# Bit of financial help needed



## Haps (Aug 28, 2012)

Retirement planning is not my forte and I'm trying to wrap my head around something:

I'm 36 and will retire in 24 years at age 60. I have approx 78000 of unused RRSP contribution credits. My wife approx 19000. 

Scenario A: Borrow 97k from lines of credit assuming a 6% interest in order to purchase RRSP again assuming 6% interest rate. When I run the scenario thru tax software I'd be looking at a refund of37kish. So I'm left with 60k owing.

So take $600 a month for the next 10years to pay off that 60k and then when down contribute that 600 a month to the RRSP.

Scenario B: Don't bother borrowing and just start contributing the $600 a month to an RRSP(assuming the same 6% returns)


Now I would have thought it made sense to do scenario A. That getting a larger lump in early would be better. But I ran the scenarios thru a couple of calculators and I'm coming up with scenario a coming out ahead only by 70k or so. Am I looking at this right? Granted scenario A is coming out better. I just would have expected it to come out alot further ahead. 70k ahead is not far enough to not factor in the convience of no debt load for 10 years etc.


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## the-royal-mail (Dec 11, 2009)

So basically you want to borrow to invest?

Terrible idea. Think of all the interest you'll pay on your loan for all those years. 

You should be paying off debt, setting up emergency cash reserves and then saving for retirement under scenario B. And no, this does not mean instant gratification. I'm working on this at the moment and I am finding it's taking me several years.


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## dubmac (Jan 9, 2011)

the-royal-mail said:


> So basically you want to borrow to invest?
> 
> Terrible idea.


I agree with royal.
You are young & have the advantage of time. Set priorities, and a make a plan - set a certain amount aside each year/month, but I wouldn't take a loan out. Returns are expected to be moderate at best in the future - whether you'll match the interest rate with any gains is questonable.


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## Spudd (Oct 11, 2011)

Yeah, the problem is there's no investment that will give you a guaranteed 6% interest rate. So you have to take risks and hope for the best. If the best doesn't arise, you're in debt and you have less than you owe.


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## Square Root (Jan 30, 2010)

Agree with the others. Save as much as you can by LBYM. Borrowing for RSP's too risky and not smart.


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## Plugging Along (Jan 3, 2011)

Borrowing to invest in this case is a very bad idea for the following reasons:
You need a greater than 6% return to cover the interest
The interest is not tax deductable if it's in your RRSP
Your tax refund is not free money, but rather just deferred money. 
Unless you are in the highest tax brackett by more than $78K (so income just under $200k/year), you are not going to get the full tax benefits this year, since the savings is based on marginal rates.
If you are in the highest tax bracket by that much, and can't put more than $600 more a month, then there is an issue with your spending. 


Whether you go with scenario b, depends on your overall financial situation. As Royal said, you should have no other consumer debt, and some emergency fund before your RRSP, or at least some combination strategy with that $600.


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## leoc2 (Dec 28, 2010)

From: https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?ArticleName=DilbertGuidetoPersonalFinance

The Dilbert guide to personal finance
Wouldn’t it be great if someone reduced financial planning to a few simple rules? 


Make a will.
Pay off your credit cards.
Get term life insurance if you have a family to support.
Fund your RRSP to the maximum.
Fund your TFSA to the maximum.
Buy a house if you want to live in a house and you can afford it.
Put six months’ expenses in a HISA.
Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.


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## Haps (Aug 28, 2012)

It was more of a question of this specific scenario.

Kids college is already more then taken care of. I have a DB pension on the way and already invest 6% of my gross with a 3% match directly thru work. And although depressed right now we do have some "liquid" investments to be used as an emergency fund if need be. I'd rather not touch them as they are down 30% since early 2008 but it's there in an emergency. No debt except a mortgage.

The $600 is an amount we could part with and not notice. I just keep seeing that RRSP contribution limit sitting there and think I should be taking advantage of it. Am I wrong in thinking there is an immediate return on my investment via the refund(although borrowing negates this return)?


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## Oldroe (Sep 18, 2009)

Think I would save/borrow enough to drop down 1 tax bracket. But in the RSSP and the tax return on the mortgage. Take the 600/month and pay loan of in 1 year.

Yes you likely need to jiggle #'s a bit maybe some of tax return on loan.


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## Daniel A. (Mar 20, 2011)

Haps said:


> It was more of a question of this specific scenario.
> I have a DB pension on the way and already invest 6% of my gross with a 3% match directly thru work.
> 
> The 6% and 3% has me confused, are you talking DC pension or some savings plan.
> Are you sure you have a DB pension and not a DC pension ?


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## Haps (Aug 28, 2012)

Daniel A. said:


> Haps said:
> 
> 
> > It was more of a question of this specific scenario.
> ...


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## Andre (Sep 13, 2012)

That depends on how much money you already have invested, your current investment habits, and your tolerance for risk.

I don't think leveraged investment strategies are a good idea for anyone that isn't already a seasoned investor. First of all, if I read your math right, you're paying a 6% interest rate on the loan, and will receive 6% interest on whatever debt instrument you're using the funds to buy. Nowhere in there do I see any consideration of inflation, which you should assume will be about 2.5% per annum over the long term. So this strategy is an immediate loss, when you consider cost of living increases.

My thoughts? Start stashing away your money now. When you're 7-10 years away from retirement, you can always reassess. If you're behind, there are all sorts of ways to get caught up.




Haps said:


> Scenario A: Borrow 97k from lines of credit assuming a 6% interest in order to purchase RRSP again assuming 6% interest rate. When I run the scenario thru tax software I'd be looking at a refund of37kish. So I'm left with 60k owing.
> 
> So take $600 a month for the next 10years to pay off that 60k and then when down contribute that 600 a month to the RRSP.
> 
> Scenario B: Don't bother borrowing and just start contributing the $600 a month to an RRSP(assuming the same 6% returns)


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