# TFSA or RRSP with DB Pension



## Longstreet (Dec 27, 2010)

Hello,

I'm currently seeking advice from a number of different sources about the best way to save for retirement. I'm 26 years old, soon to be married, own my own house, and have spent the last 8 years as a Regular soldier in the army. I'm very fortunate to be employed in an occupation that will give me a generous DB pension. Based on my expected salary after 25 years of service, I estimate I will receive around $60K per year starting at age 43, indexed to inflation. I'm nearly debt free (a %2.1 interest car loan which matures in May 2012), have a $5K emergency fund, and have approximately $5K in other savings. 

My fiancee and I feel very strongly about her staying at home to raise children so I'll only consider my salary (currently around $72K per year). I know lots of people may say this, but my fiancee and I are very committed to each other and don't ever plan on divorcing. I currently save approximately %10 of my net income for retirement. After I pay off my Home Buyers Loan (in approximately 2 1/2 years), I'm contemplating what vehicle to save for retirement. My main priority is to pay down my mortgage, but my question is regarding what to use for my %10 net savings (aka the Wealthy Barber approach). I see the following options (after the HB loan is paid off):

Option A: %100 TFSA. I'll put %10 of my net pay in a TFSA until I retire. Since I have a DB pension, my income in retirement may exceed my income now, hence the TFSA. The TFSA is obviously more liquid and can also act as a large emergency fund. With a TFSA, I won't be subject to OAS clawback. 

Option B: %100 RRSP. I'll put %10 of my net pay into an RRSP and use the tax refund to pay down my mortgage more or re-invest in the RRSP. I can use income splitting in retirement to avoid OAS clawback. 

Option C: %100 Spousal RRSP. I'll put %10 of my net pay into a spousal RRSP and use the tax refund to pay down my mortgage or re-invest it as in Option B. OAS clawback is avoided like Option B, which is quite similar to Option C.

Option D. Hybrid. I'll put %10 of my net pay into a TFSA right now because I expect my income in retirement to exceed my income now. Once my income exceeds my expected retirement income, I start to gradually shift over to RRSPs (either regular or spousal). Once my income gets very high (after age 43 when I collect a pension and work full time), I can transfer my funds from a TFSA into an RRSP for a bigger tax break and re-invest the refund. 

Furthermore, after I retire from the army and collect a pension, I plan on getting an honest, private sector job and putting my pension into an RRSP, TFSA, or finishing off the mortgage. I'm definitely leaning towards Option D. 

I would appreciate any advice on the matter. I'm starting to really love personal finance and any of your comments or insights would be more than welcome.


----------



## Brian Weatherdon CFP (Jan 18, 2011)

*Choices to maximize security & retirement*

Hi Longstreet, awesome how you've itemized your options here. I believe you could have a strong future professionally in financial planning. Keep learning  You have obviously studied these matters well already....and perhaps you simply seek someone to confirm what you feel is your best choice.

TFSA is important for all the reasons you've specified. Spousal RRSP comes next as you want to create value in your wife's lower-tax environment (though she may build significant assets too during future working years).

Easy to see, doing the TFSA keeps your options open. If at some point you choose to move $ from the tfsa into rrsp you can do so...and meanwhile if you don't do that it just keeps growing easily in your tfsa.

I'd be wondering as well how you've considered insurances. With your military service it could be difficult or impossible currently to get life or illness insurances (particularly critical illness insurance). Depends on your duties and where you serve. If Canadians cash out >$1Billion per year from RRSPs to cover financial need after health diagnoses, consider the advantage of having immediate liquidity from critical illness insurance as part of your financial security planning. I have a 2-page doc I could forward if you like - too long for this forum.

You're on the right track -- and you'll make good decisions, discussing it together (you and your wife) and being confident in your decisions.
Cheers!


----------



## Sampson (Apr 3, 2009)

Hi Longstreet,

First, thank you for serving our country! 

Re: best scenario planning, I'm a big believer that planning 20-30-40-50 years down the road is impossible. For this reason, and because each of option A, B, and C will only give you a best case scenario under specific future circumstances I always go with a 'hybrid' approach.

You will never come up with the optimal solution, but it will always be the most flexible solution and accommodate any twists and turns you encounter over those 20-30-40-50 years.

Because you believe in the lasting relationship of with your wife, it might be very prudent to use a spousal RRSP. This way you can build up resources for her knowing she will likely not be affected by OAS clawbacks etc. If anything were to happen in the marriage, she'll at least have some assets of her own.


----------



## steve41 (Apr 18, 2009)

The TFSA vs RRSP issue is going to be with us for a long time. The RRSP and TFSA are a close saw-off for pure retirement planning... i.e. one in which you are looking to a constant no-surprises retirement lifestyle, depleting your nest egg out to a maximum age horizon (95-100). If you expect a need to make 1 or 2 large cash calls during retirement, then use the TFSA to fund those, otherwise the RRSP makes sense.


----------



## Four Pillars (Apr 5, 2009)

Sampson said:


> Hi Longstreet,
> 
> First, thank you for serving our country!
> 
> ...


+1

Regarding marriage breakup - it makes no difference who's accounts the RRSPs are in. They get divided 50/50.

I'm not sure however, about RRSPs that you owned prior to the marriage. Perhaps they are treated differently.


----------



## MoneyGal (Apr 24, 2009)

Four Pillars said:


> I'm not sure however, about RRSPs that you owned prior to the marriage. Perhaps they are treated differently.


With the exception of a personal residence that becomes the matrimonial home during a marriage, the general rule is that any *gain* during the marriage in the value of assets owned by either spouse prior to the marriage must be divided equally between the spouses (or whatever division the spouses agree to). 

A pre-nuptual agreement can specify a different division, you can voluntarily agree to a different division, and a court can order a different division...but a 50/50 split of the gain is the most common approach.


----------



## OptsyEagle (Nov 29, 2009)

If your current income is above $40,000 per year, which I suspect it is, I would max your RRSP with all the contributions going into a spousal RRSP in your wifes name. The refunds should go to pay down your mortgage and then after that the TFSA or RESP for all the newly created little ones.


----------



## OhGreatGuru (May 24, 2009)

In view of the disparity between your incomes and your spouse's plans to be a stay-at-home Mom, I would suggest your Option C (Spousal RRSP) to start building some retirement income for her; with your refund going to pay down mortgage.


----------



## Plugging Along (Jan 3, 2011)

Thanks for serving Canada - and wow on your forward planning. 

You're in great shape the way you're heading right now.

I'm not sure how much your expenses are. Your emergency you mentioned is about 5K. I would consider beefing this up via the TFSA. You are still quite young, and retirement is a ways away. The TFSA is probably the flexible option for you, as it can act as your emergency fund, retirement fund, or the 'I can't believe how much these kids cost' fund j/k.

I would do the TSFA until you have at least 6-9 months in savings. If for whatever reason you cannot work, and your wife is at home with baby, you will be very thankful for this.

Then, I would work on the spousal RRSPs, putting the refund on the mortgage. If you ran reduce your mortgage to zero by the the time you retired with the pension, then it gives you so many more options in what you want to do.


----------



## Longstreet (Dec 27, 2010)

*Thanks*

Thank you all very much for taking the time out of your day to reply to my question. I'll take all your advice to heart about the RRSP/TFSA question, size of an emergency fund etc. The best of luck in the future.


----------



## Brownstein (Jan 26, 2011)

Good post Longstreet, I have a similar situation, in the Air Force with 12 years in and am 33 next month. One other thing to consider is maybe leaving room in your (or spousal) RRSP for your severance pay which could be a hefty chunk of cash that you may want sheltered from tax at that time.


----------

