Tag Archives: RRSPs

Can you retire with a $500,000 RRSP?

Posted By |
Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

Many people feel you need to save a bundle for retirement, and that can be true, depending how much you intend to spend. So, can you retire with a $500,000 RRSP? Can you retire without any company pension plan?

Read on to learn more, including how in our latest case study we tell you it’s absolutely possible to retire with no company pension while relying on your personal savings.

Financial independence facts to remember

You may recall from previous case studies on our site while achieving financial independence (FI) is desired by many it may not be possible for most to achieve.

Realizing FI takes a plan, some multi-year discipline, and ideally one or both of the following:

  1. For every additional dollar you save, you can invest that money so it can grow your wealth faster, and/or,
  2. You can realize financial independence by consuming less.

Here at Cashflows & Portfolios, we suggest you optimize both options above: if you can.

Check out these previous, detailed case studies, to see if you fall into any of these retirement dreams:

Check out how Michelle, a 20-something software engineer, plans to retire by age 40, including how much she’ll need to save to accomplish that goal.

This couple plans to retire by age 50 by using their appreciated home equity.

Here is how much you need to save to retire at age 60 rather comfortably.

There are different roads to any retirement

Members of our site have already learned the powerful math behind any retirement plan:

The more you save, the faster you are likely to achieve your goal.

However, life is not a straight line. Everyone has a unique path to retirement. Twists and turns abound. Depending on the path you took in life, including what decisions you made, your retirement planning work could be vastly different than anyone else’s.

Can you retire with a $500,000 RRSP?

Not every person has a high savings rate. In fact, most don’t.

Not every person has a company pension plan to rely on either. In fact, increasingly, many don’t!

Our case study participant today was unable to have a high, sustained savings rate and he didn’t have any company pension plan to buy into either. Is he doomed for retirement? Will $500,000 saved inside his RRSPs in his 60s be enough (in addition to $100,000 in his TFSA)?

Let’s look at his case study.

In our profile today, is Tom.

Tom is aged 63 and wonders if he can retire with $500,000 invested inside his RRSP and $100,000 in his TFSA. Here are some snippets from his email to us:

Hi there,

I was hoping you can help since I know you perform some financial projections for clients … I was just wondering if you have any articles or would you know the answer to this question. I’m a single guy with a simple life. Let’s say I have only my RRSP (for the most part) to rely on for retirement beyond government benefits. I have almost $500,000 invested there. I have no non-registered account although my TFSA is maxed and now worth $100,0000. (I don’t want to use my TFSA for retirement spending right now, I consider it a big safety net as I get older so maybe you can help me run some math?) Anyhow, I am wondering if I could start taking money from my RRSP, and retire soon. Any money I don’t need for retirement, I would move in-kind into my TFSA. (I know from reading your site I cannot make a direct transfer from my RRSP to TFSA – thanks guys but I will take any excess cash I don’t spend and likely move it there. We’ll see.) I have very modest spending needs. I have no debt. I own my home in rural, small town Ontario.

What do you think?

I make decent money now, definitely not $100,000 per year but “enough” to meet my needs and to continue to invest inside my RRSP and TFSA for the next couple of years. 

Do I have enough to retire and spend about $3,000 per month well into my 80s and 90s?

Thanks very much!

Thank you Tom!

 

To help Tom out in the future, we shared some low-cost investment ideas for his TFSA and RRSP:

  1. Everything You Need to Know about TFSAs.
  2. Everything You Need to Know about RRSPs.

Here are the cash flow and investing assumptions for Tom beyond what he told us above. Continue Reading…

Can you retire using just your TFSA?

Posted By |
Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

The opportunity for Canadians to save and invest tax-free over decades could be considered one of the greatest wonders of our modern financial world. This begs an important question:

If you start early enough – Can you retire using just your TFSA?

We believe so and in today’s post we’ll show you how!

Can you retire using just your TFSA? Why the TFSA is a gift for all Canadians!

Our Canadian government introduced TFSAs in 2009 as a way to encourage people to save money. Looking back, it was one of the best incentives ever created for Canadian savers …

Our Canada Revenue Agency has a HUGE library of TFSA links and resources to check out but we’ll help you cut to the chase along answering that leading question above:

Can you retire using just your TFSA?

Why the TFSA is just so good

Since the TFSA was introduced, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before. While the TFSA is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to your TFSA are with after-tax dollars and withdrawals are tax-free. You can carry forward any unused contributions from year to year. There is no lifetime contribution limit.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account.  This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Here is a summary of many great TFSA benefits:

  • Capital gains and other investment income earned inside a TFSA are not taxed.
  • Withdrawals from the account are tax-free.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits (such as Old Age Security (OAS)). This is very important!!
  • Anything you withdraw from your TFSA can be re-contributed in the following year, in addition to that year’s contribution limit, although we don’t recommend that. More in a bit.
  • While you cannot contribute directly as you could with an RRSP, you can give your spouse or common-law partner money to put into their TFSA.
  • TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. This makes the TFSA an outstanding estate management account – leaving TFSA assets “until the end” can be very tax-smart.

Since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out. This feature combined with the ability to compound money, tax-free, over decades, can make the TFSA one of the best ways to build wealth for retirement.

RRSP vs. TFSA – which one is better?

There is no shortage of blog posts that highlight this debate and one of our favourites is from My Own Advisor. You can check out his post here. 

Without stealing too much of his thunder, the RRSP vs. TFSA debate essentially comes down to this: managing the RRSP-generated refund.

Let’s dive deeper with a quick example.

Contributions to the RRSP are excellent because the contribution you make today lowers your taxable income – and you may get a tax refund because of it – a pretty nice formula. The problem is, some Canadians might spend the RRSP-generated refund from their contribution. You’ll see why this is a major problem.

Consider working in the higher 40% tax bracket whereby RRSP contributions to lower your taxable income make great sense:

  • If you put $300 per month into the RRSP for the year, that’s a nice $3,600 contribution.
  • You’ll get a $1,440 refund (40% of $3,600).

When your $1,440 RRSP-generated refund comes in, and now you decide to spend it on a new iPhone, just know that your RRSP refund is effectively borrowed government money. Yup, a long-term loan from the government they are going to come back for. If you always spend your refund you are undermining the effectiveness of RRSPs because you are giving up your government loan that would otherwise be used for tax-deferred growth.  A refund associated with your RRSP contribution should not be considered a financial windfall but the present value of future tax payment you must make.

If you typically spend the RRSP-generated refund in our example then we think some Canadians are FAR better off prioritizing your TFSA over your RRSP because of the known benefits of that present-day contribution.  

TFSAs offer tax-free growth for any income earner

At some point, the money that comes out of your RRSP (or Registered Retirement Income Fund (RRIF)) will be taxed.

With TFSAs, the government has eliminated the guesswork about taxation. Because the TFSA is like the RRSP, but in reverse (you don’t get any tax break on the TFSA contribution), TFSA withdrawals are tax-free.

For far more details including answering dozens of questions about this account, read on about our comprehensive TFSA post below:

If you haven’t contributed much towards your retirement and/or you can’t possibly save enough with so many competing financial priorities – that’s OK – striving to max out your TFSA contributions each year, every year, is still very valuable and admirable goal. In fact, focusing diligently on just maxing out your TFSA (and ignoring the RRSP account entirely) will still serve your retirement plan well.

Regardless of your income, any Canadian who is 18 years of age or older with a valid social insurance number (SIN) can open a TFSA. All you need to do is reach out to a financial institution, credit union or insurance company that offers TFSAs and open an account.

Whether you set up your automatic savings plan to your TFSA weekly, monthly, or other – striving to make the maximum contributions to this account can be a significant wealth-building tool as part of the Four Keys to Investing Success. 

Let’s use a case study to demonstrate just how good this account can be for you too – and why you can retire just using your TFSA!

Can you retire using just your TFSA – A Case Study

The big question in his article is – given enough time (ie. if you start young enough), can someone retire using only their TFSA?  The answer may surprise you, at least it surprised us!

To help accurately model this scenario to account for government benefits, inflation, taxes, tax credits, and optimized withdrawal schedules, we dove into the software that we are using to manage our own early retirement plans.

Here are the assumptions we made: Continue Reading…

Have some savings? Want to pay less tax? How to contribute to your RRSP and lower your tax payments

Posted By |

By Elke Rubach    

Special to the Financial Independence Hub     

Tick-tock, tick-tock. The March 1 deadline for RRSP contributions that can be claimed against your 2021 income tax return is tomorrow. If you’re among the thousands of Canadians who haven’t put money into their RRSP this year, you still have time to take advantage of this government-sponsored, tax-deferred retirement savings plan.

Whether you’re a last-minute RRSP contributor or one who invests towards retirement regularly, it’s important to take a strategic and disciplined approach to how you fund and invest in your RRSP. Here are some pointers to consider in 2022 and beyond.

Thinking of borrowing? Think about your strategy

With interest rates still staying low by historical standards, it may seem like a good idea to borrow money to invest in an RRSP. It can be if you proceed with a well-considered strategy. As a starting point make sure you have a plan for repaying the loan as quickly as possible while committing to your investment for the long-term. It’s also important to choose investments most likely to yield a return that’s higher than the interest rate on your loan.

Consider tapping into your TFSA

Instead of borrowing, you may want to consider transferring some money from your TFSA into your RRSP. This allows you to get the tax deferral from your RRSP contribution without triggering tax on the money you’re taking out of your TFSA. At the same time, TFSA rules allow you to re-contribute the following year the amount you withdrew. Just as you would if you were borrowing, make sure you have a plan for repaying your TFSA.

Don’t miss out on employer matching

Take full advantage of company-sponsored programs that match RRSP contributions. In addition to the regular contributions deducted from your pay, ask your employer to direct any bonuses coming your way straight to your RRSP. At some companies, it’s standard practice to pay bonuses in February as a way to help employees maximize RRSP matching benefits. Accept the help and put that hard-earned bonus towards your retirement.

Mind the investments in your RRSP

When it comes to investments, don’t just set it and forget it. Keep an eye on the investments inside your RRSP and review your asset allocation regularly with your financial advisor to make sure it continues to align with your goals and risk profile. Continue Reading…

Perfect storm of challenges awaits Canadians this RRSP season, survey finds

Posted By |

 

Photo credit Wes Tyrell

A “perfect storm” of challenges faces Canadian investors this RRSP season, according to a a national online study conducted on the Angus Reid Forum Panel for Co-operators, released Tuesday. Jan. 25.

After surveying financial professionals across the banking and wealth management sectors, the panel believes this  “perfect storm” can be attributed to the uncertainty of this past year and to DIY [Do It Yourself] investing strategies.

2022 is poised to be a unique RRSP season because of multiple unique market conditions, the study finds: 58 per cent agree that in the face of rising consumer debt, natural disasters (climate change), Omicron, and looming hikes in interest rates, we are approaching a “perfect storm” of challenges, a figure that jumps to 65 per cent in Quebec.

Key findings

  • 80 per cent percent of respondents say that when people experience financial mishaps or losses, many feel overcome with doubt, which leads to indecision and in-action.
  • 76 per cent hypothesize that for many Canadians living in urban centres, home ownership is increasingly feeling out of reach, and because of this, many are looking for DIY investment strategies.
  • 93 per cent say the majority of Canadians have unleveraged opportunities in that they haven’t maximized their RRSP planning and TFSAs.

“By initiating a much-needed national conversation around financial literacy, the hope is that more Canadians will feel empowered to seek counsel from a financial advisor and develop a strategic financial plan to help achieve their goals,” Co-operators said in a press release.

Conducted in January 2021, “Canadian Attitudes on RRSPs” was designed to examine the state of RRSPs, TFSAs and retirement planning strategies that Canadians are using to secure their financial futures – all from the perspective of industry professionals with their ears to the ground across the country.

Consumer confusion appears to be rampant when it comes to understanding the different roles of RRSPs and TFSAs. 90 per cent of financial professionals believe most Canadians” have a lot of confusion” about those two key retirement savings vehicles.

This is reflected in similar confusion about Saving versus Investing: 70 per cent say they see Canadians declining in their ability to differentiate between saving and investing.

The study also sees what it calls “unleveraged opportunities”: 93 per cent think the majority of Canadians haven’t yet maximized their opportunities with RRSP planning, TFSAs, and other programs.

A majority (85%) of  industry pros attribute the influence of today’s “culture of now” as hindering people from seeing retirement planning as a priority.

The venerable Registered Retirement Savings Plan (RRSP) also seems to be suffering from the challenge of an “old school image”: 57 per cent say too many Canadians today see RRSPs as “an investing tool of the past” that is no longer as attractive today.

Adding to the angst is the continuing decline of availability of Defined Pension [DB] plans offered by employers: 85 per cent think defined benefit pension plans are going extinct. They too are viewed as a thing of the past: something Canadians don’t expect to have when they retire.

No surprise then that Early Retirement is largely regarded as a myth:  92 per cent of advisors believe that because most Canadians aren’t saving enough for retirement, concepts like “early retirement” are becoming more elusive.

What’s holding Canadians back

When it comes to identifying the causes for Canadians holding back on retirement saving, the survey found financial losses generally contribute to indecision: 80 per cent of advisors say when Canadians experience financial mishaps or losses, many become overcome with doubt, which then leads to indecision and in-action. In addition, 73 per cent see a stigma of shame among many Canadians around financial mishaps or losses.

Just the fact they feel they are not saving added to their stress: 80 per cent see many Canadians feeling paralyzed from the stress of not having enough savings to meet their long-term needs. And many also feel pressure to be perceived as  “financially in-the-know.” 65 per cent think there is social pressure among Canadians to appear “financially savvy.” Continue Reading…

Behavioural Finance focus: Cost Savings tips to attain Financial Freedom

Posted By |
Photo: Towfiqu barbhuiya on Unsplash with modifications by LowrieFinancial.com

By Steve Lowrie, CFA

Special to the Financial Independence Hub

As a personal financial advisor, I am often asked about “the secret” to attaining financial freedom. Not to go all metaphysical on you, but to improve your long-term outcomes, try looking inward. After all, you are among the few drivers you have much control over. One great way to sharpen your financial acumen is by combining behavioural finance with an evidence-based perspective. Together, these disciplines offer reams of insights on how tending to your own best practices is often the best-kept secret to enjoying wealth management success.

Finding your Behavioural Finance focus

Here’s how The Behavioral Investor author Daniel Crosby describes behavioural finance:

“Emotional centers of the brain that helped guide primitive behavior like avoiding attack are now shown by brain scans to be involved in processing information about financial risks. These brain areas are found in mammals the world over and are blunt instruments designed for quick reaction, not precise thinking. Rapid, decisive action may save a squirrel from an owl, but it certainly doesn’t help investors. In fact, a large body of research suggests that investors profit most when they do the least.”

As early as the 1970s, Nobel laureate Daniel Kahneman was a driving force behind the formation of behavioural finance (along with Nobel laureate Richard Thaler and the late Amos Tversky). In his landmark book, “Thinking, Fast and Slow”, Kahneman describes this same quick vs. precise thinking as System 1 vs. System 2 thinking:

“System 1 [thinking] operates automatically and quickly, with little or no effort and no sense of voluntary control. System 2 [thinking] allocates attention to the effortful mental activities that demand it, including complex computations.”

Long before the term “behavioural finance” was a thing, wise academics and practitioners alike were suggesting investors are best off avoiding their fast-thinking instincts in favor of slower-thinking resolve. As billionaire Warren Buffett said decades ago:

“Success in investing doesn’t correlate with I.Q. … Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Buffett is correct. And yet, from what I see every day, fast, reactionary thinking continues to dominate most investors’ actions. What else could explain the never-ending parade of people chasing after FOMO (fear of missing out) investment trends instead of following the simple investing strategies, an evidence-based mindset prescribes?

Your brain’s take on Wealth Management

What’s actually going on in our heads when we allow our instincts and emotions to overcome our higher reasoning? Wall Street Journal columnist Jason Zweig’s “Your Money & Your Brain” takes us on a fascinating tour inside the mechanics in our own heads.

For example, Zweig warns us:

“…the amygdala [in your brain] can flood your body with fear signals before you are consciously aware of being afraid … [and] the nucleus accumbens in your reflexive brain becomes intensely aroused when you anticipate a financial gain.”

In this related piece, “It’s the Little Things That Can Color an Investor’s Outlook,” Zweig describes how even seeing the same financial numbers in red vs. a neutral color can unwittingly change our feelings about the data. Additional “insidious influences” include whether we’re hungry or full, sleepy or awake, or experiencing a cloudy or sunny day.

These sorts of overcharged emotions and unconscious biases can steer you wrong when you’re deciding whether to buy, sell, or hold your investments. They can also knock you off course from your holistic financial planning.

Nudging your way to Cost Savings

By adding academic rigor to our thinking, behavioural finance improves our ability to identify and manage our behavioural weaknesses. We can then apply that knowledge toward not reacting to the quick tricks our brain plays on us. Better still, we can learn how to play tricks right back on our brain: turning otherwise adverse instincts to our advantage. Continue Reading…