Personal Finance

Personal Question about My Retirement Savings

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  • Oct 12th, 2011 8:14 am
Newbie
Sep 29, 2011
10 posts
1 upvote

Personal Question about My Retirement Savings

Hi everyone,

This is my first post on RedFlagDeals, but after reading over some posts, you all seem like a very knowledgable bunch. I was hoping to get some of opinions on my current basic plan. I would really really appreciate any insight you could provide!

I am currently a 24 year old just finishing up University that is obsessed with starting my retirement savings. I work full-time and have paid off my student loans. I am not in my career yet, however, so I am in a lower tax bracket.

What I am currently planning on doing is contributing approximately $800 a month to an index fund (haven't decided on which market distributions yet) through TFSA.

I considered ETFs, but I think that TD eFunds are better for me because of the commissions you pay on ETFs, and I would be making regular contributions.

Also, hear me out on the TFSA thing! I might be crazy here, because I am not reading this idea anywhere else. But the TFSA seems ideal for retirement savings if you use it right.

Sure I am forgoing the immediate tax deferral on my income, but I don't need that yet since I deductions from my education credits that bring down my taxable income. Furthermore, I am in a lower tax bracket than I will--hopefully--be in a couple years, where I can really maximize the tax deferral from my RRSP room.

Also, it seems to me that the tax savings with TFSAs are greater than RRSPs. I know that capital gains are only taxed at 50%, so I'm already not taxed very much on my index funds...but if they do grow at an average of 10% per year, like the SP500 historically has over the last 100 years, then I could end up saving a lot of money when I withdraw it all, tax-free, in my retirement years. In contrast, I would be paying income tax on my RRSP withdrawals, even if it is a low tax rate, it is still tax on everything coming out. With the TFSA, I only paid tax on the principle, which will hopefully grown substantially by my retirement years.

Also, am I crazy to want to invest EVERYTHING in index funds/equities? I am following the rule here that you subtract your age from 100 or something, and then the remainder if how much you put in Bonds and/or safer investments. I just know that with me being 24, I ought to have most of my money in equities since it's so long term.

Furthermore, I am a huge fan of the efficient market thesis, which suggests that I have no chance of picking the right stocks that will beat the index and most fund managers can't even either.

I apologize for laying out my life story and making you read all that! I would really really appreciate any insight that any of you could give to my young and impressionable self.

Thank you so much!
20 replies
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
You are exactly right in every regard and are already more knowledgeable than the average Financial Service Rep in a bank.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Sr. Member
User avatar
Feb 21, 2009
579 posts
15 upvotes
Well done! Not only do you know more then most FSR's at banks but also then the general population! I don't really see anything wrong with your strategies, except maybe being careful with 100% equity holding...diversification across asset classes is key! So I suggest keeping 10% or so in fixed income instruments.

Good points about the TFSA other benefits include...not being used to calculate OAS, you dont have to convert it to a RRIF so no mandatory min withdrawal.

I think you will still need to contribute to your RRSP when you start hitting the higher tax brackets...trust me it hurts when you have to pay $15K or more a year to the government....plus it's Time value of money....$ today is worth more then $ tomorrow. What I suggest is for now keep maxing your TFSA but at your rate you'll run out of room soon (800/month is 9600/year), then contribute to your RRSP if your tuition credits still bring down your taxes then don't claim them till future date. Eventually Make RRSP your primary contribution, max it out and use the refunds to put in your TFSA. You will have have maxed out RRSP and TFSA.

Good luck!
Deal Addict
Aug 1, 2008
1554 posts
83 upvotes
Ottawa
hadextoday wrote: Also, hear me out on the TFSA thing! I might be crazy here, because I am not reading this idea anywhere else. But the TFSA seems ideal for retirement savings if you use it right.

Sure I am forgoing the immediate tax deferral on my income, but I don't need that yet since I deductions from my education credits that bring down my taxable income. Furthermore, I am in a lower tax bracket than I will--hopefully--be in a couple years, where I can really maximize the tax deferral from my RRSP room.
What you are saying is not incorrect and you're off to a good start as Thalo mentions....but I just want to point out that you
can make the RRSP contributions now but defer the deduction of same (almost indefinitely) until a year where it is more
beneficial i.e. after your tuition credits have gone and you're making bigger bucks. All of that time the money that you
have contributed aling the way will be growing on a tax-deferred basis.
Newbie
Sep 29, 2011
10 posts
1 upvote
Thanks so much for the insight, everyone! I really appreciate the compliments, but keep in mind that I have not even begun saving yet, so I don't really deserve any praise yet :)

I was wondering if anyone had any insight on how I ought to allocate my index investments? For instance, how much Canadian, American and international etc. I think that TFSAs don't have a minimum Canadian requirement like RRSPs? I know that it's a personal decision and the buck ultimately stops with me since it's my risk, I was just wondering how people like to position theirs.

Also, I understand that it's important to hold different asset classes because they behave differently at different times. Do index funds satisfy this? For instance, I know that there are lots of resource stocks in the S&P, so will I be satisfying that asset by holding that index?

Also, Ray420, I appreciate the advise on fixed income. I was leaning towards something like 5% because of my age, but I haven't yet decided. Do you think that I can satisfy my fixed income through eFunds as well? I know that there are bond funds and money market funds--would those satisfy my fixed income distribution?

And, thanks SPILLONAISLE9 for the tip on RRSP deferral. Everyone keeps telling me that tax is going to hurt once I start paying a lot of it. I am sort of living in a fantasy land right now with my tuition credits and I am not looking forward to them running out.

Also, one more brief question! I have read good things about no-load fund companies like Phillips, Hager & North. One book that I read suggested that it's great to buy direct, and people have said they have a good bond fond. Would it be better in that case to buy an actively managed bond fond in the far future (I think that you need $25,000 to start investing with them?) or just stick with index for that asset class?

Thank you so much everyone, I really do appreciate the advice.

P.S. another thing that I love about TFSA retirement savings is that it shouldn't affect the OAS clawback like RRSP withdrawals do. Hopefully I can minimize my retirement taxable income as much as possible...
Sr. Member
User avatar
Feb 21, 2009
579 posts
15 upvotes
Nobody can really tell you how to allocate your funds...it all depends on your risk tolerance...so figure that out first. Also do not overestimate your risk tolerance as most people do, you may think you can handle 95% equity allocation but if can you REALLY sleep after losing 15% or more of your savings? Risk tolerance overestimation is the primary reason people get in panic selling mode and get too emotional about their investments. That can only hurt your portfolio more...market tanks you panic sell and take the losses then you buy again when market is in the upswing ....classic buy high sell low.

TD e-funds has a Canadian bond fund which should work just fine for you. Money market funds are considered more cash & cash equivalent as they are pretty much risk free with lower return.
Deal Fanatic
Mar 6, 2004
9318 posts
204 upvotes
hadextoday wrote: Everyone keeps telling me that tax is going to hurt once I start paying a lot of it. I am sort of living in a fantasy land right now with my tuition credits and I am not looking forward to them running out.
Well to be fair - who is going to be paying for a subsidized post-secondary education?

(taxpayers).

Welcome to the club.
vero95: :facepalm:
Sr. Member
Jul 29, 2004
622 posts
136 upvotes
Calgary
just a heads up:

$800/month for a whole year is $9,600 but the TFSA annual limit is only $5,000!
Newbie
Sep 29, 2011
10 posts
1 upvote
JayWang wrote: just a heads up:

$800/month for a whole year is $9,600 but the TFSA annual limit is only $5,000!

Thanks for reminder! I've read horror stories of people going over TFSA contribution limit and paying the penalties to the government...fortunately I haven't used any of my contribution room, so I should be able to catch up to where we are now...$15,000 (?) before switching to RRSP contributions. Also, hopefully the Canadian government goes through with their promise on doubling contribution limits in four years so, like they promised during the election.

Also Ray, thanks for the advise on not overestimating my risk tolerance. I didn't know that was common. I keep telling myself that I know the market fluctuates and in the long-term everything will be all right. All the books I've read have told me to ignore all the short term news. But I haven't yet experienced looking at a statement saying that my equities are worth 15% or 50% of what they were before, so maybe I don't know yet how I would react. I like to think that I wouldn't sell, but I'll keep it in mind that I shouldn't put too much of my savings into equities.

Thanks so much for all the advice guys. I am looking forward to starting my savings routine very shortly.

Last question, do you need to open a TD bank account to access their eFunds? I bank with ScotiaBank, and don't want the fees of an additional bank account. I don't really want to pay any fees beyond the MER for the index funds if possible. Thanks!

Oh wait, also I don't think anyone told me how they lean on an allocation for their index funds? How much Canadian, American, International, etc?

Thank you so much! :)
Newbie
Sep 29, 2011
10 posts
1 upvote
Sorry, one FINAL question --

Everyone seems to agree with the theories I put out in my initial post. Does this mean that you use index funds for all of your equities or do you still use actively managed funds at all? The only reason I ask is because it seems like so many people still use actively managed funds, but I really want to just go with index funds, if it will be acceptable.
Newbie
Aug 6, 2011
47 posts
11 upvotes
VICTORIA
Can I ask why you are choosing Index Funds over Mutual Funds?
Sr. Member
User avatar
Feb 21, 2009
579 posts
15 upvotes
hadextoday wrote: Sorry, one FINAL question --

Everyone seems to agree with the theories I put out in my initial post. Does this mean that you use index funds for all of your equities or do you still use actively managed funds at all? The only reason I ask is because it seems like so many people still use actively managed funds, but I really want to just go with index funds, if it will be acceptable.

Index Funds....fund mangers rarely beat the index after MER so no point really to track fund managers.
Can I ask why you are choosing Index Funds over Mutual Funds?
Index funds track the market and have much lower MER...Mutual funds TRY to beat their benchmarks....and is actively managed so managers charge a fee...plus trading cost...plus unwanted taxes etc...their MER is usually much higher CAD Equity fund around 2% over long term this will eat your earnings.
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
hadextoday wrote: P.S. another thing that I love about TFSA retirement savings is that it shouldn't affect the OAS clawback like RRSP withdrawals do. Hopefully I can minimize my retirement taxable income as much as possible...

In theory a person who contributes the max to their TFSA throughout their working life, does not have a pension, RRSP or any other savings and does not qualify for the maximum CPP could qualify for not only full OAS but also GIS at age 65. Currently an individual or a couple have to be living at border-line poverty line to qualify for even just partial GIS, but if there are no changes to the means-testing for GIS over the next 50 years or so then someone could retire with $millions in a TFSA, live like a king and still collect GIS.

OAS clawback, btw, affects only a small percentage of retirees. Many believe it is worse than it actually is, but to even start to see partial clawback you have to have an individual income north of $60K during retirement ($120K for a couple) and income north of $110K for full clawback ($220K for a couple). You can still save in an RRSP as much as you want, you likely won't be hit by the clawback.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Addict
User avatar
Feb 1, 2005
2204 posts
227 upvotes
hadextoday wrote: P.S. another thing that I love about TFSA retirement savings is that it shouldn't affect the OAS clawback like RRSP withdrawals do. Hopefully I can minimize my retirement taxable income as much as possible...
Thalo wrote: In theory a person who contributes the max to their TFSA throughout their working life, does not have a pension, RRSP or any other savings and does not qualify for the maximum CPP could qualify for not only full OAS but also GIS at age 65. Currently an individual or a couple have to be living at border-line poverty line to qualify for even just partial GIS, but if there are no changes to the means-testing for GIS over the next 50 years or so then someone could retire with $millions in a TFSA, live like a king and still collect GIS.

OAS clawback, btw, affects only a small percentage of retirees. Many believe it is worse than it actually is, but to even start to see partial clawback you have to have an individual income north of $60K during retirement ($120K for a couple) and income north of $110K for full clawback ($220K for a couple). You can still save in an RRSP as much as you want, you likely won't be hit by the clawback.

Assuming they don't change the rules before you retire! :confused:
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
ShopperfiendTO wrote: Assuming they don't change the rules before you retire! :confused:

That's why I said "in theory..." LOL.

Yeah, I highly doubt a democratically elected future government will let it stand that millionaires collect GIS.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Addict
User avatar
May 15, 2010
2000 posts
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North York
hadextoday wrote: do you need to open a TD bank account to access their eFunds? I bank with ScotiaBank, and don't want the fees of an additional bank account. I don't really want to pay any fees beyond the MER for the index funds if possible. Thanks!
Yes td efunds can only be purchased with a td account. Since you are already with scotiabank, you might be interested to know that they recently introduced some commission-free etf's.
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
No, you do not need to open a TD bank account to access eFunds. You can simply open a TD Mutual Funds account and link it to your Scotia bank account.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Addict
Feb 24, 2007
1371 posts
55 upvotes
hadextoday wrote: I would be paying income tax on my RRSP withdrawals, even if it is a low tax rate, it is still tax on everything coming out. With the TFSA, I only paid tax on the principle, which will hopefully grown substantially by my retirement years.
Taxes in general on RRSP don't matter, assuming equal tax rate during pre-retirement and during retirement, the RRSP = TFSA, they are exact opposites of one another. RRSP pretax in and tax out, TFSA tax in and pretax out. Given graduate tax rates and typically lower incomes during retirment, RRSP usually is better because of the extra tax savings. This of course ignores welfare benefits, when account for those then it becomes: low income go TFSA, higher income go RRSP.
Thalo wrote: That's why I said "in theory..." LOL.

Yeah, I highly doubt a democratically elected future government will let it stand that millionaires collect GIS.
Actually that isn't all that much, more then likely it would take a couple maximizing both TFSA's to get that million. That's about $50k withdrawal per year which is about what is needed for middle class people to retire. Middle class couple means high cpp and consequently very low GIS, so its not like you have wealthy people getting massive amounts of GIS, but rather middle class people getting possibly $1-2k GIS. Plus I doubt a democratically elected future government voted in by the large elderly middle class population would vote to harm themselves.
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
halflife150 wrote: Actually that isn't all that much, more then likely it would take a couple maximizing both TFSA's to get that million. That's about $50k withdrawal per year which is about what is needed for middle class people to retire. Middle class couple means high cpp and consequently very low GIS, so its not like you have wealthy people getting massive amounts of GIS, but rather middle class people getting possibly $1-2k GIS. Plus I doubt a democratically elected future government voted in by the large elderly middle class population would vote to harm themselves.

Assuming all numbers in today's dollars, subtracting 2% for inflation:

Couple each saves $5000/yr for 40 years at a 4% real return = $950K combined

Depletion is over the next 30 years with a 2% real return growth rate (fixed income) = annual payments of $42,500 roughly

Add that to 75% of max CPP (let's assume they were always earning 25% less than YMPE) = $17,000
and max OAS = $12,000

They'd have a total gross cash flow in retirement of over $70,000 (of which only a tiny bit from CPP and OAS is subtracted for taxes) AND, based on today's rate tables, qualify for around $100 each of GIS (based on taxable income, excluding OAS, of $17K combined): http://www.servicecanada.gc.ca/eng/isp/ ... 2-22.shtml

Of course it gets even more favorable if their actual income during working years was even less (yielding less CPP) but then it would have gotten harder to save $5000 each.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.

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