How much do you put into RRSP's?

[I_H8_Crawford]

I was stupid with my money when I was younger so didn't max out RRSPs.

Now that I am making a lot more money I am using that to my advantage and only contributing enough to lower my tax brackets.

I have maxed out TFSA and will continue to do so as a priority as I think this is the best investment vehicle going forward - tax free >>>>>>>>>> tax deferral IMO.

[Slava]

Originally Posted by bizaro86

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.

It really depends on what you invested in though; it has nothing to do with whether you invested in a mutual fund either. Look at companies like Berkshire Hathaway which are worth roughly 3x what they were in the year 2000, or Coke or Exxon or Johnson and Johnson or countless others that have give both dividends (if you're into them), as well as capital growth. In Canada you could've picked basically any bank, either railroad and at this point you have even tripled your money with businesses like Manulife which was beaten down hard in the financial crisis.

For most people tripling their money in a little more than a decade is really good. Sure, there are other less than favorable examples out there, but its not like I'm finding you some unknown business here either; those are all large, well known companies that have grown fairly steadily through the last 12-13 years.

[SeeGeeWhy]

People in this thread understand that tax brackets are marginal, right?

"Lowering your bracket" by maxing out your RRSP only avoids the higher tax rate on the amount over the bracket threshold - that higher rate doesn't apply to your entire earnings.

I'm getting the impression people think a higher bracket gets applied to 100% of your earnings, but that is not true.

[Deegee]

Originally Posted by SeeGeeWhy

People in this thread understand that tax brackets are marginal, right?

"Lowering your bracket" by maxing out your RRSP only avoids the higher tax rate on the amount over the bracket threshold - that higher rate doesn't apply to your entire earnings.

I'm getting the impression people think a higher bracket gets applied to 100% of your earnings, but that is not true.

People don't understand this at all, for reducing income or for increasing it. I see people fairly regular and hear all the time the comment "I try not to work too much overtime so I don't get put into the next tax bracket".

[Cowperson]

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.

The TSX was 6,552 in Feb, 2003 and its 12,765 right now . . . . . if you include dividends, the Canadian market has doubled in the last 10 years.

If you measure from March/April, 2000, of course, that's a different thing. Returns are more tepid in that time frame but most people have moved forward for sure in the last 13 years in spite of two very unusual 50% market declines in that period.

The TSX was 3,551 in February, 1993 . . . . . . with dividends, that's basically a quadruple in the last 20 years, in spite of lengthy bear markets in there periodically.

An article in the Globe & Mail a few weeks ago was titled "The End Of Fear," saying the psychological damage of the events of 2008 is finally starting to abate, noting increased traffic into equities, four years after the bear market ended.

Since March 2009, this has been one of the longest and highest gain bull markets in history . . . . and one of the least respected or recognized. Templeton last week sent around survey results showing the majority of investors think markets have declined in the last bunch of years, although that impression is lessening in the last few years.

Markets start to rise in the middle of recessions, not the end and they start their decline in the middle of the good times, not the end. They're anticipating the future, not confirming the past or the present.

Pschologically, of course, people find it hard to get aggressive when the news is at its worst.

On my desk in Calgary, I have a Globe & Mail I bought on Oct. 20, 1987. The market had fallen about 22% in a single day on Oct. 19. The newspaper headline is "Panic Sweeps Financial Markets, Smashing Records Of 1929 Crash" with a secondary headline of "Ticker Tape Tells Tale Of Enormous Losses To Stunned Investors."

Of course, those were the headlines on the cheapest day to buy equities in the last 25.5 years.

I have a Newsweek from October 1982 as well . . . . the headline is "Will The Dow Cross 1,000?" It had spent about 16 years trying and failing to do so.

Psychology is everything. What's the reality?

Fear and greed.

Cowperson

[bizaro86]

Originally Posted by Slava

It really depends on what you invested in though; it has nothing to do with whether you invested in a mutual fund either. Look at companies like Berkshire Hathaway which are worth roughly 3x what they were in the year 2000, or Coke or Exxon or Johnson and Johnson or countless others that have give both dividends (if you're into them), as well as capital growth. In Canada you could've picked basically any bank, either railroad and at this point you have even tripled your money with businesses like Manulife which was beaten down hard in the financial crisis.

For most people tripling their money in a little more than a decade is really good. Sure, there are other less than favorable examples out there, but its not like I'm finding you some unknown business here either; those are all large, well known companies that have grown fairly steadily through the last 12-13 years.

Yes, you can provide anecdotal evidence of companies that have tripled in the last 13 years, large stable companies to be sure. On average, large stable companies are represented by the indexes, which are up very little in percentage terms in that time period. Most people do about as well or poorly as the indexes, pretty much by definition, since they're composed of the entire stock market.

Of course, if we prefer anecdotal evidence of large stable companies, I could offer:

Pfizer: Peaked in 2000 at $48, current price of $27.62
General Electric: Peaked in 2000 at $56, current price of 23.74
Sun Life Financial: Peaked in 2000 at $40, current price of 28.91

I would very much doubt that there's any subset of investors who have tripled their money in the last ten years, and saying it like that sounds much more impressive than a compound annual return of 11.7%.

[mrkajz44]

Originally Posted by SeeGeeWhy

People in this thread understand that tax brackets are marginal, right?

"Lowering your bracket" by maxing out your RRSP only avoids the higher tax rate on the amount over the bracket threshold - that higher rate doesn't apply to your entire earnings.

I'm getting the impression people think a higher bracket gets applied to 100% of your earnings, but that is not true.

Originally Posted by Deegee

People don't understand this at all, for reducing income or for increasing it. I see people fairly regular and hear all the time the comment "I try not to work too much overtime so I don't get put into the next tax bracket".

The sad truth is people don't really understand income tax at all, including the positives and negatives of RRSPs or TFSAs.

Too often I hear (and have seen in this thread already) that TFSAs are way better because there is no tax on them while RRSPs will be eventually taxed. While this is true, you can have way more money from the RRSP in the start becuase you avoid the tax.

RRSP - $10,000 pre-tax - $10,000 goes into RRSP and earns returns
TFSA - $10,000 pre-tax - $3,500 taxed (estimate) so $6,500 goes into TFSA and earns returns

So while the TFSA is no longer taxed, you start with $3,500 more in the RRSP. The point here is you have to decide which is better, never paying tax again on the investment income, or starting with an extra $3,500, or 50% more inital investment. Over 20-30 years, it may or may not.

Moral of the story is, I encourage everyone to fully understand the difference between RRSPs and TFSAs, as well as how progressive tax brackets work in general. A little education would go a long way to saving a ton more money.

[bizaro86]

Originally Posted by Cowperson

The TSX was 6,552 in Feb, 2003 and its 12,765 right now . . . . . if you include dividends, the Canadian market has doubled in the last 10 years.

If you measure from March/April, 2000, of course, that's a different thing. Returns are more tepid in that time frame but most people have moved forward for sure in the last 13 years in spite of two very unusual 50% market declines in that period.

The TSX was 3,551 in February, 1993 . . . . . . with dividends, that's basically a quadruple in the last 20 years, in spite of lengthy bear markets in there periodically.

An article in the Globe & Mail a few weeks ago was titled "The End Of Fear," saying the psychological damage of the events of 2008 is finally starting to abate, noting increased traffic into equities, four years after the bear market ended.

Since March 2009, this has been one of the longest and highest gain bull markets in history . . . . and one of the least respected or recognized. Templeton last week sent around survey results showing the majority of investors think markets have declined in the last bunch of years, although that impression is lessening in the last few years.

Markets start to rise in the middle of recessions, not the end and they start their decline in the middle of the good times, not the end. They're anticipating the future, not confirming the past or the present.

Pschologically, of course, people find it hard to get aggressive when the news is at its worst.

On my desk in Calgary, I have a Globe & Mail I bought on Oct. 20, 1987. The market had fallen about 22% in a single day on Oct. 19. The newspaper headline is "Panic Sweeps Financial Markets, Smashing Records Of 1929 Crash" with a secondary headline of "Ticker Tape Tells Tale Of Enormous Losses To Stunned Investors."

Of course, those were the headlines on the cheapest day to buy equities in the last 25.5 years.

I have a Newsweek from October 1982 as well . . . . the headline is "Will The Dow Cross 1,000?" It had spent about 16 years trying and failing to do so.

Psychology is everything. What's the reality?

Fear and greed.

Cowperson

Certainly. I sort of derailed the thread answering the question, "why are people paying down their mortgage instead of buying equities when interest rates are low?"

The answer to that question is basically fear. Those two large crashes you mentioned were both very recent, and recency bias is very real. They also seem like a huge percentage of stock market history to someone who has been paying attention to the markets for ~15 years, and mortgage paydown vs RRSP applies especially to those in their late 20s/30s, imo.

People are picking the security of a guaranteed after tax return from mortgage prepayment over the risk but likely higher return from the stock market. It's not necessarily the right choice, but it's what people are doing.

Personally, I think a couple of big crashes make another one less likely, as their recent memory makes people less likely to drive the market ahead of itself. (aka greed)

[Slava]

Originally Posted by bizaro86

Yes, you can provide anecdotal evidence of companies that have tripled in the last 13 years, large stable companies to be sure. On average, large stable companies are represented by the indexes, which are up very little in percentage terms in that time period. Most people do about as well or poorly as the indexes, pretty much by definition, since they're composed of the entire stock market.

Of course, if we prefer anecdotal evidence of large stable companies, I could offer:

Pfizer: Peaked in 2000 at $48, current price of $27.62
General Electric: Peaked in 2000 at $56, current price of 23.74
Sun Life Financial: Peaked in 2000 at $40, current price of 28.91

I would very much doubt that there's any subset of investors who have tripled their money in the last ten years, and saying it like that sounds much more impressive than a compound annual return of 11.7%.

Right and I said in my post you could find less attractive examples. I wasn't making the case that everything went up (it never does).

Let me try to explain this a different way though; its only a lost decade because the indexes are cap weighted. If an investor had bought an equal proportion of every stock in the index they saw an increase of 66% through that so-called lost decade.

Your point is that no one made money, and it was a terrible time to be invested. My point is that this didn't have to be the case at all. Firstly, people could've invested differently and made money. There is ample evidence of investors making money, regardless of what they chose to invest in. They could've been less greedy and less fearful at times and made money as well (and Cowperson provides evidence above of the fact that a lot of this comes down to fear and greed in the first place).

[bizaro86]

Originally Posted by Slava

Let me try to explain this a different way though; its only a lost decade because the indexes are cap weighted. If an investor had bought an equal proportion of every stock in the index they saw an increase of 66% through that so-called lost decade.

On average, people's portfolio's are cap weighted, because by definition they have to be.

Originally Posted by Slava

Your point is that no one made money, and it was a terrible time to be invested. My point is that this didn't have to be the case at all. Firstly, people could've invested differently and made money. There is ample evidence of investors making money, regardless of what they chose to invest in. They could've been less greedy and less fearful at times and made money as well (and Cowperson provides evidence above of the fact that a lot of this comes down to fear and greed in the first place).

Umm, nope, to the bolded part. Obviously I haven't expressed myself very well. My point was that ON AVERAGE stock market investors made very little money so far this century. To those for whom that comprises their entire investing life, that causes a perception that stocks are an unattractive investment choice. That perception is likely incorrect, but explains why many are prepaying mortgages versus buying equities.

[Slava]

Originally Posted by bizaro86

On average, people's portfolio's are cap weighted, because by definition they have to be.



Umm, nope, to the bolded part. Obviously I haven't expressed myself very well. My point was that ON AVERAGE stock market investors made very little money so far this century. To those for whom that comprises their entire investing life, that causes a perception that stocks are an unattractive investment choice. That perception is likely incorrect, but explains why many are prepaying mortgages versus buying equities.

People don't have to have cap-weighted portfolios at all. Why would they have to?

Maybe your point about the averages is where the disconnect lies. I think that the financial industry in general does a terrible disservice to people using averages for a lot of things. Retirement planning being one of the worst offenders actually, which almost brings this discussion full circle!

[DownhillGoat]

Originally Posted by Deegee

People don't understand this at all, for reducing income or for increasing it. I see people fairly regular and hear all the time the comment "I try not to work too much overtime so I don't get put into the next tax bracket".

Reminds me of a former co-worker who turned down a promotion because it was 'going to put him in a higher tax bracket'.

[darklord700]

Originally Posted by mrkajz44

RRSP - $10,000 pre-tax - $10,000 goes into RRSP and earns returns
TFSA - $10,000 pre-tax - $3,500 taxed (estimate) so $6,500 goes into TFSA and earns returns

So while the TFSA is no longer taxed, you start with $3,500 more in the RRSP.

The $3500 more in RRSP is not your money, it's the Crown's. If we ignore the marginal tax bracket effect or income inclusion effect or RRSP and TFSA, the math for both RRSP and TFSA works exactly the same. That's because the effect of both RRSP and TFSA is that your investment income is taxed only once, instead of twice as in a non registered account.

[darklord700]

Originally Posted by mrkajz44

RRSP - $10,000 pre-tax - $10,000 goes into RRSP and earns returns
TFSA - $10,000 pre-tax - $3,500 taxed (estimate) so $6,500 goes into TFSA and earns returns

So while the TFSA is no longer taxed, you start with $3,500 more in the RRSP.

The $3500 more in RRSP is not your money, it's the Crown's. If we ignore the marginal tax bracket effect or income inclusion effect of RRSP and TFSA, the math for both RRSP and TFSA works exactly the same. That's because the effect of both RRSP and TFSA is that your investment income is taxed only once, instead of twice as in a non registered account.

[squiggs96]

Originally Posted by mrkajz44

The sad truth is people don't really understand income tax at all, including the positives and negatives of RRSPs or TFSAs.

Too often I hear (and have seen in this thread already) that TFSAs are way better because there is no tax on them while RRSPs will be eventually taxed. While this is true, you can have way more money from the RRSP in the start becuase you avoid the tax.

RRSP - $10,000 pre-tax - $10,000 goes into RRSP and earns returns
TFSA - $10,000 pre-tax - $3,500 taxed (estimate) so $6,500 goes into TFSA and earns returns

So while the TFSA is no longer taxed, you start with $3,500 more in the RRSP. The point here is you have to decide which is better, never paying tax again on the investment income, or starting with an extra $3,500, or 50% more inital investment. Over 20-30 years, it may or may not.

Moral of the story is, I encourage everyone to fully understand the difference between RRSPs and TFSAs, as well as how progressive tax brackets work in general. A little education would go a long way to saving a ton more money.

Agreed on most parts. Also, with the RRSP route, assuming you make an average of $28,000 per year, you can contribute much more into it than the TFSA, which was $5,000 per year and is now $5,500 per year.

The biggest draw to the TFSA for me would be investing in penny type stocks and hoping you hit big on a few of them. Any money that you take out of your TFSA can be put back into your TFSA. This is appealing if you invest $5,000 and turn it into $100,000 and then pull it out to put into a house. When you have that money again, you can put the full $100,000 back into the TFSA and earn more money at a tax free rate.

If you are going to be earning the 2-4% per year, it makes more sense to me to put money into the RRSPs. I see several examples of if you earn 8% it will equal X dollars. There aren't that many people earning 8% per year.

I don't have any money in TFSAs, but I have been putting about 30% of my salary into RRSPs during the last 3 years. I had some unused contribution room and am trying to use it. I'll likely start looking at my TFSA soon, but I'd rather buy investment properties than put my money there. It's just a personal choice on where I'm more familiar with and where I think I can make bigger returns.

[Cowboy89]

Originally Posted by bizaro86

On average, people's portfolio's are cap weighted, because by definition they have to be.



Umm, nope, to the bolded part. Obviously I haven't expressed myself very well. My point was that ON AVERAGE stock market investors made very little money so far this century. To those for whom that comprises their entire investing life, that causes a perception that stocks are an unattractive investment choice. That perception is likely incorrect, but explains why many are prepaying mortgages versus buying equities.

Why does the average investor have to be invested in 100% equities? A reasonable investor would have allocations in other assets too. A more balanced portfolio didn't get raped as bad as the indexes in the early 2000s and in 2008. I don't have the stats on hand, but I would venture a guess that most 60% equities 40% bonds strategies beat 3% per annum over the past 'lost' decade.

Another thing to consider is asset diversification. The more aggressive one pays down their mortgage while eschewing financial assets the higher the exposure to the price of one asset in one real estate market. There are risk concerns of an asset base to consider too.

[bizaro86]

Originally Posted by Slava

People don't have to have cap-weighted portfolios at all. Why would they have to?

Maybe your point about the averages is where the disconnect lies. I think that the financial industry in general does a terrible disservice to people using averages for a lot of things. Retirement planning being one of the worst offenders actually, which almost brings this discussion full circle!

Absolutely, any individual portfolio is unlikely to be cap weighted. One person could be 100% in small caps, while someone else might have 100% Berkshire Hathaway. But on average, portfolios as a whole have to be cap weighted. As an example, the Telus market cap is about 22 billion, 22 billion of Telus is in various portfolios. On the venture exchange, PCS is in a similar business but has a market cap of 5.5 million, so 5.5 million of PCS is in various portfolios. So the "average" portfolio is cap weighted.

Some individual portfolios will outperform the average, but then others will underperform the average by an equal dollar amount. If one subset of investors beats the market by 1 billion dollars then some other subset must lag the index by 1 billion dollars.

Thus, since the market is pretty flat over the last 13 years, on average, equity portfolios are pretty flat over that time frame.

Obviously this excludes things like rebalancing and dividends, but all I was trying to explain was perceptions and comparing equities to mortgage paydown.

[bizaro86]

Originally Posted by Cowboy89

Why does the average investor have to be invested in 100% equities? A reasonable investor would have allocations in other assets too. A more balanced portfolio didn't get raped as bad as the indexes in the early 2000s and in 2008. I don't have the stats on hand, but I would venture a guess that most 60% equities 40% bonds strategies beat 3% per annum over the past 'lost' decade.

Another thing to consider is asset diversification. The more aggressive one pays down their mortgage while eschewing financial assets the higher the exposure to the price of one asset in one real estate market. There are risk concerns of an asset base to consider too.

Definitely a balanced portfolio with regular rebalancing would have hugely outperformed this past decade.

I don't agree with the second paragraph though. The average person buying a house has two pieces.

1) A real estate investment their living in, worth say 400k
2) A mortgage they used to pay for it, where they borrowed say 350k

A mortgage is basically shorting a bond, since you're borrowing money instead of lending it. So those who are prepaying their mortgages are increasing their relative fixed income weighting while leaving their real estate weighting the same.

After all, a 400k house that changes in value by 10% causes a gain or loss of 40k, and that isn't affected by how much the mortgage is.

[Cowboy89]

Originally Posted by darklord700

The $3500 more in RRSP is not your money, it's the Crown's. If we ignore the marginal tax bracket effect or income inclusion effect of RRSP and TFSA, the math for both RRSP and TFSA works exactly the same. That's because the effect of both RRSP and TFSA is that your investment income is taxed only once, instead of twice as in a non registered account.

Very true if tax rates remain exactly the same now and in the future when RRSP funds are withdrawn. If taxes go up in the meantime, then the use of a TFSA account would be superior vs. a RRSP account, the opposite is true favoring the use of a RRSP account if taxes go down. That is of course it's an 'either/or' arguement rather than the case where you have more than your contribution caps to invest.

[bizaro86]

Originally Posted by Cowboy89

Very true if tax rates remain exactly the same now and in the future when RRSP funds are withdrawn. If taxes go up in the meantime, then the use of a TFSA account would be superior vs. a RRSP account, the opposite is true favoring the use of a RRSP account if taxes go down. That is of course it's an 'either/or' arguement rather than the case where you have more than your contribution caps to invest.

There's also the piece where you have to reinvest your tax refund to make them comparable. I think a lot of tax refund money from RRSPs gets spent on new TVs and vacations.