How much do you put into RRSP's?

[Cowperson]

Originally Posted by darklord700

Can someone explain Seg Fund more please? To me, it's an insurance product that promises no less than 75% of your principle back. The downside is reduced return. My company only allows me to contribute to registered seg funds so I do to get the matching.

But giving me another choice, I would rather buy ETF or mutual funds for higher potential returns.

If you're a paranoid neurotic and have no confidence in long-term market trends . . . . . maybe you'd buy seg funds.

Tons of these were sold in the mid to late 90's and insurance companies were forced to pay out mammoth losses 10 years later because they carried a 100% guarantee.

Worse, regulators forced insurers to up their reserves to cover impending losses, which translated into mammoth increases in management fees.

By the mid-2000's, insurers had dropped their guarantees on new product to 75% but even then, the second 50% drop in markets within 10 years was making even that a painful guarantee for them to support.

Part of the reason insurer stock prices in Canada haven't recovered with the rest of the financial services sector is the spector of these large guarantees that might have to be fulfilled.

From an investor point of view, you pay for the guarantee through higher than average MER's - an insurance component. Its no free lunch.

On the insurance company side, this looks like free lunch money - markets through a ten year period should trend higher and therefore the insurer should be able to keep the extra MER cost as a bonus to earnings. They didn't regard the prospect of having to pay on guarantees as particularly likely to any great extent (except for death). Caught with their pants around their ankles on that one. There have only been three 50% declines in markets since WWII - two of them occurred from 2000 onward.

Insurers, however, will probably do well on it in the next decade which means clients probably won't.

Not a scam. Legitimate. But only worth your while if you need that floor for peace of mind.

My two cents.

Cowperson

[MarchHare]

I max my TFSA and also contribute 10% of my gross income to my RRSP. My employer, in lieu of offering a pension plan, also contributes 5% of my salary to my RRSP account, so I'm effectively saving 15% to an RRSP and a capped TFSA.

My wife and I are aggressively paying off our mortgage at the moment; when that is off the books in ~5 years, I'll start capping my RRSP contributions.

[Cowboy89]

I'm noticing a trend on here where some people are aggressively paying down their mortgage in lieu of more RRSP and TFSA contributions. In today's interest rate environment, what's the rationale for that?

I would have figured it to be smarter to use excess cash for RRSP and TFSA contributions because the returns in investments in those accounts should far exceed current mortgage rates. When interest rate normalize, then I can see switching back to an aggresive mortgage paydown strategy.

[Canehdianman]

Other than $25k for the Home Buyer's Plan, I've never contributed to my RRSP.

However, I will start contributing to my RRSP this year, but only once I've maxed my TFSA.

[JD]

Originally Posted by Cowboy89

I would have figured it to be smarter to use excess cash for RRSP and TFSA contributions because the returns in investments in those accounts should far exceed current mortgage rates. When interest rate normalize, then I can see switching back to an aggresive mortgage paydown strategy.

I'd agree, but this will revert to the old CP argument of what should be considered debt. Some people just can't stomach the idea of owing money.

[REDVAN]

I've never contributed, but would like to start.

ON my tax form every year they tell me how much unused RRSP I have- what does that mean?

[The Yen Man]

I have it deduct 10% of of gross income every pay cheque. I've done it since the beginning, so I honestly don't even notice it. My company contributes an additional 40% of what I put in(going to be 50% soon now that I've hit a certain amount of years at my work). I've pulled out a portion of it once a few years back to buy my first house. I figure it saves for the future (even if I use it as a last resort rainy day fund), I get a nice little tax break with it, plus my company gives me additional money. It's a win-win-win situation.

[darklord700]

I'm in the camp of aggreessivly paying down mortgage. I never had a non registered investment account because after maxing out RRSP (and TFSA after 2009) and aggreesivly paying down mortgage, I don't have anything left to buy stocks.

Granted, my mortgage interest rate for the last few years had never been more than 3% and I got a 2% intersest rate for 2 years once. So paying down mortgage instead of investing only makes psychological and not rational sense. This was especially true during the Lehman Brothers debacle when TSX was around 7000 points. I beat myself for not having going in heavy on stocks at that times for I would have make a nice 60%+ return just buying the index.

[Slava]

Originally Posted by REDVAN

I've never contributed, but would like to start.

ON my tax form every year they tell me how much unused RRSP I have- what does that mean?

It means that is the maximum that you can put into an RRSP this year.

Because it comes off your income for tax purposes they limit the amount that you can reduce your taxable income by.

[Slava]

Originally Posted by darklord700

I'm in the camp of aggreessivly paying down mortgage. I never had a non registered investment account because after maxing out RRSP (and TFSA after 2009) and aggreesivly paying down mortgage, I don't have anything left to buy stocks.

Granted, my mortgage interest rate for the last few years had never been more than 3% and I got a 2% intersest rate for 2 years once. So paying down mortgage instead of investing only makes psychological and not rational sense. This was especially true during the Lehman Brothers debacle when TSX was around 7000 points. I beat myself for not having going in heavy on stocks at that times for I would have make a nice 60%+ return just buying the index.

You can buy stocks in your RRSP/TFSA and probably should be (or at least considering that idea).

[bizaro86]

Originally Posted by Cowboy89

I'm noticing a trend on here where some people are aggressively paying down their mortgage in lieu of more RRSP and TFSA contributions. In today's interest rate environment, what's the rationale for that?

I would have figured it to be smarter to use excess cash for RRSP and TFSA contributions because the returns in investments in those accounts should far exceed current mortgage rates. When interest rate normalize, then I can see switching back to an aggresive mortgage paydown strategy.

The assumption that stock market returns will continue to suck, basically. Many people in their 20s/early 30s haven't really seen positive returns over their investment lifetime.

In 2000 the TSX peaked 11,388 and it's now only at 12,770, or ~1% appreciation per year (excludes dividends). We're also below the high for 2006, so a 6-7 year buy and hold investment has been a negative. Many people my age (late 20s) are anti-stocks since they've never worked out for them. I know a lot of people who have TFSA/RRSP accounts stuffed with GICs/high interest savings accounts, which is crazy for someone in their 20s, imo.

Personally, I think the "lost decade" means stocks are a better bet going forward than they were in the past, but I'm definitely still hedging my bets and putting money towards my non-tax deductible mortgage. That means I don't end up maxing either my RRSPs or mortgage pre payment, but it feels like a reasonable mix to me. I'm not at the fotze level where money just rains down...

[MarchHare]

I'm noticing a trend on here where some people are aggressively paying down their mortgage in lieu of more RRSP and TFSA contributions. In today's interest rate environment, what's the rationale for that?

I can't speak for others, but at least for me and my wife, it's for life flexibility purposes. Our mortgage is our single largest household expense, and getting that off the books will allow us to do different things.

For example: my wife is feeling stressed and demotivated at her job, but searching for a new position has not left her feeling very encouraged. All the jobs in her field that interest her require taking a ~20k/yr pay cut compared to her current position. If we were living mortgage-free, she could afford to take one of those more-appealing roles while still having enough income to maintain our current lifestyle.

And it may be different for others, but aggressively paying off our mortgage vs. investing for retirement is not an either/or decision for us. We both have capped TFSAs, I'm personally saving 10% of my gross salary in my RRSP (plus another 5% contributed by my employer), and her RRSP is maxxed. Granted, we are childfree and have chosen to live in a modest Beltline condo, so those decisions have freed up ample funds that probably aren't available to households that have made different life choices.

[Slava]

Originally Posted by bizaro86

The assumption that stock market returns will continue to suck, basically. Many people in their 20s/early 30s haven't really seen positive returns over their investment lifetime.

In 2000 the TSX peaked 11,388 and it's now only at 12,770, or ~1% appreciation per year (excludes dividends). We're also below the high for 2006, so a 6-7 year buy and hold investment has been a negative. Many people my age (late 20s) are anti-stocks since they've never worked out for them. I know a lot of people who have TFSA/RRSP accounts stuffed with GICs/high interest savings accounts, which is crazy for someone in their 20s, imo.

Personally, I think the "lost decade" means stocks are a better bet going forward than they were in the past, but I'm definitely still hedging my bets and putting money towards my non-tax deductible mortgage. That means I don't end up maxing either my RRSPs or mortgage pre payment, but it feels like a reasonable mix to me. I'm not at the fotze level where money just rains down...

Well the whole "lost decade" is nearly meaningless though. It sounds good for the media and I suppose if you invested in index funds then ya, you had that result. Its not the case for most people though.

[squiggs96]

Originally Posted by REDVAN

I've never contributed, but would like to start.

ON my tax form every year they tell me how much unused RRSP I have- what does that mean?

Each year you are allowed to contribute a percentage (currently 18%) of your earnings up to a maximum amount ($22,970 in 2012). Your RRSP contributions reduce your current year earnings by the amount contributed. If you earned $100,000 in 2012, you'd be allowed to contribute $18,000 to your RRSP and your taxable earnings would be reduced to $82,000. This is the amount your tax rate is calculated at.

If you don't use up your contribution in any year, it carries forward. The amount on your notice of assessment will give you this figure. It's the amount you are allowed to contribute to an RRSP without a penalty. You are allowed to over contribute by $2,000. On amounts beyond that, you generally have to pay a tax of 1% per month.

If you have $50,000 in unused contribution room, you make $50,000 in earnings and you contribute $50,000 to your RRSPs all in the same year, you would not owe any income tax in that year.

If you have your RRSP contribution taken directly from your pay cheque, your income taxes will be adjusted immediately. If you have your contributions done outside your payroll, you'll likely get a refund when you file your income tax return. I don't like this, as you've basically given CRA an interest free loan. To get around this, you can fill out a T1213 form from CRA. This will allow your employer to reduce the amount of income taxes taken off your pay cheque as you are contributing to a registered plan. The end result of income taxes is the same, but this way it keeps the money in your pockets faster. My goal is never to have a refund at the end of the year. I know others have a different philosophy, but I feel a refund is poor tax planning.

[bizaro86]

Originally Posted by Slava

Well the whole "lost decade" is nearly meaningless though. It sounds good for the media and I suppose if you invested in index funds then ya, you had that result. Its not the case for most people though.

Most mutual funds and mutual fund investors have not beaten the index over time, by about the cost of trading commissions and fees, but you know that.

This decade was certainly one where a fixed income/equity split with proper rebalancing would have yielded some pretty big gains relative to the index. Although I question how many people had the fortitude to sell bonds and buy stocks in December 2008. I'd actually be extremely curious to know what % of clients who had rebalancing as their plan were actually able to follow through with it in the face of negative headlines and huge equity losses.

My financial assets were 100% cash in the summer of 2008, since I'd never invested in stocks before and sold some real estate that summer. I was pretty happy with the results of putting that money in the market between Oct 08 and May 2009, but I didn't have the psychological burden of huge recent losses, which was an advantage.

I still think a flat decade is probably a good precursor for the next decade, as it means the valuations are much better than they were 10 years ago.

[mykalberta]

Until I pay off my mortgage my RRSP is only max of what my employer will match - 8%.

If I didnt have employer matching I wouldnt be putting any into it at the moment.

[SeeGeeWhy]

Cowboy, another factor might be the ubiquitous availability of HELOC type products. Pay off the mortgage and you can borrow against the equity. Provides a lot of flexibility for most folk. Registered funds are hands off until you are retired.

[Slava]

Originally Posted by bizaro86

Most mutual funds and mutual fund investors have not beaten the index over time, by about the cost of trading commissions and fees, but you know that.

This decade was certainly one where a fixed income/equity split with proper rebalancing would have yielded some pretty big gains relative to the index. Although I question how many people had the fortitude to sell bonds and buy stocks in December 2008. I'd actually be extremely curious to know what % of clients who had rebalancing as their plan were actually able to follow through with it in the face of negative headlines and huge equity losses.

My financial assets were 100% cash in the summer of 2008, since I'd never invested in stocks before and sold some real estate that summer. I was pretty happy with the results of putting that money in the market between Oct 08 and May 2009, but I didn't have the psychological burden of huge recent losses, which was an advantage.

I still think a flat decade is probably a good precursor for the next decade, as it means the valuations are much better than they were 10 years ago.

Its not a question of "beating the index" though, and that's a completely separate argument. Instead what this is about is whether a disciplined investor in general, regardless of their chosen vehicle, lost a decade in terms of returns. I would submit that there were some, of course, but not all.

[bizaro86]

Originally Posted by Slava

Its not a question of "beating the index" though, and that's a completely separate argument. Instead what this is about is whether a disciplined investor in general, regardless of their chosen vehicle, lost a decade in terms of returns. I would submit that there were some, of course, but not all.

How about a decade of sub-par returns? Anybody doing much better than 3-4% beat the market by a lot, which take more than "discipline" in a "regardless of their chosen vehicle" investing strategy.

The last decade was extremely poor for stock investors, which is why many people who have only experienced that decade as investors are shunning the stock market. That was really my only point. High volatility and low returns aren't something people find attractive.

[Husky]

About 10% personally and another 10% from company. Basically max out each year. People say focus on hosue debt but Id rather get 40% back on my RRSP and put that towards my house. Balance out the debt reduction and long term saving.