Apparently it’s RRSP week here on Financial Uproar (the blog you’d LOVE TO TOUCH. BUT YOU MUSTN’T). Check out my latest RRSP investments and how most retirees who aren’t saving 40% of their incomes won’t be screwed come their golden years. And then kindly eat a big bag of dicks.
Let’s talk a little bit today on how not to use your RRSP. Here are five RRSP mistakes the average person makes and how to correct them.
Contributing, but not investing
This is a big RRSP mistake that I’ve made in the past. I make my contribution and then the money sits there while I wait for some obscure value stock to get even cheaper.
There are a number of ways you can remedy this problem. The easiest way is to figure out an asset allocation and stick to it. Thus, when it comes time to contribute to your retirement savings, it’s only a matter of buying a couple of ETFs and calling it a day. Easy. Go golfing champ, you deserve it.
If you’re an active investor like me, there are a few other options. You could put the money to work in an ETF and then sell portions of the investment as you find better opportunities. This works especially well if you hide out in bonds, which don’t usually see big fluctuations in market value. Of course, doing this costs brokerage commissions, which can really eat into short-term returns. Especially when you’re dealing with small amounts of money.
There’s an argument to be made that GICs are reasonable fixed income products that can offer comparable yields to bonds without the risk of capital loss (although with bonds those risks are somewhat small). Additionally, it does make sense to hold any investment which is fully taxable in your RRSP to shield yourself from the taxes.
But I’m not talking about all that. I’m talking about the person who’s too scared of stocks to actually hit the buy button. Instead they hide out in GICs, content to earn 2% in exchange for not losing any of their precious capital. It’s going to be really hard to retire someday only earning 2%. Italics man, can I still call people pussies, or is that not politically correct?
Oh right. He’s dead.
Be mindful of tax brackets
The rule of thumb is simple. If you’re in the lowest tax bracket, you probably shouldn’t contribute to your RRSP. Put your cash in a TFSA instead.
When I was a young lad, when I wasn’t too busy masturbating, I contributed thousands of dollars into RRSPs. I did so while earning less than $10,000 a year working at my part-time job at Dairy Queen. In hindsight, I probably should have keep that contribution room for a few more years until I was in a higher tax bracket. Remember, you keep the room until you use it. There’s no real hurry.
Waiting until 65 to withdraw
If contributing to your RRSP should be a strategic exercise to minimize total taxes paid, then so should withdrawing. Remember, there’s no rule that says you have to wait until you’re 65 to start taking out the cash.
Thousands of Canadians are currently setting themselves up for a fantastic retirement. They max out their RRSPs every year and have accumulated hundreds of thousands of dollars there. That money will grow over time, perhaps even surpassing $1 million. That’s the holy grail for these people.
And then they hit 65 and start taking it out. They have so much invested that they’re pretty much forced to withdraw in big chunks, which comes with a large associated tax bill.
There’s a smarter way to go about it. Have a lean year at work? Take some money out of your RRSP. Sure, you’ll have to pay withholding tax at the time, but it gets treated as any other income. If you do this right, you’ll be putting money in that comes from a high tax bracket and withdrawing it to pay the tax on a low bracket. THAT’S WHAT I’M TALKING ABOUT, BITCHES.
Buying expensive mutual funds
Just don’t. Look, I’ve met that nice lady at the bank. She’s really a terrible person who is only good at sales. She murders puppies. I’ve watched.
According to every study that makes the rounds, the average person is screwed come retirement age. More screwed than Jenna Haze’s average day at work.
(Edit: She’s been retired since 2012. Way to be up on the trends, Nelson)
They all point towards the same things. The average Canadian barely has two spare nickels to rub together at the best of times. They’re not putting any money towards a rainy day, never mind their golden years. The only reason why we keep getting richer is because the top 5% keep it going. Everyone else continues to struggle.
But here’s the interesting part. The average person has saved bugger all for retirement for decades now. Sure, many people used to be able to count on pensions, but it’s not like everyone who worked in the 60s had a gold-plated pension.
Enter Nelson’s friend
Let me tell you a story about a buddy of mine, a guy who retired about five years ago.
Despite only qualifying for a small pension from his long-time employer, he’s doing fine. Both he and his wife get CPP and OAS. They shoveled a little money into RRSPs over the years. Put all those income sources together and they earn about $30,000 a year. This is easily enough for them to live a relatively comfortable life.
Perhaps most importantly, they live a simple existence. Only one car is needed, since they spend the majority of their time at home. Fancy business casual clothes aren’t needed as an office wardrobe. There’s no need to put aside 10% of their income for retirement. Their tax bill is nonexistent.
Think about all the expenses a regular working Joe has. The government takes off anywhere from 20% to 50% of his pay for various deductions. Taxes make up a big percentage, of course, but so do CPP and EI. There are commuting costs as well as socializing after work. And somebody is always selling something for their kid. Hell, the cost of working can easily eat up a third of your salary. That’s bananas!
The cost of living goes down in retirement. It’s that simple.
Humans are smart
I’ve long been an advocate of working part-time during retirement. It allows you to do something productive, get out of the house, and, most importantly, will help stretch meager savings so they last longer.
Even if a retiree gets a shit-ass job making $15 per hour for 10 hours a week, that works out to $7,500 a year. Just about everyone can work 10 hours a week. Using the 4% withdrawal rate, that’s the equivalent of an additional $300,000 in retirement savings.
Too old to work a traditional job? No problem. The internet makes it incredibly easy to earn a little money while sitting on your ass. Or you can drive an Uber. By the time automation makes Uber drivers obsolete, you’ll be dead.
People have other levers they can pull too. Downsizing is going to become increasingly common over the next couple decades, especially in expensive markets. Single retirees can get roommates, or, gasp!, move in with their kids. My cheap small town sees a steady influx of retirees who like the laid back lifestyle, decent amenities, and, most importantly, inexpensive real estate.
Another possibility is a reverse mortgage, a type of loan that doesn’t require any immediate repayments. The amount of home equity you can borrow with such a loan is established using a loan calculator tool. Then you can receive that money to spend as you see fit with no immediate consequences. You only have to pay the loan back when you vacate the property. In the meantime, you will have the money you need to pay for essential expenses or enjoyable pastimes. If you leave the property, you can pay what you owe or let the home be sold.
Humans are smart creatures. They will find a way to survive. Sure, it might not be ideal, but are these options really that bad? Let’s put things into perspective here.
Fear from asset managers
Let’s face it. Many of these fears are hoisted upon us by the people in charge of managing our money. Of course they’re going to tell you to save more. They’re directly poised to benefit from this relationship.
It’s like asking your barber if you need a haircut. Which reminds me — I really need a haircut. I look like a hobo who’s intentionally trying to play the part.
Now don’t get me wrong. Saving for retirement is a good thing. I like knowing I’ll have options in my golden years. And there’s nothing that beats that feeling of security. Except orgasms, of course.
Us financial folk also have to realize we’re preaching to the choir a bit here. The average Financial Uproar reader already knows the benefit of saving for retirement. If anything, y’all are oversaving for your golden years.
Compare that to your friend who can barely keep themselves above zero. Getting them to go from struggling week-to-week to putting aside 15% of their income is going to be a big challenge. Some find the light and get reformed, but most don’t. They’ll struggle for their entire lives, yet somehow won’t starve.
Besides, if everyone invested, think about how expensive the stock market would be. I’d have to slit my wrists.
Ooh, look at you. Such restraint in the title. Would you like the Nobel Peace Prize?
Why yes, I would, Italics Man. I think I deserve it after putting up with you.
Let’s talk a little about Nelson’s sexy new job. It must have been a great opportunity, since I quit writing about stocks to do it.
That new job is…
Just building up anticipation here, don’t mind me…
(whispers) I work in a grocery store.
(ducks as tomatoes come flying from the crowd)
Why in the actual hell would you go work at a grocery store?
First off, remember that I’ve spent much of my adult life in the retail industry. My first real job was working in a grocery store (the same one as today, actually). I stayed for almost six years. After becoming a terrible real estate agent, I went back into the industry for three more years as a potato chip salesman. It’s nice to start a new job and not have a crazy learning curve.
As I’ve mentioned before, retail is clamoring for brains. Most chains have their share of long-term employees, but most of these workers have zero hope of ever advancing past entry level. They just don’t have the intelligence or work ethic needed to excel. They’re decent at being told what to do, but never level up past that stage. Grocery is competitive as all hell; it needs people who can truly drive sales.
And apparently, one of those people is me. At least, according to my new bosses. I’ve been tapped to move up the ladder. Management has put me into a sort of half-assed advanced training program and has me in charge of certain parts of the grocery department to try and prepare me for the next step.
Grocery management is a decent living. Department managers regularly earn more than $50-60k per year, with store managers pushing six figures. Hell, even as a guy who just works in a store, I feel I’m more than adequately compensated. Certain chains invest in their staff. Others don’t. One of the reasons why I work where I do is this company is squarely in the former category. And it shows; they have some damn fine grocers.
Despite the opportunity staring me in the face, I’m not entirely certain I’m going to go for it. And it’s all because of damned financial independence.
How FI is BS
Thanks to years of aggressive saving and some savvy investments, I’m fortunate enough to be in a position at 34 years old to not have to work. I continue to drag my ass in every day because I know time off only means something if you have something to measure it against. When every day is a treat, it’s no longer a novelty. Suddenly, taking every day off is like having a job.
But while I’m a big advocate of doing work, I find myself with less motivation now that I know each paychque just goes to further increase the big pile of money at my disposal. I should be working my ass off towards getting promoted. I should be telling management to send me to a new store the minute a department manager opportunity opens up.
But I’m not. Instead, much to their chagrin, I’m hemming and hawing and coming up with reasons why it’s not a good idea to accept a promotion. I don’t want to move. I’m not sure I’m ready. I want to make sure the manager is someone I can work with.
It’s all nonsense. The reason why I’m dragging my feet is because money doesn’t motivate me any longer. Sure, there are plenty of other reasons to take a promotion, but y’all gotta admit the cash is a huge motivating factor. And if the money doesn’t motivate me, then it’s all about the challenge of a new position. But why bother taking on huge potential frustrations when I don’t need the money?
This is what financial independence has done to me. Suddenly, I understand these early retirement bloggers who threw up their hands and decided work was stupid. It’s really hard to get motivated under such circumstances. Why work so hard when you don’t need to? Why not just have fun instead?
There’s a lot of good that comes with financial independence. We all know about that. But nobody ever talks about the bad. Sapping motivation is not a good thing. Early retirees are, generally, smart as hell and great with money. They’re probably people who should stay in the work force long-term. Unfortunately, there just isn’t much sense trying to talk these people out of it. As I’m finding out, the default response to “fuck you” money is “fuck it,” no matter how much I want it not to be.
Retiring early is tough. I don’t care where you live.
Not only do you have to maintain an ultra-high savings rate for a long time, but you’ve got to constantly say no to temptation. That might be easy for some of you, but society has conditioned us to believe things like a big house and a fancy car are the byproducts of success. The only thing successful about that guy riding a bike is his ability to get DUIs.
And then you’ve got to invest successfully. This is harder than it looks. Sure, we’ve got low-cost index funds you can just stick your cash into, but they still don’t take away the human tendency of selling at the exact wrong time or raiding accounts to pay for the aforementioned new car or house.
There’s also the timing aspect to it. I’m a firm believer thoughts of early retirement spike during bull markets. People feel good and their investments are doing great. There’s nothing holding them back! Nobody is looking to retire under 40 when the market is hitting 2009 lows.
Still, it’s expensive to retire in the United States. Life in most of its major cities is expensive. An apartment in New York, San Francisco, or Chicago is as expensive as it gets. Smaller cities are cheaper, but if this thread is any indication, early retirees want nothing to do with rural America.
These folks would rather live in places like Costa Rica, Thailand, or even Mexico. They point to amenities like a cheap cost of living, better climate, and greater access to medical care as perks, as well as focusing on the adventure of living in a foreign country.
That’s all fine and good, but take it from a guy who’s lived abroad. It’s annoying. The only expats you meet are drifters with no sense of direction or English teachers, who are only slightly less insufferable. Getting the right food is annoying, and sometimes all you want are those chips you can only get at home. Even going to the damn store and getting garbage bags can be an adventure. And if you end up in the right country, you’ll get stared at. Constantly.
I don’t regret my year abroad. I can just see it from a different perspective.
Besides, it’s a whole lot of work for not a bunch of benefit. Here’s how you can retire early in rural Canada on the cheap.
First up, housing
Want to buy a decent place for under $100,000? It’s not only possible in rural Canada. It’s easily accomplished.
Here’s an 1100 square foot house in Hanna, Alberta, for $89,900. A one-bedroom condo in Swift Current, Saskatchewan is going for $99,900. A three-bedroom condo will only set you back $90k in Moose Jaw. There are 27 properties in Portage La Prairie under $110,000. Fredericton, St. John, and other places in New Brunswick have hundreds of properties under $100,000, including this brand new mobile home.
And so on.
These places aren’t in the sticks, either. They’re all towns with reasonable amenities. They have hospitals, department stores, decent schools, and are even relatively close to major airports. They might not offer as much to do as a major city, but hobbies in these places don’t cost much anyway. And there are plenty of free things to do, even in places like Swift Current.
Next, health care
I really don’t understand why early retirees are so obsessed with low-cost health care in developing countries. They’re not going to the doctor four times a week.
If you’re a reasonably healthy person in your 30s or 40s, any small town hospital will be enough to keep you healthy. Most things that go wrong when you’re younger are easy to fix anyway. Any moron can do stitches if you fall off your bike.
The big advantage retiring in Canada versus the United States is you don’t have to pay health insurance premiums. Let’s face it. Any health care plan that has a $10,000 deductible is no health plan. It’s an insurance policy only. All you’re protecting is against major injury. So why not come to Canada, where the major stuff is already included and you can get insurance to pay for the minor stuff (dental, eyes, etc.) for less than the price of a terrible U.S. plan.
Good news, Americans. Thanks to our crummy dollar–or your strong one, depending on your perspective–your cash now goes farther than ever.
Only have $800,000 to your name? Convert those bucks to Canadian and you’re suddenly a millionaire with $66,000 left over. If only it were that easy to convert zero dollars to 800,000 of them.
Everyone talks about taking advantage of this when going to sexier abroad countries. Why not Canada?
And finally, let’s talk about taxes. Specifically how you’re going to pay for an early retirement inside the socialist paradise of Canada. Somebody’s gotta pay for that sweet health care.
First of all, you won’t pay much in tax if you’re just receiving dividends and you keep your income under the $50,000 range. It’s even better if you split that income between you and your wife. If you’re both earning $30,000 in dividends and that’s it, there won’t be much tax to pay.
Next up are sales taxes, which are certainly a bigger deal in Canada than in the U.S. Some areas of Canada charge a 13% sales tax. Most places in the U.S. are between 5-8%. If you’re really worried about that, move to Alberta, the only place in the country without a provincial sales tax.
And that’s it
The bottom line? It’s pretty simple. If you’re looking to retire early, rural Canada offers cheap housing, reasonable taxes, access to a decent amount of amenities, and free health care. And your currency goes farther here than in other countries. You could do a whole lot worse.
This should go without saying, but I’m going to say it anyway. After all, this post does need an intro.
If you’re not investing in TFSAs, you’re missing out. My TFSA is more maxed than Carrie Bradshaw’s credit card, and yours should be too. TFSAs offer advantages like the ability to withdraw money whenever you want without taking a tax hit, and the flexibility to add cash back into them after you take it out.
Even though I’m still a huge fan of RRSPs, and think if given the choice, most people should contribute to them first, there’s still plenty of room for someone to invest in their TFSA too.
When somebody asks me whether they should invest in their TFSA or RRSP first, I like to say it doesn’t really matter. Just pick one and save.
Many diligent savers have one big goal–to end up as a TFSA millionaire. This might seem like a pretty lofty goal. Interest rates are lower than my IQ. Stocks (at least here in Canada, anyway) have gone basically nowhere in the last decade. Bonds have done relatively well, but there’s no way that bull market is continuing for the next decade. And so on.
This uncertain environment has caused many savers to just throw up their hands and keep their cash parked at the bank, collecting a measly 1% yield. That’s not so bad for an emergency fund, but it’s a terrible return for a TFSA. At that rate, the only way you’ll be rich is if you get frozen for 1,000 years.
A Futurama joke? Don’t mind if I do.
Bank Teller: Okay, you had a balance of $0.93.
Fry: All right…
Teller: And at an average of 2.25% interest over a period of 1,000 years, that comes to 4.3 billion dollars.
Anyhoo, let’s figure out how you can become a TFSA millionaire.
It turns out it isn’t that hard to the TFSA to seven figures. Let’s run some hypotheticals, bitches.
That never gets old.
- Borrower is 25 years old
- Has $5,000 to put towards this year’s contribution
- Has $5,000 annually to invest for the next 30 years
- How much money will they end up with at 55 earning 6%, 8%, and 10% annually?
Look at that, kids. You’re already halfway to being a TFSA millionaire, and all it took was an investment of $155,000. Not bad.
An extra 2% really makes a difference. That’s the beauty of compound interest. Just 2% more annually gets you like 33% more at the end of a lifetime of investing.
Would you look at that? We’re basically there, and all it took was investing five large a year for 31 years and earning 10%.
Look. It takes a lot of work to consistently invest over the course of a few decades. And you have to make sure you don’t do anything stupid like raid the cash for a nose job or glitter or whatever it is you kids buy these days. Consistency is the key, as well as getting decent returns.
Best case scenario
Next, we’ll build a slightly more aggressive scenario.
- Borrower is 25 years old
- Puts away $5,500 for the next 40 years, until traditional retirement age
- Has already saved $41,000, the maximum contribution room
- Same return scenarios, 6%, 8%, 10%
Well, that was easy. It turns out giving the investment an extra ten years to grow really does wonders.
Hey rich old guy! Can I have a loan?
So it turns out it’s really not that hard to become a TFSA millionaire. All you need to do is max the thing out day one, continue to max it out, wait for a while, don’t do anything stupid, and you’re golden. I guess all that is easier said than done, but it just goes to show it’s certainly achievable.
What to invest in
You already know what to invest in. Just put your cash in a few ETFs with low fees, hold on to them for a while, and you’re in business.
I don’t think it’s going to be that easy going forward.
It’s not so much that passive investing sucks. It sure beats mutual funds (except maybe these kick-ass ones), and with the average person not knowing the difference between an income and a victim impact statement, most have no business investing in individual stocks.
But at the same time, we’ve still got to be smart about what we invest in. Both Canadian and U.S. stock markets are expensive, and it’s likely both will barely keep pace with inflation over the next decade.
So what’s a wannabe millionaire to do? There are plenty of options. You could put your money to work in Poland, Turkey, or other cheap European stock markets. Energy is still a very inexpensive sector. Canada’s REIT sector is still relatively attractive. Or you could buy Aimia shares like I have in my TFSA.
Even if you max out your TFSA going forward, you’re still going to need a decent return to get that bad boy to $1 million. It’s certainly possible to do so investing in the way that’s become standard. I just don’t think that’s going to be the ideal solution over the medium-term. Local stocks are just too overvalued.
It turns out it’s not going to be that hard to become a TFSA millionaire, especially if you save a lot. It’ll take patience, a halfways decent return, and making sure you don’t take out money at an inopportune time, but it’s very possible. The only issue is inflation might make that windfall look less impressive when the time comes.