Your boy Nelly has long been a fan of RRSPs, even preferring them over TFSAs for a lot of people.
Basically, the logic goes like this. As long as you’re making a decent amount of money, you’ll trigger a nice immediate tax refund by investing in your RRSP. That refund can then be reinvested. If you’re in the 25% tax bracket, it’s basically like getting a 25% guaranteed return and then you get years of compounding on that return.
To really illustrate the power of this, allow me to consult my oldest and best friend, the compound interest calculator.
Reinvesting $2,500 of free money turns into an additional $16,000. All you have to do to make that money appear is to reinvest your tax refund, which you only got from contributing to your RRSP in the first place. It’s truly amazing.
If you do this for a decade you can really see how immediately reinvesting that tax refund starts to add up. All it takes is a 10-15 years of investing a decent amount when you’re young to ensure there’s enough for retirement.
But we often forget about what happens once you hit retirement age. That cash has to be taken out, which becomes a problem if you’ve got a mil or two sitting there. Not a big problem, mind you, but a problem nonetheless. Just how can you deplete your RRSPs without paying a boatload of tax?
I’ve been thinking about this lately. I first started contributing to my RRSP as a slightly chubby 15-year-old flush with cash from my first job. That contribution was approximately $500 and God does that make me feel old today.
Surprisingly, the 15-year-old ladies of 1998 were not impressed with my savings ability. It’s okay though; they’re all clearly lesbians.
Remember, there were no TFSAs back then. So I continued to contribute despite not having much of a tax liability. I consistently put money away over the years to the point where I’m now sitting on some pretty solid RRSP assets.
I’ve crunched the numbers and if I compound these assets at 8% for the next 30 years — which is when I’ll hit the traditional retirement age — I’ll have well over $1 million in just RRSPs alone. I should also have another $1 million from my TFSA, which I plan to max out annually for as long as I can.
I’ve also got stocks and other investments outside of these registered accounts.
So what’s a guy to do?
The problem with all this is I’m looking at big tax bills when I hit age 65. I guess I can delay it until age 71, when I’ll be forced to contribute 4% of the portfolio.
Say it’s worth $1 million even. I’ll have to withdraw $40,000 per year that first year and then even more going forward. If I have a portfolio spinning out lots of tax-efficient dividend income (which is the plan). I add the $40,000 per year — which is fully taxable — to say $50,000 in dividend income and I’m looking at a relatively high tax rate.
And that’s assuming I only get $50,000 in annual dividend income. Considering our savings rate today and having 30 years of growth ahead of us we could easily have $150,000 to $200,000 in household dividend income by the time I hit retirement age.
It was valuable to me to defer tax when I was younger. But the more I look at it the more I realize deferring tax is no longer the right answer for me. I will likely only contribute during heavier taxed years going forward, choosing instead to channel savings into my TFSA and taxable accounts.
Yes, you can oversave for retirement
Is oversave one word or two? Screw it, I’m going with one. Even if Google doesn’t agree with me.
Somebody who blindly invests the maximum into their RRSP for their entire 45 year working life is doing it wrong, IMO. They’re going to end up with a massive amount of money set aside that’ll all have to be withdrawn at a high tax rate.
The better strategy is to end up with a moderate amount in your RRSP and go nuts maxing out your TFSA.
But at the same time, this only really applies to the very small percentage of the population that has consistently maxed out their RRSPs as a young person. If you’re 40 and are sitting with $25,000 in your RRSPs ignore this whole post and put in as much money as you can afford. Your problem is saving enough for retirement, not avoiding tax caused by oversaving.
Essentially, I’m getting close to oversaving for my retirement. If I don’t settle down on the RRSPs I’ll have a big tax bill when I get older. I’m the first to admit this is the very epitome of first world problems, but it’s still something I’d like to avoid.
Oh God. What a jerk. Why do you hate the working poor?
It turns out they’re not so poor, Italics Man. About a week ago the National Post ran a story about tipping in Canada, arguing that servers were surprisingly well paid. In fact, a waitress making six figures is surprisingly common.
Read the whole article. It is absolutely bananas. Some takeaways:
- The average server is making about $30/hour including tips. This is about what a registered nurse makes
- Recent minimum wage hikes in both Ontario and Alberta could make this total even higher
- Servers give an average of $2/hour to the kitchen staff, meaning cooks average about $15/hour
- Tax evasion on tip income is rampant
- Only 9% of Canadians ever deviate from their standard tip, automatically debunking the “tip for good service” myth
- It encourages restaurant theft (servers give free food/booze to customers in exchange for larger tips
This is a goddamned outrage, and it’s about time the rest of us working Joes do something about it. Allow me to start.
I’m no longer tipping. Fuck it. I’m done.
These people don’t get a living wage? Bullshit. A server in Alberta is paid $15/hour, which is a fair wage for basically relaying a message to the cook. Oh, you brought me a water? Thanks, but I’m not sure how that’s worth about $5.
There are dozens of different jobs that only make minimum wage yet are getting sweet bugger all for tips. The cashier at the grocery store gets you checked out in an efficient manner and will likely tell you about great deals you’ve missed. Where’s their tip button? It’s the same thing with that poor bastard working at the cell phone place or the guy who drives people around for the car dealership. Either everyone gets tipped or nobody does.
Consumers have the power. Servers know they’re screwed if you decide not to tip. They have to wait until after the meal to get paid. What are they going to do at that point? They’re screwed.
(Fun fact: in Montreal they will yell at you if you only tip 10%. This did not go over well when they tried it on my wife.)
Here it comes. Watch Nelson backpedal guys.
If I lived in a big city, you bet your ass I’d stop tipping tomorrow. But I don’t. I live in a small town where I go to the same five restaurants over and over again.
(Note that if I lived in a city with 1,000 different dining options I’d start my no tipping policy immediately. The next time I eat at a restaurant where they don’t know me it’s exactly what I’m going to do)
So here’s what I’m going to do. First up, I’m going to restrict my eating out. I know, such sacrifice.
I’m also going to be more inclined to choose fast food when I do leave the house in search for food. Sure, a burger and fries at my local diner for $15 (plus tip, naturally) is a lot better than a $9 Big Mac value meal, but it’s not twice as good. Besides, the Big Mac combo ends up being less calories simply because there’s way less food there.
Next, if I hear any stories about a local restaurant tip shaming anyone in any way, I will immediately stop going to that establishment. Especially if a manager is involved in any form.
Finally, I will tip a flat 15% when I go out to a local restaurant. Note that the only reason I’m doing this is for insurance. Because let’s face it, that’s what tipping really is. It’s simply an exchange of money for feeling confident about the food that’s coming out to the table.
Who’s with me? Let your voices be heard in the comments! It won’t do anything but it’ll feel good, dammit.
Let me start off with a story a local farmer told me. I think you kids will like this one.
Jan has always been an enterprising farmer, anxious to do whatever he could to improve the yield on his land. Each winter he would read up on some of the latest farming trends, eventually investing his time and capital into the more promising ideas. He even went as far as planting an obscure crop one year after a big crop failure in Asia sent prices much higher.
(Don’t ask me what crop it was. I just racked my brain for five minutes and can’t remember)
One year, in the late 1990s, he stumbled upon his best idea yet. The premium paid for organic products was massive when compared to the regular stuff. We’re talking anywhere from 25-75% more for the same ol’ wheat. He investigated the steps it would take to become a certified organic grower. They weren’t easy. He was forced to leave land fallow for two growing seasons and do various things to remove any lingering pesticides. He could no longer use conventional fertilizer. Special machinery was needed. And so on.
The list was long, but he did it. It was all worth it during year three when his bumper crop was worth more than ever. Jan also figures his land is worth 20-30% more than conventional land, since he’s regularly getting that much more for his crops.
One day, while standing on his fancy organic field, Jan realized something. His neighbor was spraying pesticides on his crop. It wasn’t a particularly windy day, yet it sure did look like some of the liquid was ending up on his land. After waiting a while for the neighbor to finish up, he went over and inspected the edge of his property more closely.
Sure enough, it was damp. Some of the pesticide had made its way onto Jan’s organic field. He quickly realized this was likely happening every year. After all, the only thing separating the two was about 15 feet worth of road.
Jan did the right thing and reported the findings to the organic council or whoever it is that certifies land as organic. They promptly took his classification away and refused to give it back.
Just kidding. He did no such thing. He shut his mouth and went back to farming. He swears yields from that part of his land are consistently higher than the rest.
How this relates to your personal finances
I realize this is only loosely related, but screw it. What am I supposed to do, not tell that organic farming story?
Let’s talk a little today about biases, and how they might be making you poorer. But first, another story!
I like to refer to one of my buddies as a walking bias factory. He constantly comes up with poor ways to justify things. The things he cares about are uber important, and he has strongly-held opinions about them without much independent thought behind them. When faced with evidence that one of his pet opinions might be wrong, he flatly ignores it. You can see the pain in his face if you push just a little bit.
Naturally, this delights me, and I take the opportunity to troll him whenever possible. Just a bit, though. I’m not an animal.
I suspect many of you are doing the same thing when it comes to your finances. How many times have you heard the following?
- Never pick individual stocks. Only ETFs will make you rich
- Buy the most expensive item. It ultimately ends up being the frugal choice
- All mutual funds are trash
- Only a maroon goes without life/disability/travel insurance
- Retire at 65? Why? 40 is the ideal retirement age.
And so on. There are a million of these things.
We blindly accept a lot of these as facts because they’re easy to believe in. Just look at the S&P 500 performance over the last decade. And all of the people who are screwed because they didn’t get disability insurance. Retiring at the conventional age may have worked for Baby Boomers, but there’s no way in hell we can expect a millennial to wait that long.
But how many of these are really true? If all mutual funds were trash, would this fund exist:
(I cut off the bottom axis. That growth was since inception in 2009. Annual returns have been 17.2% annually.)
That’s the Pender Small-Cap Opportunities Fund, which invests in small-cap Canadian companies. It has absolutely demolished the TSX Composite since inception. You can’t invest in it, though. They recently closed it to new investors despite only having less than $200 million in total assets.
I can bust a lot of the other myths I put up earlier, but I won’t bother. Just check my archives; they’re full of posts saying why the average rule of thumb is bullshit — at least some of the time.
Get to the point, Nelly
I am. Geez, guys. Whoever writes the subheadings here is kind of a jerk.
We blindly believe the organic bread at the store is made with 100% organic wheat. My friend the farmer would urge y’all to not be so naive.
We blindly believe all mutual funds are trash, ignoring the funds that absolutely kill it over a long-term basis. These funds don’t confirm our already-held beliefs, so we ignore them.
The overall point is this. You likely haven’t done the research on many of the things that strongly influence your life. You just heard something was true and you chose to believe it because that fact sounded reasonable at the time.
I constantly seek out opinions that differ from mine. You should see some of the people I follow on Twitter. I get mad every time they pollute my feed with opinions that are clearly 14 different kinds of wrong. I mean hell, I follow people who invest in gold and crypto currency. I follow feminists who somehow believe 2018 isn’t a terrific time to be a woman. I follow early retirees and debt bloggers and so many more people I really don’t see eye-to-eye with. I’d say a full 25% of my feed is this way.
Why do I put myself through this? Because without these differing opinions constantly challenging me, I’m no better than my walking bias factory buddy, just repeating the same maxims I heard some smart guy say five years ago and talking my own book.
Think critically and don’t believe everything you read. Loosely hold new opinions and constantly challenge existing ones. Change your mind on things that are important. These are the things that will take you to the next level.
It’s taken me a little while to realize this, but hey. Apparently getting things in a reasonable amount of time is not my strong suit. Hell, it took me 18 years to figure out long division.
The key to happiness is to design the life you want to live from scratch. Some people like the routine of going to work each day, but most of us don’t. We want to be able to randomly take a Thursday and go to an interesting event two cities over without having to worry about the consequences at the office on Friday.
I’ve recently taken steps to do this myself. Gone are the days where I’m going into my grocery store job five days a week. I’m down to 1-2 days a week and couldn’t be happier. I get the interaction with the guys without falling into the trap of workplace politics. I feel more like a casual observer than someone who actually cares about what’s going on.
I should have done this a year and a half ago rather than quitting my writing job.
Speaking of my writing job, I’m back at it, baby. You can read my stuff here if you’re so inclined. I’m also available to write on your blog. Because, hey, who doesn’t need a bunch of dick jokes and incomplete sentences masquerading as actual serious points about finance.
Just think about it is what I’m saying.
Anyway, let’s get to the point of this article — you don’t need to wait for financial independence to make the life of your dreams.
Unhappy? Then change things, stupid!
Back when I had a more conventional job, I used to fall into the same trap whenever things weren’t going well. I’d vow to quit my lousy job and travel around North America, seeing a ball game at all 30 MLB parks. Only then would I be happy.
This was not healthy, of course. It was nothing more than escapism. I didn’t really want to travel long-term. I just wanted to be away from my crummy situation.
After doing this a few times I began to realize something. If I’m fantasizing about being away from a particular thing on a regular basis, then it’s probably a good idea to quit that activity. It doesn’t matter if that thing is a job, or a hobby, or some other form of commitment.
Of course, things aren’t always that simple. You can’t quit things willy-nilly. Most people can’t live without a job, and many have become accustomed to having a certain lifestyle. In other words, taking a pay cut is out of the question. Which means they’re stuck between the proverbial rock and a hard place. The only way they can quit their lousy job is to replace it with one that offers a similar level of pay. That wage comes with similar responsibilities and duties, which negates the whole point of quitting the lousy job in the first place.
So they turn to financial independence. That’ll solve all their problems.
Remember, you don’t need financial independence to be happy
Let me tell you guys about a buddy of mine who lives a pretty interesting life.
He discovered he doesn’t need much to make him happy. He lives in a small house in an extra quiet part of a small town. His leisure time is spent watching movies, reading books, and going online. He doesn’t own much stuff because there simply isn’t room in his small house for it. Besides, things don’t really make him happy anyway. Much of his disposable income is spent going on random road trips.
These decisions were a result of a long thought process about his life and what made him happy. About 15 years ago he was on the fast track to an upper management post at a certain Canadian retailer I used to own shares in. Once he hit middle management it didn’t take him long to conclude being in charge of people made him miserable.
He realized he would be much happier if he wasn’t in management, trying to motivate retail employees who want nothing more than to slack off all day. So he made a choice. He vowed to live a life so simple that it could be sustained on a entry-level salary. He then quit his stressful middle management job in favor of one that barely makes more than minimum wage. It’s been 15 years now and he doesn’t regret his choice for a second.
Don’t Wait. Act
The point is you don’t necessarily need financial independence to live the life of your dreams. You need to define what your ideal life is first before striving to become so rich you no longer need to work.
Say you want to become a full-time writer, or blogger, or whatever. Do you really need to hit a $1 million net worth to do that? Hardly. The world is filled with entrepreneurs who quit their jobs to start something new. Hell, some people might argue having no safety net will make someone more likely to succeed. Failure just isn’t an option.
For many people, financial independence ultimately becomes something they need before embarking on the life of their dreams. I’d argue waiting to design your best life is silly. Do it today, and do it with gusto. Don’t wait for your net worth to hit that magic number, just go for it.
But at the same time, I get it. The kind of person who waits until they hit a seven-figure net worth to make significant life changes is obviously a little risk adverse. Quitting their job and moving to a tiny house in the middle of nowhere is out of the question. So they wait until they hit their number and then make the change.
This is perfectly okay, of course. Just remember, you don’t need to wait that long. If it’s your dream to write or open a small store, take steps to do that today. Not tomorrow, not 10 years from now when you’re moderately wealthy. Do it today. Start designing your ideal life now.
If you want to bring together people who absolutely hate each other (like me and the readers of this here webblog), just bring up the TOTAL RIPOFF which is the power company. You’ll have everyone nodding in agreement in no time.
The power company, obviously, is the worst entity on the planet. If they just charged you for power, it wouldn’t be so bad. We all understand coal needs to be burned. I just so happens such a thing makes power. I’m still pretty sure we’d burn coal anyway, since all the carbon is good for trees.
The big issue is with all those GODDAMN HIDDEN FEES. Distribution charges? WTF are those? Transmission charges? Isn’t that just another name for distribution charges? Local access fees? Uh, no. I already pay my taxes, thank you very much. The Screw You Tax? I KNOW THAT DOESN’T EXIST BUT I’M STILL MAD ABOUT IT.
Whenever I encounter somebody bitching about their power/gas/whatever bill, I always have the same response. “If the power company is ripping you off so much, then it must be a great business. You should buy shares in it.” This is such a great response because it shuts them the hell up a full 98% of the time. You’ve outfoxed them and even if they don’t believe you like hell they’re going to enter into a boring conversation about the power company’s stock.
Don’t just dismiss my pithy comeback because there’s a really important truth there. The most hated companies make the best investments. You should position your portfolio accordingly.
Let’s brainstorm here. What are the biggest ripoffs you just can’t live without?
- Cell phone
- Banking fees (including interest)
- Movie theater popcorn
There’s probably more, but you get the idea.
How does a movie theater get away with charging $18 for a popcorn/soda/candy combo? How do those rat bastard telecoms get away with charging Canadians way more than anyone else for cell phone data? It’s because they know they’ve got you. If you want to swipe right on the Tinder, you need that data. And if you go to a movie, only a communist goes without that delicious popcorn.
This is what smart people call a captive customer. These companies know they have you over a barrel and will make you pay for it.
You can get mad about this or use it to power your investment thinking. Even though there are plenty of companies willing to sell you power, there are only a few that own the underlying infrastructure. As you can see, it’s been a pretty good investment.
How about the company that provides me with mobile data? Yep, that’s done well too.
How about Canada’s largest banks? Oh baby, they’ve done well.
Note that all of these returns are before dividends. Most of these stocks yield 4%+ annually, meaning a 400% return over 20 years turns into a 500-600% return.
This doesn’t work every time, unfortunately. I talked about Altagas a couple of years ago, saying you could invest about $18,000 in it to generate enough dividends to cover your gas bill. This investment is down about 50% since I talked about it, and it looks like the dividend is ripe to get cut.
Diversify, yo. That’s always the lesson. Not every ripoff company will be a good investment, but together they make a pretty good investment portfolio.
It’s all about competition
Unfortunately, successful investing isn’t just about the companies you hate.
Let’s look at another example, grocery stores. Those rat bastards are constantly raising the prices on all sorts of stuff. Remember when 90 pounds of flour cost a nickel? I do because that was only a week ago. This is how quickly flour prices go up.
I’d argue it’s not a good idea to put any of your investing dollars into a grocery store stock, even if you hate the damn place. Why? There’s just too much competition in the space. It’s hard to stand out when there are about a dozen competitors who use both physical locations and online shopping.
Here’s my rule of thumb: if someone can make a company’s life miserable using just money, it’s probably a poor investment.
Any chump can open a store. Getting into the oil business is as easy as finding the stuff. Manufacturing simple items is a pretty easy business to enter. No bread producer cares where their grain comes from. And so on.
Compare that to businesses with a far better barrier of entry. You need government approval to build a power plant. Most cities only have one airport. Getting shelf space at the grocery store is a difficult endeavor. And good luck making a dent in Canada’s banking monopoly.
See the difference in the two types of businesses? One kind can be disrupted fairly easily with money. The other has a built-in competitive advantage.
The reason why Canada’s most hated companies can charge such high prices is because they all have this advantage. It’s what you’re looking for as an investor. It took me years to figure out just how powerful this is. Don’t screw up like I did.