change! The age of eligibility for OAS and GIS was pushed back to 67 recently, that's about $24k in benefits gone.

I don't expect major cuts either, but it makes sense for a lot of people to budget as if they might be tweaked at the margin again.
posted by ripley_ at 8:55 PM on March 16, 2015

I keep small bills in my home and like to keep things in cash because the popular mutual fund I "gambled" on a year ago is not impressing me.

A mutual fund is a long term vehicle. Is it performing better than your savings account?

Regardless, since this is explicitly for retirement savings, is there a reason you are not focused on your RRSP?
posted by DarlingBri at 9:34 PM on March 16, 2015

That's exactly what I was thinking of - not cataclysms but tweaks, like that one, which already happened right here in Canada. Shave off a year here, make a little cut there - after two or three decades of shifts like that, OP may well regret not having planned to supplement an income based on current expectations. It's tight now for seniors living in certain high-COL areas solely on CPP/OAS/GIS. It might all be fine (or better) later, who knows. No harm in planning around the less comfortable scenario.
posted by cotton dress sock at 9:40 PM on March 16, 2015

Homeboy Trouble said everything I was going to say.

I have a small TFSA holding the Tangerine Balanced Income Fund. It's got a management fee of 1.07% like he says, which is a little high, but it is SO SIMPLE. It's balanced between stocks (equity) and bonds (income) and I don't have to do a thing. Given the small amount I have in savings, it's cost effective. Because it essentially tracks the market, it has just been steady growth since 2008, more or less.

I decided to buy it after reading the Canadian Couch Potato blog on "passive index investing". Passive index investing just means that whatever you buy, you try to buy mirroring the market, and just hold onto it for the long haul. You don't increase your money by betting on certain companies (high-risk!). Instead you increase your money by spreading it out over the whole market over a long period. To make it easy to spread your money across the whole market, you find LOW COST funds / ETFs to invest in. I'm not explaining it well -- try starting with the CCP FAQ.

We also subscribed to MoneySense magazine -- they have a bunch of guides online that try to explain this stuff in bit-sized pieces.

Basically, from what I've read, if you have a small pot of savings, sticking into a cheap-to-own (i.e. low management fee) index fund sheltered in a TFSA is probably not a bad idea.

It is daunting but after reading about this stuff for a bit, I can confirm it is not rocket science, and what's more, like most science, you don't need to know how it works intimately for it to work for you.
posted by girlpublisher at 9:00 AM on March 17, 2015 [3 favorites]

Check out the Canadian Couch Potato website.
posted by thegoldfish at 8:50 PM on March 17, 2015

Response by poster: Thank you everyone for the excellent ideas. I am following up on many suggestions and will return shortly with more comments when I have a better idea of what choices I will make.
posted by partly squamous and partly rugose at 6:39 PM on March 20, 2015

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