Personal Finance

How much should you have in RRSP's by 40?

  • Last Updated:
  • Nov 2nd, 2008 11:24 pm
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Deal Expert
Oct 20, 2001
18709 posts
1157 upvotes
hagbard wrote:
Apr 1st, 2008 10:45 am
Well, I'm screwed.
Me too. My current RRSP balance: $53.84 :lol:

There are definitely too many factors involved for there to be a general "should" on this figure... (For example, despite my low RRSP balance I may have enough to retire in as little as 5 years from now.)
These folks have taken over RFD, so I'm done here.

Mutu qabla an tamutu
Deal Guru
Aug 26, 2001
14694 posts
266 upvotes
North York
pitz wrote:
Apr 1st, 2008 10:05 am
A good rule of thumb is that you can, at best, double your purchasing power in real terms every 10 years before retirement through a combination of investment growth and contributions.

Someone at the age of 40, with 160k in assets, properly invested, probably is on track for ~$35k/year of retirement income, inflation indexxed, per year.

Add in CPP and OAS, and he's good for $50k/year (today's dollars) if he doesn't touch his savings until he's 65, and manages them properly in the mean time.
When you say assets are you including the person's house (if they own one, and live in it)?

Edit: No, you're not... that wouldn't make sense!

So do your calculations take home ownership into account?
Member
Dec 14, 2007
278 posts
1 upvote
Toronto, Ontario
kasm wrote:
Apr 1st, 2008 2:29 pm
I read somewhere (I think it was Sherry Cooper's latest book on Retirement) that by 40 your RRSP savings should be worth twice your pretax income.
That's fairly easy to do. Assuming someone started to work at 25 years old. His salary goes up by 5% each year and he max out his RRSP. Even if the return rate is 0%, he would have almost twice (196%) his pretax income by 40. If his salary goes up by more than 5%, then it's harder, but I wouldn't worry about my retirement if my salary kept on going up by 10% each year.
Member
Dec 14, 2007
278 posts
1 upvote
Toronto, Ontario
PuppyB wrote:
Apr 1st, 2008 2:33 pm
But the reality is - how many local Canadian people really put money into their RRSP account? :confused: :confused:

I really doubt, I can only see they are full of CC debt, loan, where is the money for RRSP?
Why not? For most people, that's the only way to save income taxes. Unless most Candians don't pay taxes.

I am always shocked by those surveys which say less than half of eligible Canadian actually purchase any RRSP. I am hoping that's because people buy their RRSPs every two years.
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Jun 19, 2006
9349 posts
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species5618w wrote:
Apr 1st, 2008 3:03 pm
Why not? For most people, that's the only way to save income taxes. Unless most Candians don't pay taxes.
RRSP's often don't 'save' income taxes -- rather, they only defer tax until one retires. For the majority of Canadians, its perfectly rational to not contribute to RRSPs.

I am always shocked by those surveys which say less than half of eligible Canadian actually purchase any RRSP. I am hoping that's because people buy their RRSPs every two years.
I'm not. Canadians are just exhibiting (surprise, surprise!) rational behaviour.
Deal Fanatic
Feb 1, 2006
9099 posts
215 upvotes
species5618w wrote:
Apr 1st, 2008 3:03 pm
Why not? For most people, that's the only way to save income taxes. Unless most Candians don't pay taxes.

I am always shocked by those surveys which say less than half of eligible Canadian actually purchase any RRSP. I am hoping that's because people buy their RRSPs every two years.
Lots of people with pensions have no use for RRSP's, they are often better off to invest outside an RRSP. Ditto for many lower income individuals, who would get little, if any, benefit, from them. Then there are young people who are saving for a home, and who already have the max $20k they can transfer from an RRSP.

Lots of reasons why people wouldn't want to use an RRSP.
Deal Fanatic
Feb 1, 2006
9099 posts
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pitz wrote:
Apr 1st, 2008 3:07 pm
RRSP's often don't 'save' income taxes -- rather, they only defer tax until one retires. For the majority of Canadians, its perfectly rational to not contribute to RRSPs.
Pitz beat me to it, cross posted.
Deal Addict
Sep 20, 2006
1507 posts
52 upvotes
hagbard wrote:
Apr 1st, 2008 3:44 pm
Image
Hhahahahahahah I think he'll work till he's 100.
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Dec 22, 2004
1973 posts
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Rehan wrote:
Apr 1st, 2008 2:34 pm
Me too. My current RRSP balance: $53.84 :lol:

There are definitely too many factors involved for there to be a general "should" on this figure... (For example, despite my low RRSP balance I may have enough to retire in as little as 5 years from now.)
Rehan's a baller.
Member
Dec 14, 2007
278 posts
1 upvote
Toronto, Ontario
pitz wrote:
Apr 1st, 2008 3:07 pm
RRSP's often don't 'save' income taxes -- rather, they only defer tax until one retires. For the majority of Canadians, its perfectly rational to not contribute to RRSPs.

I'm not. Canadians are just exhibiting (surprise, surprise!) rational behaviour.
I don't think that's true. Take a 8% yearly return and 40% marginal tax rate,

Outside RRSP: After tax return is 4.8%. Total return after 40 years is ((1+4.8%)^40 - 1 )/4.8% = 11506%

Inside RRSP (Cash out everything at 65 years old): (((1+8%)^40 - 1) /8%) * (1-40%) + 40% * ((1+4.8%)^40 - 1 )/4.8% = 20146%

RRSP would return 75% more even for people with high retirement income. And that's assuming people max out their RRSP, so they have to invest their tax saving in an unregistered account each year.

What if a person pays only 30% marginal rate before retirement, but pays 40% after retirement?

Outside RRSP: After tax return is 5.6%. Total return after 40 years is ((1+5.6%)^40 - 1 )/5.6% = 14004%

Inside RRSP (Cash out everything at 65 years old): (((1+8%)^40 - 1) /8%) * (1-40%) + 30% * ((1+5.6%)^40 - 1 )/5.6% = 19745%

RRSP still returns 40% more.

Now, let's assume somebody only invests in actively traded equity fund. So they will only be taxed at 15%.

Outside RRSP: After tax return is 6.8%. Total return after 40 years is ((1+6.8%)^40 - 1 )/6.8% = 18963%

Inside RRSP (Cash out everything at 65 years old): (((1+8%)^40 - 1) /8%) * (1-40%) + 30% * ((1+6.8%)^40 - 1 )/6.8% = 21232%

RRSP wins by 12%.

A person would only choose to not invest in RRSP if he/she only invest in passively traded equity funds. I am not sure a lot of Canadians are doing it.

Now, I agree TFSA would be a better deal for a lot of people, but it's not available yet.
Deal Addict
Dec 27, 2007
1058 posts
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Markham
At what income bracket is it considered "high"?

How much do you have to make to make it "worth while" to put money in RRSP's and save a good amount in taxes.

I hope this question makes as much sense as I think it does.

thanks
Deal Addict
Feb 9, 2005
4166 posts
4 upvotes
bririp wrote:
Apr 1st, 2008 7:43 pm
At what income bracket is it considered "high"?

How much do you have to make to make it "worth while" to put money in RRSP's and save a good amount in taxes.

I hope this question makes as much sense as I think it does.

thanks
I think it really depends on what you income is now, what you expect your income will be in the future, and what you expect you income will be once you retire.
Member
Dec 14, 2007
278 posts
1 upvote
Toronto, Ontario
bririp wrote:
Apr 1st, 2008 7:43 pm
At what income bracket is it considered "high"?

How much do you have to make to make it "worth while" to put money in RRSP's and save a good amount in taxes.

I hope this question makes as much sense as I think it does.

thanks
Tax brackets are less important for lower incomes since tax credits become significant. For example, a person making a couple of thousands can have a negative income tax rate (overall tax rate would still be positive, but GST and property tax refund would more than offset the income tax).

RRSP does not "save" the income taxes for the original contribution, it simply defers it. If your tax rate stays the same after retirement and if investment incomes are not taxes, invest inside and outside RRSP are exactly the same.

The thing really makes RRSP powerful is the fact taxes on investment incomes are deferred. Since future value of a investment grows exponentially with the return rate, deferring the tax would significantly increase return.

TFSA has the exact same effect. Although TFSA does not defer the income tax on the original contribution, the end result would be same if the tax rate stays the same.

However, RRSP has two significant short comes.

1. The money is not accessible. You lose the contribution room permanently if you withdraw money from the account. (Except for HBP).

2. All investment incomes are taxed 100% after you retire. For example, if your investment generate Canadian Dividends. Normally you get a dividend tax credit. Not with RRSP.

TFSA has neither problems. However, it's not available now and it's only $5000/year.
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