Advice needed - RRSP & Non- Reg

[Steve19]

This is hypothetical, but tell me what you suggest. I am calculating both my common-law and self's retirement savings plan. We both have company pensions currently, but I would rather not incorporate that income into anything.

My concern lies with the total amount of 'potential' RSP income at retirement - I think it's way too much, but I also don't want to under save for my RSP because it's a nice cushion to have. I should also mention the savings of $1500 is an easy and comfortable amount both of us can save per month (this could increase down the road).

Both age 25.

RSP - 500/month @ 6% annual return from age 25 - 65= 1 million (close to it). This is not including re-investing the amounts received after filing our taxes.

Non-Reg - 1k/month @ 5% annual return from age 25-55 = 800k

Retire @ 55 - Each withdrawal 55k/year from non-registered portfolio - will last 15 years (until age 70) - this is not considering dividends, strictly withdrawal of capital till zero dollars.

Use RSP for income after (if I make till 70).

Thoughts/suggestions?
Thanks.

[sprocket1200]

much of this decision is based on tax rates.
if you are in a lower or same bracket as you will be when you withdraw RRSP funds, then there is no advantage (though u get a refund now).

TFSA can be used to safely reduce your taxable income during retirement (though you use after tax dollars to fund today, but at $5000/year it is not a large amount). as well, TFSA is not income tested for gov't program clawbacks.

during retirement you may want to drawdown RRSPs earlier to avoid higher tax brackets later, though this will reduce tax free earnings once pulled out.

the ultimate killer of the RRSP would be for the last of the couple that dies. all RRSP funds would become income for that year. if this puts you in a higher tax bracket (which we can assume it will) much of your hard earned cash will become income tax and not be passed on to future generations or used as you wish!

[Sampson]

Thoughts/suggestions?
Thanks.

I think it is important to consider your pensions since it may mean you can either reduce your savings rate and spend more now, or retire even earlier.

Also, I don't know if you have considered inflation, either in your expected returns, or in your purchasing power in 30 years. Assuming inflation is 2.5%, your $55k will only be equivalent to about $27.5k in present dollars. 3% inflation and that's $22k in present dollars.

I think the most important factor to consider is how you expect your lifestyle to be in retirement. Only then can you know if you'll have 'enough'. A few months back MillionDollarJourney had a post on early retirement where FT outlined all his projected expenses in retirement. Probably usefull to do something like that to get a sense of how much you'll need.

good luck!

[leslie]

Since you are just starting your working life, and there are so many unknowable unknowns that will affect what your retirement will look like, it seems to me that 'planning' is really useless.

The fear of having TOO MUCH in an RRSP comes because 95% of people confuse the mechanics of the program with what is actually happening. Learn how it really works.

The income earned on your after-tax savings is protected from tax within the RRSP. That protection will continue for 45 years and even then it will continue until age 100 to a lesser extent.

That benefit is SO big that even an increase in tax rates on withdrawal of 20 percentage points (say contr @ 25% and draw @ 45%), would only reduce a 8% return on investments to a 7.3% after-withdrawal-tax return. That is far better than the after-tax return you would get investing outside an RRSP.

You won't want this part of advice but ... If I were you I would have no part of advising/managing your girlfriend's money. She is perfectly capable of learning how and making her own decisions. Ask yourself why you are taking this on. Is it for your benefit or hers? Hers because you say so, or hers because she says so?

[Jon202]

Simple solution: Have a couple kids, then all your money problems will disappear. Also, in retirement years, you simply guilt your children into taking care of you.

[sprocket1200]

Leslie,

are you saying that the calculations point to leaving RRSP money to grow as long as possible with in the account? that even withdrawn at the highest tax bracket makes it a better investment than an outside account? would this not also be true for the TFSA as well?

[steve41]

It is almost impossible to fabricate a plan (over a normal working/saving-retiring/unsaving lifespan) in which the MTR in the retired phase is the same as or exceeds the MTR during the working phase.

(you can remove the words 'same as' from the above statement)

[leslie]

"Would this not also be true for the TFSA as well?" If you want to understand the comparison of an TFSA to an RRSP you have to understand the RRSP model.

"It is almost impossible (marginal tax rate in the retired phase same or exceeds marginal tax rate during the working phase)." Well I am living proof it is possible. There is a long list of variables that impact the assumption. But more importantly, I was trying to make a point by arguing the worst case scenario in order to forestall criticism. The OP can make his own assumptions and see their effect.

[steve41]

To do this analysis justice, you have to look at tax as tax (the T1), not as it is approximated in most spreadsheets.

Here is a 32 yr-old earning $50,000 and planning to retire at age 60. He starts with a modest $20K RRSP. In one projection, he continues contributing to his RRSP and in the other he abandons his RRSP and contributes 100% to his TFSA. (note... we are assuming that the TFSA has no $5000 limit just to make the point for this example)

I won't show the actual numbers, but the following graph illustrates the nature of the "RRSP is tax-neutral" paradigm.

tax comparison TFSA vs RRSP

BTW... the plans include all tax components... age credits, indexed brackets, ei/cpp deductions, OAS, CPP and GIS income. Tax is BC based.

[sprocket1200]

I guess my concern as related to the OPs is that if RRSP grows to the point that we are withdrawing amounts that take us into the top tax bracket, is that a concern? or does the growth within an RRSP make top tax bracket concerns null and void?

i review the models, but need to study them further as they are confusing to me at this point. I realize this is not easy stuff!