But what about compound interest? Won't a person miss out on the slow accumulation of wealth if they wait until their late-40s or 50s to make RRSPs contributions? Not so, says Trahair, who is a chartered accountant. Relying on straightforward calculations, he points out that a person who is debt-free in their early-50s can: a) save significant more amounts of money than someone in their 30s or 40s who is paying off a mortgage and / or raising children; and b) because they are reaching their top earning years their tax refunds will be much higher. These refunds, in turn, can be used to make more RRSP contributions.
When analysed this way, the "tax turbo-charged RRSP" strategy is much better than the "start early" approach. To paraphrase the book, one can save $200 a month in RRSPs during their 30s, 40 and 50s, (and in the process pay off their mortgage more slowly, resulting in higher interest charges), or alternatively, one can focus on paying off their mortgage during their 30s and 40s and then, once debt free in their early-50s, save $1,500 a month in RRSPs for 10 years. At the end of the day, the latter approach will result in greater savings. (Note: This example is not in the book, it simply paraphrases the argument).
What should someone invest in when they have paid off their debt? The book's answer is clear: Guaranteed Investment Certificates (GICs). After watching the stock market plunge in 2008, Trahair is adamant that stocks are too risky. Furthermore, he argues that the rate of return on GICs are not that much different from stocks.
It is at this point that the book's thesis starts to weaken. Given the financial meltdown in 2008 and the ensuing recession, it is understandable why some people would want to swear off the stock market. However, Trahair's analysis is overly pessimistic. In order to make his point, he repeatedly mentions how the TSX crashed in 2008, and how this crash destroyed the rate of return for stocks. Unfortunately, this analysis ignores the partial-recovery that has taken place since then. As well, his analysis of the returns of GICs versus stocks tends to ignore dividends, which skews his argument.
Trahair makes a solid argument when he states that Canadians should first pay off debt before investing. He also makes a plausible case that GICs are a much better investment than people think. Where he starts to go off the rails, however, is in his claim that the rate of return for GICs are comparable to those of stocks. This is simply not true. Yes, stocks are risky (you can lose all of your money) but the returns can also be much greater. If you want to protect your investment then it makes sense to consider the GIC, tax turbo-charged RRSP strategy. If you are looking for stock-like returns with GIC safety, however, then you won't find that in this book because such a scenario does not exist.
3 1/2 out of 5 stars
