The other week or whatever (I don’t believe in calendars, they’re the work of SATAN), I wrote a post about how I might be oversaving for retirement. For those of you who didn’t read it (how dare you), the gist of the post was how folks with a healthy RRSP balance at a young age might want to look at filling their TFSAs instead, and then maybe keeping more assets outside of their RRSPs.
It generated a bunch of great comments and some good discussions, with some people questioning the tax benefits of my plan to live off dividends (which aren’t taxed on the first 50k of income). It has to do with OAS clawbacks and other such issues, stuff that the ladies GO WILD over. Fellas, take note.
I tucked the information in the back of my mind because it really doesn’t matter at this point. I’m still focused on amassing assets right now, and putting cash to work in great companies. I’ll worry about that stuff as I approach 65.
And then we had perhaps the most unhelpful comment of all, although it wouldn’t appear to be on the surface. Take it away, Maxwell1985:
A couple other things to consider:
1. What does your defined benefit pension/OAS and CPP add up to? If it is not huge, then the tax-deferral could outweigh the tax upon withdrawal of an RSP. Remember, at age 65 you get the personal tax credit, plus the age tax credit. If you split income between RSP and SRSP and utilize both partners tax brackets on withdrawal, how much tax will actually be paid?
2. 8% returns are not realistic in the coming decade – maybe in small caps and frontier markets, but the volatility would not be for the weak of stomach. When calculating returns of 100% equity portfolio 6% is more realistic.
3. Asset allocation trumps tax efficiency. In order to enjoy the preferential tax treatment if eligible Canadian dividends, you are in the large cap space, a heavily correlated and concentrated space, sensitive to raising interest rates. Look no further than the current TSX 60. People were lulled into thinking “blue-chip” is a safe place to be until, well, it wasn’t.
4. There are a myriad of other considerations: Is your mortgage paid? Do you want maximum income in retirement or is it balanced with an estate plan? Do you have an emergency plan that is liquid?
A good strategy would be:
Use RSP and SRSP in highest income earning years. Use TFSAs in lower income earning years. If you spill into non-registered, keep your tax-efficient equities there.
On investment structuring:
A total return strategy using counter correlated asset classes, systematically re balanced. The mix of dividends, capital gains and return of capital is going to provide similar tax efficiency and help keep you out of trouble. Corporate class or total return index funds could enhance tax efficiency in Non-reg.
Finally, if you are lost or suspect you are missing something, consider an Advisor who understands asset allocation and the income tax act for a reasonable fee (say 1% annually). Make sure they are a CFP or equivalent and don’t sell you garbage.
Don’t worry if your eyes glossed over halfway through that comment. I was bored too. I managed to make it through and then offered a comeback. My response could be summed up in about four words.
Holy shit dude. Relax.
The problem with financial advisors
I assumed there was a 99% chance this guy is some sort of financial advisor, a conclusion I came to before doing a little internet sleuthing. It turns out he works for Investors Group, because of course he does.
Maxwell up there asks a lot of questions I’m not even close to answering, like how much CPP I’m looking at and any defined benefit pensions I or my wife might have. I’m not even sure how much my retirement income will be. This is because I’m 30 years away from the traditional retirement age.
He then touches on a lot of things I’ve covered for years. Do I have an “emergency plan?” Honestly. What kind of amateur does he mistake me for? He also assumes 100% of my portfolio is in large-cap Canadian dividend stocks, which is also wrong.
Basically, he just took a machine gun and fired a whole bunch of crap at the wall in an attempt to look smart.
This is a sin most financial advisors are guilty of, frankly. In their zeal to impress the average client they forget about the benefits of having a clear and uncomplicated financial plan. Maxwell overwhelms you with all this stuff and you’re so confused you just give it all to him to worry about.
An easy plan
When I first started writing about stocks, I tried my best to sound as smart as possible. I’d dive into the tiniest minuate on the balance sheet or income statement to further cement my thesis.
I quickly realized what a giant waste of time that was. People don’t care about the amortization of intangibles. They want an easily digested story, a narrative clearly explaining why a company will succeed going forward. Sometimes the answer is valuation; sometimes it’s a competitive business advantage.
The answer is never found in the footnotes of the financial statements.
Now don’t get me wrong. You should be reading those footnotes. Sometimes they have enough information in them to create serious issues, like that hotel company I just researched that replaced the outgoing CEO with his brother. That’s bearish.
But then the new CEO is spending millions of his own dollars to buy stock and has elected to be paid in shares. That’s bullish.
See? This stuff is hard.
The point is most humans do not want to dive into the details, especially those of us who do financial planning or investing as a means to an end. We want something that we can believe in, that’s easy to understand, and doesn’t need the help of a million professionals to implement.
In other words, there’s a lot of value in “split your assets so you don’t have all your eggs in RRSP baskets” rather than “corporate class or total return index funds could enhance tax efficiency in Non-Reg” and “a portfolio full of the best dividend stocks creates tax-efficient income” versus “(a)sset allocation trumps tax efficiency. In order to enjoy the preferential tax treatment if eligible Canadian dividends, you are in the large cap space, a heavily correlated and concentrated space, sensitive to raising interest rates.”
Save the mumbo jumbo for the 5% of people who really want to dive into the details and give the rest of us simple, easy-to-execute financial plans.
In fact, I’ll go a step further. All most people need to do is worry about putting away as much as possible for retirement. Most people have a saving problem, not an execution problem. Or to use a different metaphor: worry about finding someone willing to sleep with you before you start your high-end escort career.