BetCrooks | Financial Crooks

When we bought our current house it came with a water heater tank rented from (then) Enbridge. Soon after the rental contract was shifted to Direct Energy. No one changed the tank though. It was ancient and getting older. Eventually we cancelled our water tank rental and had our own tank installed. Here’s why.

Ancient Water Heater Tank Struggles On

According to the information on the side of the tank, our water heater was installed by Consumers Gas in August 1991. We live in an area with hard water so goodness knows how much scale had deposited in the tank over the years. I have no reason to believe the previous owners had followed the required maintenance practice of flushing the tank regularly. (A neighbour whose tank finally failed found there was over a foot of solid scale at the bottom when the tank was cut open.)

I started hearing stories from relatives and friends of tanks of this age suddenly failing, often when the owners were away. Often their basement was damaged by flooding. Our tank is in an unfinished part of our basement with a clear short run to the floor drain but even so it made me nervous to hear.

Rent Versus Buy for a Water Heater Tank

I knew I wanted our tank replaced before anything nasty happened.

At that time, we were renting the tank for $14.93 per month (including the HST.) Yes, we were paying almost $180 a year for a tank that was almost 20 years old!

It was not necessarily going to be easy to convince Direct Energy to replace the tank because it wasn’t broken yet. If we could convince them, we knew the rental cost per month would increase.

The other option was to buy and install our own tank.

Checking Prices and Warranties

We did a bit of scouting around online looking at prices and warranties. To be honest, we could have spent more time and been more thorough. But we saw an offer that looked good and went with it.

Home Depot at that time was selling 40 gallon natural gas water heater tanks with three levels of quality. A 6-year tank, a 9-year tank and a 12-year tank. From reading reviews and consumer information, it appeared that usually the difference between tanks is the thickness of the walls and parts and the use of one or more sacrificial anodes. All of these things are intended to increase a tank’s life by slowing down how quickly it rusts out. Since we wanted a tank that could last as long as possible (since labour costs are a big part of tank replacement costs) we went with the 12-year tank. (If they’d offered a longer life we probably would have bought it.)

The warranty offered by Home Depot if you had the tank installed by their Installation Services department was great. For the 6- and 9-year tanks, the tanks and functional parts were only guaranteed for the 6 and 9 year expected life, but the labour was also covered. For the 12-year tank, the warranty covers the tank and functional parts and LABOUR not just for 12 years, but for life! Their tagline is “The last hot water heater you’ll ever buy!”

Do we realistically expect to be able to hold Home Depot to that warranty if the tank has problems in, say, 15 years? No. But it sounds great on paper! (We do have a copy of the information in writing but I suspect there is some way it can be weaseled out of.)

What this warranty really suggests to me is that the tank is probably of a reasonable quality.

Installation Is Easier for a Replacement Water Heater Tank

Our installation costs were not that high. We were replacing a natural gas water heater tank with another of the same. Due to some changes in the shape and height of tanks over the years a small amount of pipefitting adjustment was needed. However the actual gas lines were already in place, etc, which means the required work was minimal.

What Did It Cost to Replace our 40 Gallon Natural Gas Water Heater Tank?

All in, taxes, delivery, tank, installation, and removal of the old tank from the basement to the great out of doors, cost us $910.90. Probably not the best deal available but it was acceptable to us.

What Did We Do With Our Old Tank?

Believe it or not, Direct Energy wanted back the old tank! When I phoned them to cancel our rental they told us they would pick up the tank for free or we could deliver it to one of their depots. (There may be a cost now for tank pickup. Check your contract.) We opted to have them pick it up.

Ever mindful of the horror stories I read in The Star about water heaters I didn’t really relax till they picked it up about a week later. I even kept a tarpaulin over it to keep the snow off just in case. Fortunately in my case there was absolutely no problem with Direct Energy.

When Will We Payout the Water Tank?

The rental cost for our old tank was $12.99 per month plus HST, so just over $14.93 per month. At $179.26 per year the payout on the new tank would take a long time: about 5 years.

It’s important to remember though that the reason we replaced the tank was

we thought it would leak and damage our basement at any time
the rental fee for a new tank would be much higher

At the time, a new rental from Direct Energy would be about $25 per month. At that rate, the tank would payout in about 3 years.

Yes, technically I should include the value that money could have earned if invested. I didn’t. I’m mathematically lazy.

Having Control of My Water Heater Costs Appeals to Me

~~I’m a control freak~~. I enjoy feeling in control. I like knowing that no one can arbitrarily raise the cost of my water heater.

Do We Regret Buying Our Own Water Heater?

We had our water heater installed in December 2010. Two and a half years later it’s still working well. So we’ve almost paid it out. After December if it breaks and we have to pay to replace it, we’ll be no worse off than if we rented. If it doesn’t break, we will start saving money each month versus renting.

Related Reading

Is Hot Water a Matter of Life and Death? If Not, Why Are You Insuring Your Water Tank?
Budgetting for Retirement: Reduce How Much You Must Pay on a Fixed Schedule (This includes an update in March 2014 on the water heater described in this post.)

Join In
Do you own or rent a water heater? Is it a tank or a “tankless” system? Please share your views with a comment.

Like many Canadians, part of our retirement income will come, we hope!, from a defined contribution pension plan. This is the type of plan where you choose what to invest in, hope it earns profits, and hope that by the time you retire there’s enough money in the plan to pay you something monthly. It is not the kind most people want, which is a defined benefit plan, which is (almost) guaranteed to pay you something monthly. It’s up to us (and you if you have one) to make sure our defined contribution pension is invested the best way possible and that’s what makes the plan a pain.

Lack of Fixed Income Choices in DC Plan Frustrates

While some plans swamp employees with too many choices to invest in, others, like ours, offer too few.

For example, here’s what we can invest in for the fixed income category:

a mid-to-long term bond fund managed by a major financial firm
a money market fund managed rather poorly by another major financial firm

Yep. That’s it.

Short Term to Maturity Bond Funds are Better Right Now

If you’ve read anything about the future of the bond market, you’ll know it’s at risk of a major drop. As interest rates climb, the rates offered on new bond issues will also climb. That will make existing bonds with lower rates undesirable. To bolster demand, the owners will have to cut the price they are trying to sell them for to offset the lower interest paid.

Say I have a $10,000 originally-20-year bond paying 1.5% a year that has 5 years left on it before it matures. New 20-year-bonds appear on the market offering 2.5% a year. That new bond pays about $100 a year more interest than the old bond. To find a buyer for the old bond, I would likely have to reduce my price from $10,000 to $9500 or less (5 years remaining x $100 per year) to find an interested buyer.

The interest paid on bonds has not increased by much yet. But it still may be necessary to offer a reduced price when selling old bonds just because the buyer thinks the interest rates will be rising. Unfair but true.

That’s why many people suggest going with short term-to-maturity bonds right now. Buyers are less likely to be worried that interest rates will climb high quickly in a short time. Therefore you might be able to persuade them to buy your bonds without offering much of a discount. and you could always just hold the bonds to maturity and re-invest at a higher rate when they mature.

So why does our DC pension plan not offer us a bond fund with a short average term to maturity?!

Even our bond fund manager is painfully aware of the risk right now. I’ve noticed if you look in the details about what the fund holds that they are playing some interesting paper games to try to reduce risk. They will do things like buy some 40-year term-to-maturity bonds at a ridiculously low interest rate to counterbalance buying a lot of very short term bonds. The result is that they can stay within their fund’s defined required range of age to maturity with less risk than if they invested solely in mid- to long-term range bonds.

Money Market Funds are Risky

Some people mistakenly assume a money market fund is like a bank account. You put your money in, earn some interest, and it’s all waiting for you when you want it out.

Wrong.

Money market funds invest in things like commercial paper. In theory, this is fairly safe and the funds are fairly low risk. They are not NO risk though.

In fact in the 2008-2009 financial fiasco huge amounts of commercial paper went bad. You can read up on it online in articles like When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007–2009.

Money Market Funds Preparing for “Negative Earnings”

“Negative earnings” is what you and I call losing money!

In a January 2013 article by Bloomberg, for example, it explains how some big investment houses are resetting the rules for their money market funds to allow them to drop in value below their nominal (usually $10) value per unit. The article RBS Changing Money-Market Funds to Accommodate Negative Yields.

Firms that are doing this include

JPMorgan Chase & Co. (JPM)
Morgan Stanley
RBS Asset Management Ltd.
and various European fund providers

The move is driven by the fact that funds have been experiencing losses and ***are expected to have further losses.*** They want to be able to give you back less money than you paid when you bought the fund. That doesn’t sound much like a bank account to me. (Unless you had one in Cyprus.)

By the way, do you think the average pension plan member knows about all of this? This is why I think DC Pension Plans are a real danger.

Why Our Defined Contribution Plan Doesn’t Offer Truly Safe Fixed Income Choices

Some DC Plans allow members to invest in GICs. These guaranteed investment certificates ensure your principal is safe and offer a very low, but safe, payment of interest.

Our plan does not offer GICs. If I understand correctly it’s because people would put too much money into low interest GICs. Then, by the time they want to retire, there would not be enough money in their DC plan to buy an annuity to get a reasonable monthly cheque.

That tells me two things:

people are scared of losing what little money they have in their pension plan
the company hasn’t considered ways to offer GICs while managing risk

I think they should offer some truly safe investment like GICs but limit the total amount of the pension plan that can be invested in that category. The limit should change depending on how close a person is to retirement.

Pension Planning is Easier if You Have a RRSP and a DC Pension Plan

Things are a bit easier for us than for some members of our DC Pension plan. We have RRSPs in addition to our work savings. So we balance across the two plans. We can, for example, buy GICs or deposit cash in a CDIC-insured daily interest savings account within our RRSP. Then we can keep our DC pension plan earnings in the stock market, if we wish.

Many people are not that fortunate, however. Lots of employees do not have a RRSP or a TFSA for a variety of financial reasons, some good, most sad. What are they supposed to do?

Keeping Aware of How a DC Pension is Invested Is Work

To keep up to date on the types of fixed income investments offered in our DC pension plan is work.

In the olden days this work was done for employees by a financial specialist who would make investment choices for the entire company within the defined benefit pension plan. Now, each employee must do this work himself or herself. It’s a waste of time and energy. And frankly many of the employees lack the skills to do the research and make good choices. It’s worrying and it’s a pain.