# Defined Pension Plan & RRSP



## Izzy

What type of RRSP commitment should someone consider when they have a Defined Pension Plan with the Government or the Ontario Teachers Plan? I know you could never have enough money in an RRSP as it is a tax shelter but if you are in a Defined Pension plan do you really need to regularly contribute to an RRSP?


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## Sampson

Depends on when you want to retire and how much you want to retire on.

I know people who live on under $1500 per month in retirement, whereas some need much much more. If you identify how much you'll need, and how much your DPP will pay out, then you'll know if you need to top-up your retirement income by saving/contributing to your RRSPs now.


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## Maltese

I'm within 5 years of retirement and my response to you is as absolute "yes!" - especially if you end up single like I did due to divorce. 

I'm in a DBP and over the years have only been allowed to contribute $2000-2500 to an RSP. I've contributed my maximum every year since I was 23 years old and still I only have a paltry sum in the RRSP. Plus I've saved outside my RSP & still need to save more before I can retire. I've determined that I need a total of $300,000 saved in both registered and non-registered funds in order to have a pre-tax income of $55,000 per year indexed to inflation of 3%. Without these extra funds I wouldn't even be able to consider retiring at the age of 59. 

My pension is NOT guaranteed indexed to inflation so I need to take this into consideration. My personal funds will have to cover inflation as well as home repairs and renovations and the occassional fun extra like travel. My pension will only cover my basic living expenses.

Of course, it you happen to be married, stay together forever and both of you have 35 year indexed DBPs then you'll have lots of money when you retire. However, life does not always unfold as we expect. (Mine sure didn't.) 

Since you'll only be able to invest a limited amount into an RSP anyway, you may as well do it. It's always better to have too much money than not enough. When I started investing I had no idea what curves life would throw at me and I'm very glad now that I started early. 

My co-workers who haven't saved a dime will be working until at least 65 and even then won't be able to live the retirement life they've dreamed about. Now that they're older and wiser they always tell me that they wished they'd paid more attention when they were younger and put money into RSPs as I have done.


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## sprocket1200

that is the problem with defined plans, the number just have to add up, and you have no choice (well cat food might be a choice, though KD is cheaper) but to work to the bitter end.

as well, there is no tidy nest egg to cover spousal death, mishap, inheritance, etc


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## bean438

I have a DB pension and I max out both my RSP and TFSA. I hear all the time at work "ya don't need rSP's with our pension you'll get taxed to death". 
I don't buy it. Sure my expenses will be less in retirement (no mortgage, rsp/tfsa contributions) but I always say I would rather have a tax problem than a money problem. 
My goal is to retire with 100% of my take home pay, indexed to inflation.


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## moneymusing

bean438 said:


> I would rather have a tax problem than a money problem.


This is a great quote that really should be said more often. If you're getting taxed more it means that you're keeping more money than you were before. As far as I know there is no tax bracket that charges >100% on income.


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## Shayne

Izzy said:


> What type of RRSP commitment should someone consider when they have a Defined Pension Plan with the Government or the Ontario Teachers Plan? I know you could never have enough money in an RRSP as it is a tax shelter but if you are in a Defined Pension plan do you really need to regularly contribute to an RRSP?


Money Sense magazine had a good article this month on RRSPs. This is one of the questions and answers:

_Q. I have a pension. Do I need an RRSP too?

A. For most people the answer is yes – although if you have a good pension at work you can certainly contribute less to your RRSP than someone without one. With no pension, you can contribute up to 18% of your income to an RRSP each year. If you have a private pension, then the amount you are allowed to contribute to your RRSP will be reduced, to reflect the fact that you are also contributing to your retirement income through your pension at work.

There is one group that doesn’t need RRSPs at all: government workers. Teachers, police officers and other civil servants have among the best pension plans available and won’t need help from RRSPs to retire comfortably. For instance a couple who are both government workers can expect to enjoy a combined annual pension income of at least $50,000 with is roughly the kind of income that a million dollar portfolio would generate
_

I know my pension administrators have a pension estimator that I look at once and awhile. If I feel that I can't live on what they estimate I will have to contribute to RRSPs or make unregistered investments.


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## MoneyGal

MoneyMusing: for low-income Canadians, surprisingly, marginal effective tax rates can hit more than 100% in certain income brackets. 

Two recent C.D. Howe Institute reports have documented this phenomenon: the most recent one on TFSAs and RRSPs, and here's another one.


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## steve41

I'm waiting to see that ultimate article titled..... _*"I made $x and had to pay $x in taxes.... what went wrong?"*_

There is no average tax rate, marginal tax rate, effective tax rate, or marginal effective tax rate. There is tax.... you know, the thing you fill out once a year... your T1.

Innumeracy, you gotta love it!


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## MoneyGal

steve41 said:


> There is no average tax rate, marginal tax rate, effective tax rate, or marginal effective tax rate.


Aroo? (That's the Scooby Doo question mark sound.)


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## steve41

What I am saying is that those entities are derived numbers.... you can calculate/display them AFTER you do your annual taxes (T1).

I have never seen a tax return or tax program which starts out with... _"please enter your 'effective marginal tax rate' _and has your tax payable for the year drop out.


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## moneymusing

Thanks for the links MoneyGal.

I'll have to take some time to go over these, but I still can't see where, like steve41 says, I make $x and give $x to the government.

I can however see the inherent disadvantage in a tax deferred savings plan vs. TFSA and in the long run paying more taxes. Table 1 of the e-brief shows you paying $1061 in taxes on the $1000 you invested, but you've earned money ($1,163) in interest that you haven't yet paid taxes on so the amount of money you earned still exceeds the taxes you've paid.

As I mentioned I didn't read the documents yet, but I plan to since I am interested in the situation where you're better off asking for change on the street than showering and going to work.


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## steve41

The other issue to keep in mind is that final tax payment -on death- you are exposed to (the one which your estate sees). The decision to go TFSA or RRSP is drastically effected by estate concerns. If you die prematurely, it would have been better (for your estate) if you had chosen the TFSA.... if you live to a relatively old age, it would have been better if you stuck to the RRSP.

Tax, and your T1 (actually ALL the T1s you complete over the next 20-30-50 years) is a vastly important calculation as it interacts with your various investments (reg/nonreg/tfsa/equity/realestate) over time. Approximating them with a single marginal or average tax rate is just wrong.


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## MoneyGal

Hmmm. Steve41, I think I agree with you - I concur that the average/effective/marginal tax rate can only be calculated after your T1/T2 is complete. However, ... these are "real" rates, in the sense that they really affect your after-tax (obvs) income. 

I'm not suggesting that average/effective/marginal rates are very useful for forward-looking projections. MoneyMusing said he/she was not aware of any situations resulting in negative income tax - and my link was to a couple of studies which point out that at low income rates, you can have effective (i.e., "actual") tax rates which approach or even reach 100%. 

This isn't a planning tool - just an example of a factual situation meeting a certain parameter. Or are you responding to a different point entirely?


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## steve41

I am simply objecting to a study which talks about 100% tax rates and is published in the media without properly explaining it. The general public is confused enough about investing/retirement/taxation without this type of strange reporting.

I used to report (after calculation) the marginal tax rate as described... add $1 to the income and re-calculate tax... it was fine before things got strange (the provinces started TONI with different bracket thresholds, various clawbacks etc....) I gave it up because it served no useful planning purpose. I now calculate marginal tax rate as the sum of the fed and provincial tax brackets for that year's income. My users prefer to see it this way since it is a much better-behaved metric.


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## MoneyGal

OK, I still think we are in agreement.


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## Shayne

bean438 said:


> I have a DB pension and I max out both my RSP and TFSA. I hear all the time at work "ya don't need rSP's with our pension you'll get taxed to death".
> I don't buy it. Sure my expenses will be less in retirement (no mortgage, rsp/tfsa contributions) but I always say I would rather have a tax problem than a money problem.
> My goal is to retire with 100% of my take home pay, indexed to inflation.


The same take home pay? If you are in retirement and no longer contributing to your "retirement fund" you won't need the same take home pay. 

You may be missing out of some living now?????


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## Larry6417

I read Moneygals link to the CD Howe report, and it made a lot of sense to me. I don't think it was confusing. If people are confused then I suspect it's the media's fault, not the fault of the CD Howe report. 

If you read the fine print of the report, marginal effective tax rate takes into account the clawback of social benefits like GIS and OAS. If we're talking about labour income only then marginal tax rates are fine, but retirement income, as stated in the report, is often taxed at a higher rate than labour income due to clawbacks. It's messy to take into account clawbacks, but people aren't getting a complete picture of their retirement income if they ignore the effects of clawbacks. If you look at charts in the report of METR (marginal effective tax rates, i.e. marginal rates including the effect of clawbacks) rates reach up to ~ 85% in Quebec under $20,000 and up to 100% in Ontario. If you are a low income Canadian in one of those provinces making ~ $20,000-25,000, and you've saved up some money to invest close to retirement, then the TFSA is far superior to the RRSP. That's what the report is saying, and it's incredibly important for Canadians in that situation to know that.


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## steve41

I challenge anyone to show me where tax in retirement is higher than tax pre retirement. It just doesn't happen. What many fail to realize is that:

1. that tax brackets are indexed to inflation
2. it's not the tax you pay, it is the PV of those taxes
3. tax for a senior is subject to fairly hefty breaks

Just the first point alone is notable. Whereas tax on $50K now is just over $11K, in 60 years at 3% inflation, the tax will be just $1K

The tax break you get now from the RRSP deduction is more than offset by the tax you pay on withdrawal down the road.

Tax pre retirement is simply much higher than tax post retirement


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## steve41

Let me qualify that prior statement.... For a 'normal' financial plan which involves saving for retirement and subsequently living from the proceeds in a way which causes the proceeds to deplete as one reaches old age, this is generally the case. For someone making a major league salary and building up to a large estate, taxes in retirement could be higher.


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## Larry6417

steve41 said:


> I challenge anyone to show me where tax in retirement is higher than tax pre retirement. It just doesn't happen. What many fail to realize is that:
> 
> 1. that tax brackets are indexed to inflation
> 2. it's not the tax you pay, it is the PV of those taxes
> 3. tax for a senior is subject to fairly hefty breaks
> 
> Just the first point alone is notable. Whereas tax on $50K now is just over $11K, in 60 years at 3% inflation, the tax will be just $1K
> 
> The tax break you get now from the RRSP deduction is more than offset by the tax you pay on withdrawal down the road.
> 
> Tax pre retirement is simply much higher than tax post retirement


How do you define "tax rate"? If you define tax rate as only what you pay on your return, then you're right. If you define marginal effective tax rate as tax rate + effect of clawbacks esp. GIS, then marginal effective tax rates on retirement income are much higher than people realize. That's one of the main points of ths report MoneyGal provided. People think that their marginal effective tax rates are automatically lower in retirement because they have only a fraction of their pre-retirement income. Not so! What the report showed was that low-income people as well as many middle-class people are far better off investing in TFSAs rather than RRSPs because of the clawback of social benefits.


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## steve41

I look at what the individual sees as ATI... after-tax income (spending on beer&groceries) after income tax and clawbacks of GIS, OAS... etc.


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## Larry6417

steve41 said:


> I look at what the individual sees as ATI... after-tax income (spending on beer&groceries) after income tax and clawbacks of GIS, OAS... etc.


I agree with you completely. What's most important is how much money is left after taxes, clawbacks, etc. The report from the CD Howe institute includes tables that show the effect of taxes + clawbacks. What the CD Howe Institute found was that RRSPs were awful for low-income Canadians trying to save for retirement. Money withdrawn from an RRSP directly reduces social benefits such as GIS. In Ontario, marginal effective tax rates can be as high as 100% at very low income levels. That is, if you somehow saved $1,000 in an RRSP, that savings, when withdrawn, would reduce your overall money-in-pocket (marginal tax rate + clawback of GIS) by $1,000. At modest levels of income (~ $20,000) the marginal effective tax rate drops to a mere 80% . Therefore, people with modest incomes are far better off saving within a TFSA than an RRSP; $1,000 saved within a RRSP for those individuals yields only an extra $200 in pocket after taxes + clawback, but $1,000 saved in a TFSA for modest-income Canadians yields an extra $1,000.

The surprising part of the report was that TFSAs are more tax-efficient for large numbers of middle-class Canadians as well.


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## steve41

OK.... give me a simple 'middle class' scenario.... age, salary, current savings (rrsp&nonreg), retirement age, rate of return, inflation, 'horizon age' (most ambitious age at death -90-95-100) and let's run a plan.


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## Larry6417

steve41 said:


> OK.... give me a simple 'middle class' scenario.... age, salary, current savings (rrsp&nonreg), retirement age, rate of return, inflation, 'horizon age' (most ambitious age at death -90-95-100) and let's run a plan.


Can't be done with certainty. The CD Howe report makes this very clear. It states that its projections are likely valid for those in or very near retirement, but it can't state with certainty what's best for people at the start of their working lives because taxation policies can change quickly. For example, the TFSA, which has changed saving in Canada drastically, is only 2 years old.


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## Ben

Larry6417 said:


> Can't be done with certainty. The CD Howe report makes this very clear. It states that its projections are likely valid for those in or very near retirement, but it can't state with certainty what's best for people at the start of their working lives because taxation policies can change quickly. For example, the TFSA, which has changed saving in Canada drastically, is only 2 years old.


Too true. I expect by the time I retire in 25-30 years a lot of things will have changed. There is the saying "A bird in the hand worth two in the bush." As in, take the tax breaks the government gives today, for they may not be there tomorrow. For example, we can talk about using the TFSA to delay RRSP contributions until income is in a higher tax bracket, but that concept could go up in smoke at the whim of the government of the day.

With massive unfunded liabilities due to aging population and infrastructure, I am braced for significant tax changes over my lifetime. Lots of things on the table: reduction in OAS pension payment, increase in age at which you can begin to draw CPP, RRSP credit instead of deduction, higher sales taxes, etc.


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## Berubeland

I think the TFSA is the greatest thing since sliced bread.

I am one of those low income people and with my husband taking care of our son I hardly pay any tax at all. I am self employed so I also get a lot of deductions there. 

Before I did contribute to an RRSP but I deferred claiming it. I really didn't need the deduction. 

What I did need is what the TFSA provides... Some flexibility for rainy days and being able to take money out and then put it back in later on. I did have to take out money I had saved in an RRSP and that contribution room is gone forever. 

I do really want to save but if you consider that I can't really benefit from a deduction and can't take the money out well then the choice becomes obvious. 

So thank you government


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## steve41

This is not a cherry picked example, it is randomly selected...

35 year old with just $5000 in his RRSP. Salary $65000 (indexed to inflation) retiring at age 65.

The parameters forcing the 3 plans are that he will enjoy a constant lifestyle (after-tax/after-inflation) such that his capital (just) takes him out to age 95, at which time he dies broke. Full CPP&OAS entitlement, 5% rate, living in BC.

The 3 retirement strategies are

1. all retirement savings directed to RRSP.

2. all savings directed to non reg (taxed 100% as dividends, tax-accrued)

3. all savings directed to TFSA

In the last strategy, the $5000 cap is disregarded for the purpose of the comparison.

Here are the results for the diebroke maximum ATI...

#1 (RRSP only) $40654
#2 (nonreg only) $39759
#3 (TFSA only) $40815

There is nothing to say these results might be in different order given another set of parameters such as age, rate, salary etc. All this does is point out the fact that there is really not much to choose between the RRSP and the TFSA. 

I am not sure where this guy sits, but I am guessing he would be classified as being in the middle of the financial spectrum. The reason the RRSP looks so good is given up-thread... indexed tax brackets, time value of money (RRSP's near term tax break vs its far-term tax on withdrawal), and the age-related tax credits.


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## Larry6417

Berubeland said:


> I think the TFSA is the greatest thing since sliced bread.


I love the TFSA as well. If I had to choose between sliced bread or a TFSA, I would definitely pick the TFSA!  It *almost *makes up for the reversal on income trusts.

My ultimate (tax) fantasy: TFSAs + income trusts. That way I could have a non-depleting source of tax-free income. Right now I invest in REITs in my TFSA.


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## bean438

Shayne said:


> The same take home pay? If you are in retirement and no longer contributing to your "retirement fund" you won't need the same take home pay.
> 
> You may be missing out of some living now?????


I guess it depends on how you define living. I have no kids, I buy a new vehicle every 10-12 years, I dont have the latest greatest plasma big screen, I dont have a cottage, nor do I fly to Maui every year. I eat oatmeal for breakfast, and I dont buy trendy expensive clothing.

I do however live in a nice home, in a nicer area of my city, even though I drive a "beater". I go to a movie when I want, I go out for breakfast at least once a week with friends, and i go out for a nice steak dinner when I want.
I went to Vegas in October to see U2 play, and I can drive down to Minneapolis once a year to do some shopping and watch some baseball.

I can do the things I want to do in life, so i guess I can say I am truly wealthy. Not financially independent yet , but truly wealthy.

I am a lowly civil servant, and can afford to max out the RSP. I'll take the refund now thank you very much, and if I really need to I can always withdrawl from the TFSA if I really "need" something.

You can still save for a rainy day and live a good life.
I have many friends who are "edumacated" and have jobs that pay 2-3x more than what i make, and they actually have "less" than I do, depedning on how you define wealth.

It is amazing how much those coffees at starbucks add up, as do the daily lunches you buy.
Have 2 cars, when one spouse can take the bus? REALLY amazing how much money can be saved there, especially when you see what my friends drive. Amazing cars, although they dont think so as they need new ones every 3 years or so.

I think with good planning along steve's thinking can go along way.


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## bean438

Forgot to add that my "sacrifices" now will allow me to retire earlier than my "wealthier" friends.
The trade off is that my health may not be great, or I may die, or have a stroke, and end up in a care home, having to pay more for my care than some jerkoff who has no savings because he lived for today.

It's all about balance folks.


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## steve41

Larry6417 said:


> I love the TFSA as well. If I had to choose between sliced bread or a TFSA, I would definitely pick the TFSA!  It *almost *makes up for the reversal on income trusts.
> 
> My ultimate (tax) fantasy: TFSAs + income trusts. That way I could have a non-depleting source of tax-free income. Right now I invest in REITs in my TFSA.


Uh.... $161 per year ($3 a week) advantage on a $40,000 lifestyle.... that's a tax fantasy? I don't think so.


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## Larry6417

steve41 said:


> Uh.... $161 per year ($3 a week) advantage on a $40,000 lifestyle.... that's a tax fantasy? I don't think so.


Where do you get $3 per week? My dream would be to grow my TFSA to $500,000 or larger (I'm still two or three decades from retirement) and replace my growth investments with income investments like REITs or income trusts. At an 8% yield, $500,000 yields $40,000 tax-free without depleting the assets.


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## MoneyGal

What's that old Hunter S. Thompson saying? _When the going gets weird, the weird turn pro_. Another weird discussion (and believe me, I identify myself as a "pro," and hence weird, in this discussion). 

At base, this is a question of whether it is better (where "better" is defined as after-tax-income-maximizing) to invest in a tax-deferred account where (eventual) withdrawals are subject to high taxation, or in accounts with low continuous taxation, or in in accounts with no taxation. This is actually solveable mathematically: there are known answers (which is, I guess, what Steve41 is arguing). 

Surprise! I have a Milevsky calculator which solves, in a simplistic way, for the high-deferred vs low-continuous tax problem. Steve41, I know you will say the assumption of a single average tax rate makes these calculators meaningless. But so does the assumption of a single average investment return; this isn't any worse (which doesn't make it "good"). 

Anyways. Calculator at the link. Go to the "tax savings" link.

Editing to add: the original article from which this calculator is taken includes the "no-tax-ever" scenario. The article provides a model to evaluate which tax scenario is preferable, and when. This is a critically-important issue when considering the investment _horizon_. The article is worth reading, and here's a link.


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## Berubeland

I have a friend who is the epitome of bad money management. 

Her husband and her have been married 16 years. When they married he had a really nice big house (inherited) with $100,000 mortgage. Since then they have gradually moved down the ladder due to her bad choices. She runs up the credit cards they refinance.... rinse.... repeat. They have finally sold their last house and are now renting. They were supposed to put that money away in investments but a week later she was out shopping like a crazy woman. I called her and she couldn't talk because there were so many great things to spend money on. 

She also has a new car all the time mostly because she crashes the old ones not necessarily on purpose but then she goes out and gets a new car. Also she doesn't even shop around for a decent deal. Oh and she doesn't work but her poor husband takes the bus to work. 

Anyways there are a lot of lessons to be learned from watching these kinds of financial disasters. Mostly lessons like don't do that !!!! 

So I am pretty sure that they will retire broke too and I really don't recommend it. Money really sucks for a lot of things like good relationships and mending broken hearts but for the things it can fix it's excellent and I highly recommend having some 

The point to my story is good for you Bean keep going i too would rather have way too much than too little and I am working on it.


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## steve41

OK.... I ran those same three studies under a series of randomized rates. (sort of a montecarlo-ed run of 100 iterations each) 

Here are the ATI results for the averages...

RRSP $40558
TFSA $40614
NonReg $39529

No change in the ranking however.

The effect of tax is too important to be neglected, IMHO. Remember these runs include all the 'fiddly bits'... CPP/OAS/GIS clawbacks, surtaxes, inflation, indexed brackets, etc.


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## MoneyGal

But what's the investment horizon you assumed? And what would the results look like at different points along that horizon? That is the point of the linked article.


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## steve41

I assumed our guy invested at the same 5% rate (subject to randomization) for the entire 35-95 time frame. I could have changed the weighting.. 7% early on and 3% in the later years, but I chose not to. If I get the time, I will try that on as well.

One comment about tax and the naysayers who claim taxes change continually and so concentrating on tax accuracy is foolish:-

I re-do my tax subroutine every year and have been doing so for over 12 years. If I take an old version of my program, turn back the clock on my PC and run that older version.... you would be surprised just how consistent tax stays year to year (allowing for bracket indexing) Certainly a heck of a lot more predictable than the markets!


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## Larry6417

steve41 said:


> I assumed our guy invested at the same 5% rate (subject to randomization) for the entire 35-95 time frame. I could have changed the weighting.. 7% early on and 3% in the later years, but I chose not to. If I get the time, I will try that on as well.
> 
> One comment about tax and the naysayers who claim taxes change continually and so concentrating on tax accuracy is foolish:-
> 
> I re-do my tax subroutine every year and have been doing so for over 12 years. If I take an old version of my program, turn back the clock on my PC and run that older version.... you would be surprised just how consistent tax stays year to year (allowing for bracket indexing) Certainly a heck of a lot more predictable than the markets!


I don't recall anyone saying that tax accuracy is "foolish" - just hard to predict over the long-term. Tax is the largest single expenditure for many people, so obviously it's important to be accurate. But I defy anyone to tell me with complete accuracy what tax rates (including clawback of social benefits) will be 30 years from now. Will the retirement age be the same in 30 years? Will CPP benefits be exactly the same? Will there be special surtaxes on million dollar RRSPs or TFSAs?

Let's say that in 1970 you avoided investing in RRSPs because there was no capital gains on stocks. Well you were awfully disappointed when the capital gains tax was introduced. Conversely the argument for RRSPs became weaker over the past few years due to improved rate of taxation on capital gains and dividends in a non-registered account.


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## steve41

Things _do_ change, such as the dividend tax credit, clawback thresholds, new products such as the TFSA, etc. While I continually modify my s/w to reflect these changes, I don't get too many users who complain about the tax accuracy issue. And, of course, I hope that these changes continue, since the recurring revenue keeps me in beer. I wouldn't expect too much in the way of really drastic changes however. 

Remember the flack the feds took when they threatened to change the OAS to the Seniors Benefit? Once Paul Martin introduced the tax bracket indexing, things have settled down a fair bit. I expect the investment, entitlement and tax regimes to stay as is for a while to come.


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## bean438

Steve it seems that all 3 situations turned out the same. 
CRA giveth with one hand and taketh with the other at retirement. 
The whole system is well thought out so in the end CRA gets what they want. 
Bottom line , save what you can. RSP,TFSA non reg. The more you save the more they tax but in t he end you end up with more than you would had you not saved.


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## steve41

bean438 said:


> Steve it seems that all 3 situations turned out the same.
> CRA giveth with one hand and taketh with the other at retirement.
> The whole system is well thought out so in the end CRA gets what they want.
> Bottom line , save what you can. RSP,TFSA non reg. The more you save the more they tax but in t he end you end up with more than you would had you not saved.


Essentially, it shows that the RRSP is tax neutral, or very close to it. The tax rebate you get early on, on contribution, is offset by the tax you pay on withdrawal, contrary to what the anti-tax nutters love to spout.

Remember, I taxed the nonreg as all dividends. If I had run the nonreg as 100% interest, the RRSP would have had a decided advantage.

One thing that has to be said about the TFSA is that for planned lump sum cash needs, saving via your TFSA is recommended, and that, estate-wise, if you should die early, your estate will be advantaged as well.

Once more... for any plan I have seen, where the subject is saving for retirement and expects to deplete his savings (or close to deplete), I have never observed an effective tax rate post retirement higher than the rate pre retirement.


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## MoneyGal

Steve, who are you calling a nutter? Are you arguing with people in this thread, or on this board, or what? 

It is ... weird to read these messages where you suggest you are taking umbrage with a point of view which I don't think anyone has expressed. No one on this thread has said that getting tax projections right is "foolish" or has described themselves as "anti-tax" (???) (except, presumably, in the sense that we are all anti-tax, after-tax-income-maximizers). 

People - including me - have expressed different points of view than yours. In particular, I have suggested that the optimal choice between a high-rate, tax-deferred investment (RRSP) or a low-rate, continuously-taxed investment (open account, presumably with capital gains), or a no-tax-ever investment (TFSA) will depend on your time horizon (and, obvs, your assumed tax rate over time). 

I also linked to a study by a non-partisan think tank which suggests that the benefits of tax-deferred investing are perhaps less than is commonly assumed, but I didn't espouse these views as my own. 

I don't like seeing these perpetual little jabs from you in each response you post. Although I'm not certain they are addressed at me, I presume they MUST be, because I'm one of the main participants in this thread. So if you aren't talking to me, who are you talking to? And if you are talking to me, would you consider knocking it off?


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## steve41

I am sorry if I have offended anyone, you included. I am referring to those who like to go on about the unfairness of taxation. My philosophy is that we all should pay our share of income tax... If tax can be legally avoided, then by all means look to minimize it. 

My reference to 'nutters' is to those who go on about the RRSP being some kind of major tax grab by the feds. You know the type.... _"Avoid the RRSP... the tax will kill you in retirement"_


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## MoneyGal

OOOOOhkay. We share that POV. I was a little concerned there.


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## steve41

Testing the Forum .... disregard this post.


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## MoneyGal

Aren't you always testing the forum?


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## icu_nxtime

*Am I on the right track ?*

I have a Government work pension but have some RRSP’s saved up, I plan to stop the RRSP and put the money I normally invest into TFSA instead.

I have seen my relatives become obsessed with their RRSP some saying now it was such a scam to have them. They have pensions too and virtually all the money they take fom an RRSP is taxed at a high rate. (Govt. Pension too)

If they did get a tax break say 30 years ago when they started to contribute it is much less value than at today’s tax rate 30 years later AND they are also paying the tax on the interest that accumulated for 30 years. RRSP Does not make sense to me at all now especially for someone with a pension.

I didn't see a post here that seems to take into consideration what your tax rates will be say 20 yrs from now when you are retiring and taking the RRSP money back out. I think you really need to consider what that percent might be in the future.

Sure I got a 20% tax break when I put it in but it is going to cost me 25% to take it back out and I need to pay tax on the interest earned too !!!

Is my scenario flawed I’d like to know if I am completely out to lunch here and would love to hear other points.

Thanks !


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## steve41

This isn't meant to challenge the 'tax rates higher in retirement' thesis, but here is a simple example. A 35 yrold with no savings (only $5K), a 65K salary, retiring at 65 and dying broke at age 95. (5% rate, 2% inflation)...
RRSP and Tax Study


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## houska

A lot of the discussion here has gone off in the taxation arbitrage decision. There's another dimension to the OP's question, and that's risk management.

Money you save for retirement in an RRSP, TFSA, etc. faces 2 big risks: a) market risk (how will your investment returns be) and b) taxation policy risk (how the gov't may tweak taxation rules for RRSPs, RRIFs, TFSAs, etc during your lifetime).

Retirement benefits you are building through a typical defined benefit plan have two radically different risks: c) counterparty risk (will your employer be able to - and be around to - pay you the promised benefits), and d) disproportionate exposure to job loss risk.

Let me explain d) in more detail. Everyone's retirement plan carries job loss risk - since if you lose your job, you may stop being able to save, and may even need to draw down your savings. However, the typical defined benefit plan has a formula for retirement benefits something like 2% x years of service x maximum income. So every year you keep your job, your ultimate retirement benefit increases, since your years of service goes up, and your maximum income (assuming raises...) goes up too. So you gain a huge part of the ultimate value of your pension in your later working years. In fact, a ballpark calculation I've done for my wife's pension is that now it's as if she were getting a 5% bonus each year compared to someone with no DB pension. If she keeps her job until age 50, then each year she will be getting a roughly 20% annual bonus through this effect. At age 60, it's 40%. 

If someone with a DB plan needs to give up their job for any reason, they give up this implicit deferred compensation. That's why it's disproportionate exposure (compared to no DB pension, RRSP only) to job loss risk.

It's generally a good thing to diversify one's risks. So even if you have a pretty good DB plan, to diversify risks c) and d) it's a good idea to build some retirement savings with an RRSP, TFSA, on nonregistered investments anyway and not put all eggs into one basket.


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## MoneyGal

Fantastic post!!!! Thanks for taking the time to write up your thoughts.

Editing to add that I'd be very interested to see how you derive your values (i.e., 5%, 20%, etc.)


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## bean438

steve41 said:


> I am sorry if I have offended anyone, you included. I am referring to those who like to go on about the unfairness of taxation. My philosophy is that we all should pay our share of income tax... If tax can be legally avoided, then by all means look to minimize it.
> 
> My reference to 'nutters' is to those who go on about the RRSP being some kind of major tax grab by the feds. You know the type.... _"Avoid the RRSP... the tax will kill you in retirement"_



I have these "nutters" at work who assume because we have an excellent DB pension, "RSP is a waste of time".

One way or the other, CRA gets its dues. That is the cost of living in a modern society, with features such as cops, firefighters, hospitals, roads, etc.

In the end when you are retired and earning any type of income you will be taxed.
The trick is to try to plan it out and be as tax efficient as possible.
My thoughts are to max out the RSP, and TFSA, and possibly start a non reg portfolio or smith manouevre.

This way I have saved the most money I can (which is the backbone of retirement savings.), thus giving me the most options at retirement. I can pension split, RSP meltdown, dont touch the RSP until the TFSA is empty, etc.

AN RSP is not a tax grab by the gov't. 
I do however think that the clawbacks are unfair. I understand OAS and GIS is to help out lower income people in retirement. I have no problem with this for disabled, or working poor.
But I dont think it is fair that I save and do "without" the finer things in life that my friends enjoy (exotic trips, backpacking all year over the world, startbucks coffee, new cars, big screen tv's, etc) and they will get OAS because they are "poorer", and mine will be clawed back because I make too much money.


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## houska

MoneyGal said:


> Fantastic post!!!! Thanks for taking the time to write up your thoughts.
> 
> Editing to add that I'd be very interested to see how you derive your values (i.e., 5%, 20%, etc.)


Project out forecast income growth until retirement (in the simplified case I calculated, 4.5% annual raises from age 35 to 60). In each year, calculate the annual pension entitlement you would have if you quit right then - in our case 2% x num years service x final income at the starting age. Calculate the present value of this as an annuity from age 60 to 80 (an approximation - depends on retirement age, pension rules and expected lifespan), discounted back to the current year via expected investment returns (7% p.a.). This is the amount of cash you'd need in a retirement plan now to fund the equivalent pension the DB plan offers - this is the current value of the pension (I think it's more or less what analysts call the actuarial value, but I'm not quite sure)

Now fast forward one year. Redo the calculation, not surprisingly, your pension is worth more since your number of years service as well as income have gone up. Subtract the previous year's pension value increased by expected investment returns (7%) - this is what you would have if the previous year instead of a pension entitlement you had the pile of cash and invested it. The difference between the new pension value and the 7% grossed up old one is the "bonus" you have implicitly received - as deferred compensation - in the intervening year.

If you use the numbers above, that bonus amounts to about 5% at age 35, with 5 years of job tenure. It amounts to 20% at age 50, and over 40% at age 60 (in this case the last year). The precise numbers depend on the assumptions you plug in, but the consequence I described in my previous post is true regardless.


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## MoneyGal

Ah. The brute force method.


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## jambo411

Thank you houska for finally getting back to the original question should I contribute to an RRSP if I have a DB pension.

Twenty five years ago when I got a job with the feds I immediately started an RRSP even though the amount allowed was small. I had been through several careers by the time I got his job and just did not assume I would be employed until retirement. 

Flash forward and today I have 54 months to go to minimum retirement age. We were privatised 14 years ago and are currently going through downsizing. Beacause of onerous penalties I may need the RRSP to live on if I get laid off before my retirement date. As someone mentioned earlier I would rather have the money and pay tax on it later than not have had the peace of mind of the RRSP cushion. Also half of my contributions went to a spousal plan in the interest of income splitting.


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