The Smith Manoeuvre is an efficient strategy to use your home equity to invest for your future without using your cash flow. It converts your mortgage into a tax-deductible investment credit line over time.
Most Canadians are searching for a feeling of financial security, but all the bills and life expenses mean they never build up enough of a nest egg to be secure. The Smith Manoeuvre is a strategy that can help you build your nest egg and make your retirement dreams a reality.
It is best to consider it as part of your retirement plan. I have helped thousands of Canadians plan for their retirement and found that many people are unable to invest enough to be able to have the retirement they want without a significant effect on their lifestyle today. In many cases, the Smith Manoeuvre filled the gap by providing enough additional investments for them to achieve their retirement dreams without having to change their lifestyle now.
In short, with the Smith Manoeuvre you borrow the available equity in your home to invest bit by bit as you gain equity with each mortgage payment. As your mortgage declines, it is replaced by a tax-deductible credit line from money you borrowed to invest.
You can borrow from the credit line to pay its own interest, so it does not require your cash flow. I call this “capitalizing the interest”. The interest tax deductions can give you tax refunds, which you can use to pay down your mortgage more quickly. Over time, your investments can build up a large nest egg that can help fund the retirement you want.
I meet with people all the time whose main financial goal is to pay off their mortgage as soon as possible, and then they can finally start saving for retirement. However, it is increasingly clear that much of Canada’s hard-working middle class continues to face under-funded “golden years’ simply because they run out of time. One of the main benefits of the Smith Manoeuvre is that it can help you start saving for your retirement now – not 20 years from now.
Long term returns on the stock market have been far higher than typical borrowing rates, so you could earn a significant investment gain over time, especially when you include the tax benefits. For example, if your secured credit line interest rate is 3.5% and you are in a 40% tax bracket, you only need to invest to earn 2.1% per year after tax long term to benefit. That is quite a low hurdle.
The typical net expected benefit of the Smith Manoeuvre over 25 years is double your current mortgage. For example, it you have a $500,000 mortgage now, with conservative assumptions you could clear a $1 million net gain after 25 years.
Borrowing to invest is inherently risky. You should only consider it if you are confident you will stay invested through any market crash or bear market. Selling your investments or switching to more conservative investments at the market bottom is the “Big Mistake”. If you might make the “Big Mistake” even once in the next 25 years, you should not consider the Smith Manoeuvre.
It should, also, never be done only for the tax deductions. The Smith Manoeuvre is mainly an efficient leveraged investment strategy.
The risks decline considerably with time. The stock market fluctuates widely in one-year periods, but the worst 25-year return of the S&P500 in the last 80 years has been a gain of 5.6% per year. This is why the Smith Manoeuvre is generally only suitable for you if you have a high risk tolerance and a long time horizon. I recommend a minimum time period of 20 years.
When it comes to the Smith Manoeuvre, I have helped hundreds of Canadian families implement it professionally and properly. I am the:
- Leading and most experienced expert in Canada.
- only accountant working with it. I can make sure you have no tax issues.
- only financial planner combining it with comprehensive financial planning.
- only source for all 7 Smith Manoeuvre strategies.
I am recognized as an expert by Fraser Smith in his book “The Smith Manoeuvre” on page 82 (4th printing – July, 2005).
If you think the strategy might be suitable for you, discuss with your financial planner whether or not to include it in your retirement plan.
If you “Work with Me” to create your Financial Plan, I can help you determine whether or not to include the Smith Manoeuvre in your retirement plan. If it makes sense for you, I can help you figure out which of the 7 Smith Manoeuvre strategies is best for you, how big or small to go, how to invest most effectively, and how best to implement it for you.
For help in getting the best readvanceable mortgage for your situation at the lowest rate, check out my free “Ed’s Mortgage Referral Service”. I know the advantages and disadvantages of all the readvanceable mortgages available in Canada and have contacts and experience with most of them.
If your mortgage is not due yet and you want to start sooner, check out “Ed’s Mortgage Breaking Calculation” to find out whether or not paying the penalty to start now is worth it for you.
Also, read Ed Rempel’s recent interview on YoungUpstarts here.