How much do you put into RRSP's?

[CarlW]

Originally Posted by Slava

Oh ya, I wasn't questioning anything that you said or anything, just adding to your thoughts there really.

I see that they have some hedge funds and more aggressive funds there, but the MER is getting close to 3.5% and then you have a performance fee on top of that. That gets tough to take!

Well I didn't say they were cheap , but they do have interesting fund options on the risky side. Their bond fund selection is also interesting.

Yea, the High MER's suck but it isn't the end all and be all of a fund, I hope people realize when they see the fund performances that MERs have already been deducted. So if a fund performance says it earned 10%, you don't have to deduct your MER's again.

[chemgear]

http://business.financialpost.com/20...rrsp-deadline/

Sixty-three percent of Canadians have already made contributions or plan to before the Friday deadline, up from 38% last year, according to BMO Financial Group’s Post-RRSP Deadline study.

The report, conducted during the last week of February, showed Canadians contributed an average of $3,544 to their RRSPs, down from an average of $4,670 last year.

[AMG_G]

$3,544 sad...yet half the boomers don't plan on downsizing their homes....how does that add up? Also, 1.8 million people took money out of their RRSP to buy a new home but 47% fail to make the annual repayments...Something's gotta give....Pay yourself first people.

http://www.canadianmortgagetrends.co...yers-plan.html

[chemgear]

Originally Posted by AMG_G

$3,544 sad...yet half the boomers don't plan on downsizing their homes....how does that add up?

It adds up given the pile of debt that Canadians are running up. And to this:

http://business.financialpost.com/20...oney-on-homes/

24% of the homeowners surveyed expect to have debt on their principal residence after they retire. Of those who expect to owe money on their homes when they retire, more than one-quarter said they don’t know how they will pay it off.

http://business.financialpost.com/20...nt-poll-finds/

Half of Canadians aged 50 and older believe they will run out of retirement savings within the first 10 years after leaving work.

19% of respondents have no idea how much they have saved for retirement. One quarter, (24%), do not know how much they will need to draw from their savings and investments every year after retirement.

[AMG_G]

The future does not look bright for these folks. Simple math, you cannot continue to spend more than you make...and don't be smug even if you are borderline....you have to spend well below and invest the difference to get ahead. 10 years ago I thought what's the point of saving as it doesn't seem to grow but in time my small portfolio has grown to something substantial and even the smallest growth is very noticeable. It's like an addiction once you get it to a certain level you just want to get up to the next level. A lot of my friends pulled out all their money during the big drop in 2008. I told them that the loss is only real when you sell it...they didn't listen because they were too scared to lose it all which is almost impossible unless you are buying indidual stocks. All my stuff recovered and then some. I don't get people, so scared about losing money in the market yet they can dump it all into one asset (house). I'll pick the markets over real estate because try selling your house if you need money tomorrow.

[MarchHare]

Originally Posted by AMG_G

$3,544 sad...yet half the boomers don't plan on downsizing their homes....how does that add up? Also, 1.8 million people took money out of their RRSP to buy a new home but 47% fail to make the annual repayments...Something's gotta give....Pay yourself first people.

http://www.canadianmortgagetrends.co...yers-plan.html

If the average Canadian is saving $3,544 annually, that's not that bad. The average salary in the country is $47,200 per year, so the average person is saving 7.5%. It's certainly not as much as I would recommend saving, but I honestly expected the number to be lower.

[Bill Bumface]

Originally Posted by AMG_G

$3,544 sad...yet half the boomers don't plan on downsizing their homes....how does that add up? Also, 1.8 million people took money out of their RRSP to buy a new home but 47% fail to make the annual repayments...Something's gotta give....Pay yourself first people.

http://www.canadianmortgagetrends.co...yers-plan.html

I think a lot of people on here are a bit out of touch. A large part of the population is making $30-$40K/year, and to put away 10% of your gross income per year at that income level is actually pretty admirable.

Edit: Should have refreshed this before posting and copying March Hare

[edn88]

If I were to say why you would spend less in retirement that during working years

1. You have less income - so need to be conservative about spending
2. Working costs money - car, fuel, insurance to/from work, parking, transit, work clothes, eating out for lunch, expensive vacations to deal with stress of work, day care for kids,
3. Typically you have your house paid for and are not paying any more money into RRSPs.
4. You are older/wiser and know that spending money on frivolous stuff doesn't make you happy
5. You are able to sell your house and move to a place where it is like a vacation

Now that is not always the case for everyone and so you should be wary of anyone who doesn't completely understand your situation.

I know that I will spend less money during retirement (all things being equal) simply because of not working. I also know that at a certain point, I am less likely to outright retire and more likely to work at work that I really want to do to supplement my retirement income (or my dream retirement job of golf course marshal/starter). Also, I am pinning my hopes to my two boys being less leach-like and more able to support their old folks

[Sylvanfan]

Originally Posted by MarchHare

If the average Canadian is saving $3,544 annually, that's not that bad. The average salary in the country is $47,200 per year, so the average person is saving 7.5%. It's certainly not as much as I would recommend saving, but I honestly expected the number to be lower.

I would agree that people making a household income of 70k a year and putting 6 into retirement, likely won't be in for too rough of a retirement so long as OAS, and CPP are around. What surprised me with St.Albert was that median house hold incomes were at 115k more or less, and the average household RRSP contribution was only around 4500. People used to making an income like this will be shocked when they get to be 65 and realize they can only draw a third of that in retirement income.

As for the previous poster who suggested going to work costs money, that depends on who you are, and what you do. I spend around $45 every two weeks to drive to work, and go out for a $5 sandwich once in that time period. I don't have to wear special clothes for work. So really work gives me something that occupies 40 hours of my week and my costs to do it are pretty cheap. It's when I have free time and need to entertain myself that life gets expensive.

[Enoch Root]

Originally Posted by AMG_G

$3,544 sad...yet half the boomers don't plan on downsizing their homes....how does that add up? Also, 1.8 million people took money out of their RRSP to buy a new home but 47% fail to make the annual repayments...Something's gotta give....Pay yourself first people.

http://www.canadianmortgagetrends.co...yers-plan.html

Just entering the thread and haven't read all the way through yet, so my apologies if redundant...

The quoted stat refers just to RSP cpntributions, that does not equate to savings. There are losts of ways to save other than RSPs. And jsut off the cuff, my first guess on the decline would be because people are utilizing their TFSAs first (which they should)

Also, higher net worth individuals often choose not to utilize RSPs to a significant extent because they are a) limited in their scope, b) inflexible, and c) can be very tax inefficient once the balance exceeds a certain point, or if the participant is getting close to 71.

[Knalus]

Utilize your TFSA's first? Why? You get a massive return on RRSPs, on your tax return. You then take the return on TFSAs, or if you are in the first 7 years of your mortgage, put it on your house. TFSAs are last in the pecking order, not first. Unless you have serious issues with liquidity.

[Canehdianman]

Originally Posted by Knalus

Utilize your TFSA's first? Why? You get a massive return on RRSPs, on your tax return. You then take the return on TFSAs, or if you are in the first 7 years of your mortgage, put it on your house. TFSAs are last in the pecking order, not first. Unless you have serious issues with liquidity.

I value my TFSA more highly than my RRSP.

[firebug]

Originally Posted by Knalus

Utilize your TFSA's first? Why? You get a massive return on RRSPs, on your tax return. You then take the return on TFSAs, or if you are in the first 7 years of your mortgage, put it on your house. TFSAs are last in the pecking order, not first. Unless you have serious issues with liquidity.

It all depends on your tax rates.

If you expect to pay a higher tax rate in retirement than you do currently, a TFSA is better. If you expect to pay a lower tax rate in retirement than you do today then an RRSP is better.

If you expect to pay the same tax rate in retirement as you do today it is a complete wash. Do the math.

[Canehdianman]

Originally Posted by firebug

It all depends on your tax rates.

If you expect to pay a higher tax rate in retirement than you do currently, a TFSA is better. If you expect to pay a lower tax rate in retirement than you do today then an RRSP is better.

If you expect to pay the same tax rate in retirement as you do today it is a complete wash. Do the math.

Unless you expect tax rates to increase, then it it not a wash.

[Slava]

Originally Posted by Canehdianman

Unless you expect tax rates to increase, then it it not a wash.

I've seen this happen to a lot of clients as well. Guys who started saving as early as possible and were saving say 15-20% on taxes and now on withdrawals will pay 20-25% as an average rate. Its impossible to predict what tax rates will do say 20 years from now. I would guess go up, but obviously there is no way of knowing.

Certainly time value of money is a consideration as well though. An RRSP contribution today saves some tax, grows tax free for say 20 years, and while its taxable at the end, you're still ahead of the game. Its a harder consideration as retirement approaches, but can be sensible for the young.

[squiggs96]

Originally Posted by Knalus

Utilize your TFSA's first? Why? You get a massive return on RRSPs, on your tax return. You then take the return on TFSAs, or if you are in the first 7 years of your mortgage, put it on your house. TFSAs are last in the pecking order, not first. Unless you have serious issues with liquidity.

Let's say you want to invest $10,000 in a stock that has a value of $1.00 per share. Let's further assume in 10 years this stock has gone up to $100 per share.

If you made this investment through your RRSPs, you'd save $2,500 (give or take depending on your marginal tax rate) during the year of the contribution and then would pay $430,000 (assumed rate of 43%) in taxes when you withdraw the $1,000,000 investment.

If you had made the same investment through your TFSA, you wouldn't receive the $2,500 contribution savings, but when you withdrew your investment, you'd get to keep the entire $1,000,000, as the earnings are not subject to tax.

In this case, it's very easy to see the TFSA works much better. There will be some scenarios where the RRSP works better than the TFSA, and vice versa. To give a blanket statement that TFSAs are the last in the pecking order is bad advice. What if you were only making $10,000 per year, like I was during my university days? You are only allowed to contribute $1,800 to your RRSP and get $5,500 per year for the TFSA. By contributing to your RRSP at that point, you aren't knocking yourself down to a lower tax bracket. In this case, the TFSA is far superior.

[mrkajz44]

Originally Posted by squiggs96

Let's say you want to invest $10,000 in a stock that has a value of $1.00 per share. Let's further assume in 10 years this stock has gone up to $100 per share.

If you made this investment through your RRSPs, you'd save $2,500 (give or take depending on your marginal tax rate) during the year of the contribution and then would pay $430,000 (assumed rate of 43%) in taxes when you withdraw the $1,000,000 investment.

If you had made the same investment through your TFSA, you wouldn't receive the $2,500 contribution savings, but when you withdrew your investment, you'd get to keep the entire $1,000,000, as the earnings are not subject to tax.

In this case, it's very easy to see the TFSA works much better.

There is alot wrong with this example. For one thing, it is unlikely your marginal rate when contributing will be 25% and 43% when withdrawing; for the vast majority of people, it will be the opposite.

Let's re-do the example with the more realistic tax rates (43% at contribution and 25% at withdrawl). Take the $4,300 saved from the contribution at add it to the orginal stock buy. Now, the stock it worth $1.43 million in the RRSP after 10 years, due to the greater intial stock buy. A tax rate of 25% would leave the RRSP with $1.07 million net; greater than the $1 million in the TFSA. Of course this assumes that you reinvest your RRSP savings, rather than blow it as many people do with their tax refund.

As I said before in this thread, this is why blanket statements regarding which is better, an RRSP or a TFSA, is usually never right. So many factors go into each it is very hard to easily compare the two. Personally, I think you should use both fairly evenly and that will create the best result.

[squiggs96]

Originally Posted by mrkajz44

There is alot wrong with this example. For one thing, it is unlikely your marginal rate when contributing will be 25% and 43% when withdrawing; for the vast majority of people, it will be the opposite.

Let's re-do the example with the more realistic tax rates (43% at contribution and 25% at withdrawl). Take the $4,300 saved from the contribution at add it to the orginal stock buy. Now, the stock it worth $1.43 million in the RRSP after 10 years, due to the greater intial stock buy. A tax rate of 25% would leave the RRSP with $1.07 million net; greater than the $1 million in the TFSA. Of course this assumes that you reinvest your RRSP savings, rather than blow it as many people do with their tax refund.

As I said before in this thread, this is why blanket statements regarding which is better, an RRSP or a TFSA, is usually never right. So many factors go into each it is very hard to easily compare the two. Personally, I think you should use both fairly evenly and that will create the best result.

Whether it's 25% (which I said was just an example) or 43% it's a difference of $1,800 in the first year. Although there is no point arguing over $1,800, the vast majority of people are not taxed at 43%. I'd make a guess the vast majority of people have income closer to $40,000 than $130,000, and thus would be closer to a 25% tax rate.

Of course you can invest the refund in, but if you only contribute the amount and don't get your refund until next year, you might not put it in. You might put the refund into another investment entirely. For my example it was a straight $10,000 investment. I chose to keep the refund out, to keep it simple. The $4,300 you said to reinvest, would also create a refund, which could be reinvested as well. Instead, you might have reduced taxes taken off your pay stub, and thus the $4,300 refund wouldn't even be there. The taxes owing might equal the taxes paid.

Why would the rate when paying out $1M, or in your case $1.43M only be 25%? If you are having income of $1M, you'll be in the highest tax bracket, which I made an assumption would be 43%. I'm not talking about the amount withheld, or the amount from a RIF or any other measures. If you take the amount out in 10 years, it's taxable income and would be subject to the highest income tax rate.

What you've done is give a separate example, including reinvesting the refund. It does not make my example wrong. It's just one scenario. We both agree that blanket statements aren't appropriate when comparing the two. You have illustrated an alternate proposal that could be presented to the investor. Many of these situations should be looked at when investing. What works for one person, will not always work for everyone.

[Knalus]

Ok, but your RRSPs give you an additional $2500 NOW, which could be reinvested in the TFSAs. As your TFSA has a cap of $5000 per year, it doesn't take a massive RRSP contribution to also max out your TFSA, but if you buy your TFSA first, you don't get the tax rebate which you can always use towards your TFSA.

Besides, the tax gains you get now are guaranteed, while your stock going from $1 to $100 is theoretical.

[Slava]

Originally Posted by Knalus

Ok, but your RRSPs give you an additional $2500 NOW, which could be reinvested in the TFSAs. As your TFSA has a cap of $5000 per year, it doesn't take a massive RRSP contribution to also max out your TFSA, but if you buy your TFSA first, you don't get the tax rebate which you can always use towards your TFSA.

Besides, the tax gains you get now are guaranteed, while your stock going from $1 to $100 is theoretical.

I just wanted to point out that the TFSA limit this year is $5500.

I think comparing TFSAs and RRSPs for efficacy is difficult primarily because they are used very differently. If I were at retirement and was making a lump sum purchase of some kind (a Winnebago, a golf membership, a new car, etc.) I would use the TFSA cash most likely because you pay no tax on the withdrawal. I wouldn't want to do that with RRSP because if I needed $100k I would have to withdraw $130k to begin with, which depletes the pool that much faster.